BAUER PERFORMANCE SPORTS LTD. Cdn

A copy of this preliminary prospectus has been filed with the securities regulatory authorities in each of the provinces and territories of Canada but has not
yet become final for the purpose of the sale of securities. Information contained in this preliminary prospectus may not be complete and may have to be
amended. The securities may not be sold until a receipt for the prospectus is obtained from the securities regulatory authorities.
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This prospectus constitutes a
public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such
securities.
These securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the ‘‘U.S. Securities Act’’) or any state
securities legislation and may not be offered or sold in the United States except in compliance with the registration requirements of the U.S. Securities Act
and applicable state securities legislation or pursuant to an exemption therefrom. This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby within the United States. See ‘‘Plan of Distribution’’.
PRELIMINARY PROSPECTUS
Initial Public Offering
January 27, 2011
21JAN201119454623
BAUER PERFORMANCE SPORTS LTD.
Cdn$
Common Shares
This prospectus qualifies the distribution (the ‘‘Offering’’) of common shares (the ‘‘Common Shares’’) of Bauer
Performance Sports Ltd. (‘‘we’’, ‘‘us’’, the ‘‘Company’’ or ‘‘Bauer’’) at a price of Cdn$ per Common Share
(the ‘‘Offering Price’’). The Company is a corporation formed under the laws of the Province of British Columbia for the
purpose of acquiring (the ‘‘Acquisition’’) 100% of Kohlberg Sports Group Inc. (‘‘KSGI’’), a Cayman Island corporation,
from its securityholders (as defined herein the ‘‘Existing Holders’’) in exchange for (i) a combination of Common Shares
and proportionate voting shares (the ‘‘Proportionate Voting Shares’’ and together with the Common Shares, the ‘‘Equity
Shares’’) representing a
% equity and voting interest in the Company ( % on a fully diluted basis), plus
Cdn$ in cash being the net proceeds of the Offering received by the Company (exclusive of expenses of the Offering)
assuming no exercise of the Over-Allotment Option (described below), or (ii) a combination of Common Shares and
Proportionate Voting Shares representing a % equity and voting interest in the Company ( % on a fully diluted
basis), plus Cdn$ in cash being the net proceeds of the Offering and the Over-Allotment Option received by the
Company (exclusive of expenses of the Offering and the Over-Allotment Option) if the Over-Allotment Option is exercised
in full. See ‘‘Use of Proceeds’’, the ‘‘Acquisition’’, and ‘‘Principal Shareholders’’.
The Offering is being underwritten by RBC Dominion Securities Inc., CIBC World Markets Inc., BMO Nesbitt Burns Inc.,
Scotia Capital Inc., TD Securities Inc. and Macquarie Capital Markets Canada Ltd. (collectively, the ‘‘Underwriters’’). If the
Over-Allotment Option is exercised in full, an aggregate of an additional
Common Shares will be offered by
the Company.
There is currently no market through which the Common Shares may be sold and purchasers may not be able to resell the
Common Shares purchased under this prospectus. This may affect the pricing of the Common Shares in the secondary
market, the transparency and availability of trading prices, the liquidity of the Common Shares, and the extent of issuer
regulation. See ‘‘Risk Factors’’. The Company has applied to list the Common Shares on the Toronto Stock Exchange
(‘‘TSX’’). Listing of the Common Shares is subject to approval by the TSX of the Company’s listing application and
fulfillment by the Company of all of the TSX’s original listing requirements. The TSX has not conditionally approved the
listing of the Common Shares and there is no assurance that the TSX will approve the Company’s listing application.
In connection with the Offering, the Underwriters may over-allot or effect transactions that stabilize or maintain the market
price of the Common Shares at levels other than those which otherwise might prevail on the open market. See ‘‘Plan of
Distribution’’.
An investment in Common Shares is subject to a number of risks that should be considered by a prospective purchaser.
Investors should carefully consider the risk factors described under ‘‘Risk Factors’’ before purchasing Common Shares.
Price: Cdn$
per Common Share
Price to the
Public(1)
Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Offering(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cdn$
Cdn$
Underwriters’
Commission
Cdn$
Cdn$
Net Proceeds to the
Company(2)
Cdn$
Cdn$
(1)
The price of the Common Shares has been determined by negotiation between the Company and the Underwriters.
(2)
Before deducting the expenses of the Offering, which are estimated to be approximately Cdn$ , which expenses will be paid by the
Company. The Existing Holders will pay the Underwriters’ Commission (as set off against the purchase price paid by the Company to the
Existing Holders to acquire KSGI), including in respect of the Over-Allotment Option, if exercised, but will not bear any other expenses of
the Offering.
(continued on next page)
(continued from cover)
(3)
We have granted to the Underwriters an over-allotment option, exercisable, in whole or in part, at the sole discretion of the
Underwriters, for a period of 30 days from the Closing, to purchase up to an additional Common Shares (representing
approximately 15% of the Common Shares offered hereunder) on the same terms as set out above solely to cover over-allotments, if
any, and for market stabilization purposes (the ‘‘Over-Allotment Option’’). If the Over-Allotment Option is exercised in full, the total
‘‘Price to the Public’’, ‘‘Underwriters’ Commission’’ and ‘‘Net Proceeds to the Company’’ will be Cdn$ , Cdn$ and
Cdn$ , respectively. This prospectus qualifies the distribution of the Over-Allotment Option and the issuance of up to Common Shares upon exercise of the Over-Allotment Option. A purchaser who acquires Common Shares forming part of the
Over-Allotment Option acquires those shares under this prospectus, regardless of whether the position is ultimately filled through the
exercise of the Over-Allotment Option or secondary market purchases. See ‘‘Plan of Distribution’’.
The following table sets out the number of Common Shares that may be sold by the Company to the
Underwriters pursuant to the Over-Allotment Option:
Number of
Common Shares Available
Over-Allotment Option . . . . . . . . . . . . . . .
Exercise Period
Exercise Price
Up to 30 days
following Closing
Cdn$ per
Common Share
The Underwriters, as principals, conditionally offer the Common Shares, subject to prior sale, if, as and when
issued by the Company and accepted by the Underwriters in accordance with the conditions contained in the
underwriting agreement dated
, 2011 (the ‘‘Underwriting Agreement’’) referred to under ‘‘Plan of
Distribution’’ and subject to the approval of certain legal matters on behalf of the Company by Stikeman
Elliott LLP and on behalf of the Underwriters by Ogilvy Renault LLP. The Underwriters may offer the Common
Shares at a lower price than stated above. See ‘‘Plan of Distribution’’.
RBC Dominion Securities Inc., CIBC World Markets Inc. and Scotia Capital Inc. are affiliates of Canadian
chartered banks that are members of a syndicate of lenders that will, concurrent with Closing, make the
New Credit Facility (defined herein) available to the Company. Accordingly, in connection with the Offering the
Company may be considered a ‘‘connected issuer’’ of RBC Dominion Securities Inc., CIBC World Markets Inc.
and Scotia Capital Inc. for the purposes of applicable securities legislation. See ‘‘Description of Refinancing and
Material Indebtedness’’ and ‘‘Relationship Between the Company and Certain Underwriters’’.
Subscriptions will be received subject to rejection or allotment in whole or in part and the Underwriters reserve
the right to close the subscription books at any time without notice. It is expected that Closing will occur on or
about , 2011, or such later date as the Company and the Underwriters may agree, but in any event not later
than , 2011. One or more certificates representing the Common Shares to be sold in the Offering will be
issued in registered form to CDS Clearing and Depository Services Inc. (‘‘CDS’’), or to its nominee, and
deposited with CDS on the date of the Closing. A purchaser of Common Shares will receive only a customer
confirmation from the registered dealer from or through which the Common Shares are purchased. See ‘‘Plan of
Distribution’’.
Generally, the Common Shares and Proportionate Voting Shares have the same rights, are interconvertible at any
time, are equal in all respects and are treated by us as if they were shares of one class only, except that: each
Proportionate Voting Share carries 1,000 votes per share (compared to one vote per Common Share) and is
entitled to dividends and liquidation distributions in an amount equal to 1,000 times the amount distributed in
respect of each Common Share. A holder of Common Shares may at any time, at the option of the holder, convert
such Common Shares into Proportionate Voting Shares on the basis of 1,000 Common Shares for one
Proportionate Voting Share. Each Proportionate Voting Share may at any time, at the option of the holder, be
converted into 1,000 Common Shares. See ‘‘Description of Share Capital’’.
An investor should rely only on the information contained in this prospectus and is not entitled to rely on parts of
information contained in this prospectus to the exclusion of others. Neither the Company nor any of the
Underwriters has authorized anyone to provide investors with additional or different information. Neither the
Company nor any of the Underwriters is offering to sell the Common Shares in any jurisdictions where the offer
or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or any sale of the Common Shares.
For investors outside Canada, neither the Company nor the Underwriters has done anything that would permit
the Offering or distribution of this prospectus in any jurisdiction where action for that purpose is required, other
than in Canada. Investors are required to inform themselves about and to observe any restrictions relating to the
Offering and the distribution of this prospectus.
TABLE OF CONTENTS
Page
Page
GENERAL MATTERS . . . . . . . . . . . . . . .
3
MANAGEMENT . . . . . . . . . . . . . . . . . . . .
94
MARKET AND INDUSTRY DATA . . . . . .
3
EXECUTIVE COMPENSATION . . . . . . . .
101
TRADEMARKS, BUSINESS NAMES
AND SERVICE MARKS . . . . . . . . . . . .
4
INDEBTEDNESS OF DIRECTORS AND
OFFICERS . . . . . . . . . . . . . . . . . . . . . .
106
PRESENTATION OF FINANCIAL
INFORMATION . . . . . . . . . . . . . . . . . .
4
CORPORATE GOVERNANCE . . . . . . . . .
107
NON-U.S. GAAP MEASURES . . . . . . . . .
4
PLAN OF DISTRIBUTION . . . . . . . . . . . .
110
FORWARD-LOOKING STATEMENTS . . .
5
EXCHANGE RATE DATA . . . . . . . . . . . .
6
RELATIONSHIP BETWEEN THE
COMPANY AND CERTAIN
UNDERWRITERS . . . . . . . . . . . . . . . . .
114
PROSPECTUS SUMMARY . . . . . . . . . . . .
7
LEGAL PROCEEDINGS . . . . . . . . . . . . .
114
INDUSTRY OVERVIEW . . . . . . . . . . . . .
7
BUSINESS OF THE COMPANY . . . . . . . .
10
THE OFFERING . . . . . . . . . . . . . . . . . . .
17
INTEREST OF MANAGEMENT AND
OTHERS IN MATERIAL
TRANSACTIONS . . . . . . . . . . . . . . . . .
114
AUDITORS, TRANSFER AGENT AND
REGISTRAR . . . . . . . . . . . . . . . . . . . . .
115
SUMMARY CONSOLIDATED
FINANCIAL INFORMATION . . . . . . . .
20
CORPORATE STRUCTURE . . . . . . . . . .
25
MATERIAL CONTRACTS . . . . . . . . . . . .
115
INDUSTRY OVERVIEW . . . . . . . . . . . . .
26
EXEMPTION FROM NATIONAL
INSTRUMENTS . . . . . . . . . . . . . . . . . .
115
BUSINESS OF THE COMPANY . . . . . . . .
32
USE OF PROCEEDS . . . . . . . . . . . . . . . .
53
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . .
115
DIVIDEND POLICY . . . . . . . . . . . . . . . .
53
CERTAIN CANADIAN FEDERAL
INCOME TAX CONSIDERATIONS . . . .
116
SELECTED CONSOLIDATED
FINANCIAL INFORMATION . . . . . . . .
53
ELIGIBILITY FOR INVESTMENT . . . . . .
119
CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS . . . . . . . . . . . . . . .
119
RISK FACTORS . . . . . . . . . . . . . . . . . . . .
124
PURCHASERS’ STATUTORY RIGHTS
OF WITHDRAWAL AND RESCISSION
139
GLOSSARY OF TERMS . . . . . . . . . . . . . .
140
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . .
58
DESCRIPTION OF SHARE CAPITAL . . .
83
THE ACQUISITION . . . . . . . . . . . . . . . . .
85
DESCRIPTION OF REFINANCING AND
MATERIAL INDEBTEDNESS . . . . . . . .
87
APPENDIX A . . . . . . . . . . . . . . . . . . . . . .
A-1
CONSOLIDATED CAPITALIZATION . . .
89
INDEX TO FINANCIAL STATEMENTS . .
F-1
OPTIONS TO PURCHASE SECURITIES .
90
AUDITORS’ CONSENT . . . . . . . . . . . . . .
F-69
PRIOR SALES . . . . . . . . . . . . . . . . . . . . .
91
PRINCIPAL SHAREHOLDERS . . . . . . . .
91
CERTIFICATE OF BAUER
PERFORMANCE SPORTS LTD. . . . . . .
C-1
CERTAIN SECURITYHOLDERS
AGREEMENTS . . . . . . . . . . . . . . . . . . .
91
CERTIFICATE OF THE
UNDERWRITERS . . . . . . . . . . . . . . . . .
C-2
2
GENERAL MATTERS
Unless otherwise noted or the context otherwise indicates, ‘‘Bauer’’, the ‘‘Company’’, ‘‘we’’, ‘‘us’’ and ‘‘our’’:
• refer to Bauer Performance Sports Ltd. and its direct and indirect subsidiaries or other entities controlled
by them as constituted on the date of the Closing of the Offering, which gives effect to the Acquisition;
• in the case of references in ‘‘Summary Consolidated Financial Information’’, ‘‘Management’s Discussion
and Analysis of Financial Condition and Results of Operations’’, ‘‘Selected Consolidated Financial
Information’’ and elsewhere in this prospectus to financial information relating to a period or as at a date
prior to completion of the Offering, refer to KSGI and its subsidiary entities as referred to in notes 1
and 2 to the consolidated financial statements of KSGI included in this prospectus; and
• in the case of references in this prospectus to matters undertaken by a predecessor in interest to KSGI or
its subsidiaries, include each such predecessor in interest.
Unless otherwise indicated, the disclosure contained in this prospectus assumes that (i) the Over-Allotment
Option has not been exercised and (ii) the transactions referred under the headings ‘‘The Acquisition’’ and
‘‘Description of Refinancing and Material Indebtedness’’ have been completed.
Unless otherwise indicated, the number of Common Shares outstanding after the Offering is based on an
equivalent of Common Shares (assuming the conversion of the Proportionate Voting Shares issued,
excluding the Over-Allotment Option, to Common Shares on the basis of 1,000 Common Shares for one
Proportionate Voting Share). It does not include an aggregate of Common Shares reserved for issuance
under the Company’s stock option plans (the 2011 Plan and the Rollover Plan, each as defined herein), or
Common Shares that may be issued upon exercise of the Over-Allotment Option.
References to ‘‘management’’ in this prospectus means the persons who will be the senior officers of the
Company and/or its operating subsidiaries, as the case may be, following the Closing of the Offering and who are
currently senior officers of KSGI and/or its operating subsidiaries, as applicable. See ‘‘Management’’. Any
statements in this prospectus made by or on behalf of management are made in such persons’ capacities as
officers of the Company, KSGI and its operating subsidiaries, as applicable, and not in their personal capacities.
Certain capitalized terms and phrases used in this prospectus are defined in the ‘‘Glossary of Terms’’
beginning on page 140.
MARKET AND INDUSTRY DATA
We have obtained the market and industry data presented in this prospectus from a combination of internal
company surveys and commissioned reports, including from Straight Path Management (‘‘SPM’’), and third
party information, including from independent industry publications and reports, such as The Sporting Goods
Manufacturing Association (‘‘SGMA’’), and from hockey associations and federations, including the Canadian
Hockey Association (‘‘Hockey Canada’’) and the International Ice Hockey Federation (‘‘IIHF’’), and the
estimates of our management. There are limited sources that report on ice hockey, roller hockey and lacrosse
equipment and related apparel markets. As such, much of the industry and market data presented in this
prospectus is based on internally-generated management estimates, including estimates based on extrapolations
from third party surveys of ice hockey, roller hockey and lacrosse equipment and related apparel markets. While
we believe our internal surveys, third party information, and estimates of our management are reliable, we have
not verified them, nor have they been verified by any independent sources. While we are not aware of any
misstatements regarding the market and industry data presented in this prospectus, such data involves risks and
uncertainties and are subject to change based on various factors, including those factors discussed under
‘‘Forward-Looking Statements’’ and ‘‘Risk Factors’’. References to market share data and market size in this
prospectus are based on wholesale net revenues unless otherwise indicated.
3
TRADEMARKS, BUSINESS NAMES AND SERVICE MARKS
This prospectus includes trademarks, such as Bauer, Supreme, Mission, ITECH and Maverik, which are
protected under applicable intellectual property laws and are the property of Bauer Hockey Corp. and Bauer
Hockey, Inc. or their respective subsidiaries, as applicable. Solely for convenience, our trademarks and business
names referred to in this prospectus may appear without the or symbol, but such references are not intended
to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of
the applicable licensor to these trademarks and business names. All other trademarks used in this prospectus are
the property of their respective owners or have been licensed to us. See ‘‘Business of the Company —
Intellectual Property’’.
PRESENTATION OF FINANCIAL INFORMATION
All references to ‘‘Fiscal 2008’’ in this prospectus are to the fiscal year consisting of KSGI’s predecessor’s
fiscal period commencing on June 1, 2007 and ending on April 16, 2008 (the ‘‘Predecessor Period’’), being the
period prior to the sale of the Bauer Business by Nike to the Existing Holders, together with KSGI’s fiscal period
commencing on April 17, 2008 and ending on May 31, 2008 (the ‘‘Successor Period’’), to ‘‘Fiscal 2009’’ are to the
KSGI’s fiscal year ended May 31, 2009 and to ‘‘Fiscal 2010’’ are to KSGI’s fiscal year ending May 31, 2010.
The Company presents its consolidated financial statements in United States dollars. In this prospectus,
references to ‘‘$’’, ‘‘US$’’, ‘‘dollars’’ or ‘‘U.S. dollars’’ are to United States dollars and references to ‘‘Cdn$’’ and
‘‘Canadian dollars’’ are to Canadian dollars. Amounts are stated in U.S. dollars unless otherwise indicated.
All of the financial statements and financial data contained in this prospectus relating to KSGI have been
prepared using U.S. generally accepted accounting principles (‘‘U.S. GAAP’’). All of the financial statements
and financial data contained in this prospectus relating to the Company have been prepared using Canadian
generally accepted accounting principles (‘‘Canadian GAAP’’).
Canadian GAAP differs in certain significant respects from U.S. GAAP. For a summary of the principal
differences between Canadian GAAP and U.S. GAAP in respect of KSGI’s financial statements included in this
prospectus, you should refer to the U.S. GAAP to Canadian GAAP reconciliation starting at page F-55 of this
prospectus.
The Company has made a pre-filing application with the Ontario Securities Commission for relief from the
requirements to (i) include a U.S. GAAP to Canadian GAAP reconciliation for Fiscal 2008 (KSGI’s third most
recently completed fiscal year) and (ii) include a pro forma balance sheet or statement of operations, retained
earnings/deficit and cash flow of the Company to give effect to the acquisition of KSGI by the Company for the
year ending May 31, 2010 or for the six month period ending November 30, 2010, both as required by Part 4 of
National Instrument — 41-101 General Prospectus Requirements and Form 41-101F1 Information Required in
a Prospectus. In accordance with Part 19 of NI 41-101, the receipt for the final prospectus will constitute
evidence of receipt of such relief for the purposes of the financial statements contained in the final prospectus.
NON-U.S. GAAP MEASURES
This prospectus makes reference to certain non-U.S. GAAP measures. These non-U.S. GAAP measures are
not recognized measures under U.S. GAAP, do not have a standardized meaning prescribed by U.S. GAAP and
are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these
measures are provided as additional information to complement those U.S. GAAP measures by providing
further understanding of KSGI’s results of operations from management’s perspective. Accordingly, they should
not be considered in isolation nor as a substitute for analysis of KSGI’s financial information reported under
U.S. GAAP. We use non-U.S. GAAP measures such as Adjusted EBITDA, Adjusted Gross Profit and EBITDA
to provide investors with a supplemental measure of our operating performance and thus highlight trends in our
core business that may not otherwise be apparent when relying solely on U.S. GAAP financial measures. We also
believe that securities analysts, investors and other interested parties frequently use non-U.S. GAAP measures
in the evaluation of issuers. Our management also uses non-U.S. GAAP measures in order to facilitate operating
performance comparisons from period to period, prepare annual operating budgets and assess our ability to
meet our future debt service, capital expenditure and working capital requirements. We refer the reader to
4
‘‘Selected Consolidated Financial Information’’ for the definition and reconciliation of Adjusted EBITDA,
Adjusted Gross Profit and EBITDA used and presented by the Company to the most directly comparable
U.S. GAAP measures. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results
of Operations’’.
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus about our current and future plans, expectations and intentions,
results, levels of activity, performance, goals or achievements or any other future events or developments
constitute forward-looking statements. The words ‘‘may’’, ‘‘will’’, ‘‘would’’, ‘‘should’’, ‘‘could’’, ‘‘expects’’,
‘‘plans’’, ‘‘intends’’, ‘‘trends’’, ‘‘indications’’, ‘‘anticipates’’, ‘‘believes’’, ‘‘estimates’’, ‘‘predicts’’, ‘‘likely’’ or
‘‘potential’’ or the negative or other variations of these words or other comparable words or phrases, are
intended to identify forward-looking statements. Discussions containing forward-looking statements may be
found, among other places, under ‘‘Prospectus Summary’’, ‘‘Industry Overview’’, ‘‘Business of The Company’’,
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Risk Factors’’.
Forward-looking statements are based on estimates and assumptions made by us in light of our experience and
perception of historical trends, current conditions and expected future developments, as well as other factors
that we believe are appropriate and reasonable in the circumstances, but there can be no assurance that such
estimates and assumptions will prove to be correct. Certain assumptions in respect of the determination of the
impairment of losses, claim liabilities, income taxes, employee future benefits, goodwill and intangibles are
material factors made in preparing forward-looking information and management’s expectations. Many factors
could cause our actual results, level of activity, performance or achievements or future events or developments
to differ materially from those expressed or implied by the forward-looking statements, including, without
limitation, the following factors, which are discussed in greater detail in the ‘‘Risk Factors’’ section of this
prospectus: inability to introduce new and innovative products, intense competition in the apparel and
equipment industries, inability to introduce technical innovation, decrease in ice hockey, roller hockey and/or
lacrosse participation rates, adverse publicity, inability to maintain and enhance brands, reliance on third-party
suppliers and manufacturers, disruption of distribution chain or loss of significant customers or suppliers, cost of
raw materials and shipping freight, protection of trademarks and other proprietary rights, weather conditions or
seasonal fluctuations in the demand for our products, inability to forecast demand for products, inventory
shrinkage or excess inventory, inability to expand into international market segments, product liability claims
and product recalls, compliance with standards of testing and athletic governing bodies, departure of senior
executives or other key personnel, litigation, employment or union related matters, disruption of information
technology systems, restrictive covenants in our New Credit Facility, anticipated levels of indebtedness, inability
to generate sufficient cash to service all the Company’s indebtedness, inability to continue making strategic
acquisitions, public market for the securities, volatile market price for Common Shares, no current plans to pay
cash dividends, costs associated with reporting requirements and regulations affecting public companies, holding
company structure, assertion the Acquisition is an inversion transaction, conflicts of interests among investors,
influence by the Existing Holders and future sales of Common Shares by the Existing Holders, fluctuations in
the value certain foreign currencies, including but not limited to the Canadian dollar, euro, Swedish krona,
Chinese renminbi, Taiwan dollar and Thai baht in relation to the U.S. dollar, general economic and market
conditions, current adverse economic conditions, changes in consumer preferences and the difficulty in
anticipating or forecasting those changes, changes in government regulations, inability of counterparties and
customers to meet their financial obligations, and natural disasters. These factors are not intended to represent a
complete list of the factors that could affect us; however, these factors should be considered carefully. The
purpose of the forward-looking statements is to provide the reader with a description of management’s
expectations regarding the Company’s financial performance and may not be appropriate for other purposes;
readers should not place undue reliance on forward-looking statements made herein. Furthermore, unless
otherwise stated, the forward-looking statements contained in this prospectus are made as of the date of this
prospectus, and we have no intention and undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, except as required by law. The
forward-looking statements contained in this prospectus are expressly qualified by this cautionary statement.
5
EXCHANGE RATE DATA
We disclose certain financial information contained in this prospectus in U.S. dollars. The following table
sets forth, for the periods indicated, the high, low, average and period-end noon spot rates of exchange for one
U.S. dollar, expressed in Canadian dollars, published by the Bank of Canada.
May 31, 2010
(Cdn$)
Highest rate during the period . . . . . . . .
Lowest rate during the period . . . . . . . .
Average noon spot rate for the period(1) .
Rate at the end of the period . . . . . . . .
(1)
.
.
.
.
1.1655
0.9961
1.0632
1.0462
Fiscal Year Ended
May 31, 2009 May 31, 2008
(Cdn$)
(Cdn$)
1.3000
0.9942
1.1562
1.0961
Six Month Period Ended
Nov. 30, 2010 Nov. 30, 2009
(Cdn$)
(Cdn$)
1.0755
0.9170
1.0142
1.0013
1.0660
1.0013
1.0311
1.0264
1.1655
1.0292
1.0897
1.0574
Determined by averaging the rates on the last business day of each month during the respective period.
On January 26, 2011, the noon rate of exchange posted by the Bank of Canada for conversion of
U.S. dollars into Canadian dollars was US$1.00 equals Cdn$0.9953.
6
PROSPECTUS SUMMARY
The following is a summary of the principal features of the Offering and should be read together with the more
detailed information and financial data and statements contained elsewhere in this prospectus. Please refer to the
‘‘Glossary of Terms’’ beginning on page 140 of this prospectus for a list of defined terms used herein.
INDUSTRY OVERVIEW
We design, develop, manufacture and sell performance sports equipment for ice hockey, roller hockey, and
lacrosse, as well as related apparel and accessories.
Ice Hockey
Ice Hockey Participation Rates and Demographics
Ice hockey is a team sport played in more than 68 countries by more than an estimated six million people.
While ice hockey is played around the world, the largest and most significant markets for ice hockey are Canada,
the United States and a number of European countries, including the Nordic countries (principally Sweden and
Finland), Central European countries (principally the Czech Republic, Germany, Switzerland, Austria and
Slovakia) and Eastern European countries (particularly Russia).
Global registered hockey participation rates have been stable over the last 10 years, growing at
approximately 1% to 2% per year. We believe casual and unregistered hockey participation growth rates,
especially in the United States, as well as growth rates in Eastern Europe (particularly Russia) and women’s
hockey, have exceeded that of the registered segment as a whole.
Ice Hockey Equipment and Related Apparel Industry
The global ice hockey equipment and related apparel industry is a stable and growing market with
significant barriers to entry. Ice hockey equipment and related apparel sales are driven primarily by global ice
hockey participation rates (registered and unregistered). Other drivers of equipment sales include demand
creation efforts, the introduction of innovative products, a shorter product replacement cycle, general
macroeconomic conditions and the level of consumer discretionary spending. Management estimates that the
global ice hockey equipment market (which excludes related apparel, such as performance apparel, team jerseys
and socks) totaled approximately $555 million in 2010 and is growing at an annual rate of approximately 1% to
2%, which is consistent with the global registered hockey participation growth rates observed over the last
10 years. Skates and sticks are the largest contributors to equipment sales, accounting for an estimated 62% of
industry sales in 2010.
Management estimates that over 80% of the ice hockey equipment market is attributable to three major
competitors: Bauer, Reebok (which owns both the Reebok and CCM brands) and Easton, each of whom offers
consumers a full range of products (skates, sticks and full protective equipment). The remaining equipment
market is highly fragmented among many smaller equipment manufacturers offering specific products, catering
to niche segments within the broader market. Management estimates that Bauer has the largest share of the
market, which we believe is in excess of the next three brands combined.
The following table shows our estimated ranking of the three major competitors referenced above, in total
and by major product category:
Market Position of the Three Major Ice Hockey Equipment Manufacturers
Company
Total
Market
Skates
Sticks
Helmets
Protective
Goalie
Bauer
#1
#1
#2
#1
#1
#1
Reebok
#2
#2
#3
#2
#2
#2
Easton
#3
#3
#1
#3
#3
n/a
(1)
(1)
Reebok includes Reebok and CCM branded equipment.
7
Management estimates that the global ice hockey related apparel market for 2010 (which includes such
items as performance apparel, team jerseys and socks) is approximately $300 million in size and is growing at an
annual rate which we believe exceeds that of the ice hockey equipment market. The related apparel market is
more fragmented than the equipment market and includes a variety of larger and smaller participants. Similar to
what has occurred in the ice hockey equipment industry, we expect consolidation in this market to occur in the
coming years.
Roller Hockey
Roller Hockey Participation Rates and Demographics
Roller hockey is a team sport played principally in the United States, particularly in warmer regions such as
California. According to SGMA, there were approximately 600,000 ‘‘frequent’’ roller hockey participants in the
United States in 2009 who played at least 13 times during the year. In 2009, total participation was estimated at
1.4 million participants.
Roller Hockey Equipment and Related Apparel Industry
The roller hockey equipment and related apparel industry shares similar characteristics to the ice hockey
equipment and related apparel industry given the similarity of the sports. Management estimates that the roller
hockey equipment market generated approximately $25 million in sales in 2009.
Through our Mission and Bauer brands, we believe we hold the number one and two market share positions
in the roller hockey equipment market, and have a substantial lead over our primary competitors, including
Reebok, Tour and a few small niche players who compete in sub-categories such as wheels and accessories.
Lacrosse
Lacrosse Participation Rates and Demographics
Lacrosse is a team sport played principally in the United States and Canada. In the United States, according
to SPM, lacrosse is the fastest growing team sport and participation has grown at an annual compound growth
rate of 10.6% from 2001 to 2009, with over 550,000 registered players in the United States in 2009. In Canada,
we estimate that there are currently 150,000 participants.
Over 90% of lacrosse participants in the United States are under the age of 18, with 52% of participants in
the pre-high school category and 40% of participants in the high school category. Similar to ice hockey, the high
representation of youth in the sport provides the industry with a more frequent product replacement cycle as
players grow out of their equipment. The following graphs illustrate the growth in U.S. lacrosse participation for
the periods presented and the demographic breakdown of U.S. participation for 2009:
Number of Players (in thousands)
U.S. Lacrosse Participation
2009 U.S. Lacrosse Participation by Level
568
600
524
CAGR: 10.6%
481
500
426
400
300
College
5.6%
352
254
288
382
302
High
School
40.1%
200
100
2001
2002
Pro/PostCollegiate
2.0%
2003
2004
2005
2006
2007
2008 2009
21JAN201119372499
Source: U.S. Lacrosse, Inc.
8
Youth
52.3%
25JAN201123304661
Lacrosse Equipment and Related Apparel Industry
The North American lacrosse equipment and related apparel market is a high growth, emerging sports
equipment market underpinned by strong growth in participation rates.
In 2009, the U.S. lacrosse equipment market was estimated to be approximately $80 million to $90 million
while the Canadian market was estimated to be approximately $10 million. According to SPM, the U.S. market
is expected to grow by 40% to 90% in the next five years to approximately $125 million to $150 million,
representing a compound annual growth rate of up to 10.1%. The lacrosse equipment market is made up of four
primary equipment categories: sticks (shafts and heads), gloves, helmets and protective equipment. At
approximately 46% of 2009 industry-wide U.S. sales, sticks currently make up the largest segment of the lacrosse
equipment market.
See ‘‘Industry Overview’’.
9
BUSINESS OF THE COMPANY
Our Company
We are the world’s leading designer, developer, manufacturer, and marketer of ice and roller hockey
equipment. We have the most recognized and strongest brand in the ice hockey equipment industry, and hold
the number one market share position in both the ice and roller hockey equipment industries. With an estimated
45% share of ice hockey equipment sales in Fiscal 2010, we have the leading and fastest growing share of the
overall ice hockey equipment market, which we believe is in excess of the next three largest brands combined. In
roller hockey, we had an estimated 55% share of equipment sales in Fiscal 2010.
The following graphs set forth our estimated overall market share of ice hockey equipment sales and our
total net revenues for the periods presented:
Overall Market Share
Ice Hockey Equipment Sales
Net Revenues(1)
50%
41%
42%
(US$ millions)
Market Share
45%
40%
35%
35%
30%
CAGR: 15.7%
$300
45%
28%
$282.7
$242.2
$250
$257.4
$219.5
$200
$166.4
$150
$146.6
$100
25%
2006
2007
2008
Fiscal Year
2009
2010
2006
2007
27JAN201113562066
2008
2009
Fiscal Year
(1)
Includes ice hockey and roller hockey equipment and related apparel.
(2)
Last twelve months ended November 30, 2010 also includes lacrosse equipment and related apparel.
2010
LTM(2)
27JAN201113562200
Ice hockey equipment is the cornerstone of our world-class performance sports product platform, which we
have repeatedly used to grow our business into new performance equipment and apparel categories and sports
markets. Since the sale of the Bauer Business by Nike to our Existing Holders in April 2008, we:
• completed the strategic acquisition of Mission-ITECH (September 2008);
• acquired intellectual property assets from Jock Plus Hockey (November 2009); and
• completed the strategic acquisition of Maverik (June 2010).
For both ice and roller hockey, our equipment offering includes skates, sticks, under-protective equipment,
gloves, pants, helmets, facial protection and goalie equipment, and for lacrosse, we also offer a comprehensive
line of equipment.
Our ice hockey, roller hockey and lacrosse authentic brands and product offerings provide us with an
opportunity to cross-sell and promote a comprehensive line of related apparel and accessories, including
performance, team and lifestyle apparel.
We believe we have the largest and most experienced sales force in the ice and roller hockey equipment
industries. In addition, we have an established global distribution network in the major geographic markets
where hockey is popular, including Canada, the United States, Western Europe, Eastern Europe and Russia.
Our History
Founded by the Bauer family in Kitchener, Ontario in 1927, we have focused on design and innovation to
produce high-performance sports equipment throughout our history. We designed and manufactured the first
10
ice skate with the blade attached to the boot and in 1976, we introduced the TUUK blade holder, a predecessor
to the holder currently used by more than 80% of NHL players.
Our predecessor, Canstar Sports Inc., acquired other well-known brands such as Micron, Lange, Mega, and
Daoust ice skates, as well as Flak and Cooper hockey equipment. In 1995, the Bauer Business was acquired by
Nike who introduced a line of Nike branded equipment alongside the existing line of Bauer branded equipment
in 1997.
In April 2008, the Existing Holders acquired the Bauer Business from Nike and, in addition to re-branding
all ice hockey equipment lines exclusively under the Bauer name, management was provided with the
opportunity to leverage the strength of our platform and acquire complementary brands and technology assets.
Our Competitive Strengths
We believe that the following competitive strengths position us well to succeed and grow in the future:
Most Recognized Brands in Ice and Roller Hockey; Cutting-Edge Brand in Lacrosse
Bauer is the most recognized brand in the ice hockey equipment industry and has been synonymous with
the sport itself for more than 83 years. Generations of adult, junior, and youth hockey players strongly identify
with our iconic brand, an image fostered over years of providing top-quality products to recreational through
professional players.
According to a North American market research survey commissioned by the Company in 2009, Bauer has
90% unaided brand awareness among hockey consumers and is the top-rated brand in hockey with consumers
identifying Bauer as having ‘‘innovative products’’ (64%), being the ‘‘best brand on the market’’ (59%) and ‘‘my
favourite brand’’ (54%).
‘‘Innovative Products’’
75%
‘‘Best Brand on the Market’’
59%
60%
45%
75%
75%
64%
60%
60%
43%
25%
30%
15%
30%
26%
23%
21%
CCM
25JAN201110090510
Reebok
22%
22%
Easton
CCM
19%
0%
0%
Easton
30%
15%
15%
0%
54%
45%
45%
37%
‘‘My Favourite Brand’’
Easton
Reebok
25JAN201110090223
CCM
Reebok
25JAN201110085793
Our brand recognition creates significant barriers to entry in our market as many consumers believe that
brands with heritage and authenticity in their sport understand their needs and will provide the best products to
improve their game. Additionally, our brand strength leads more retailers to carry our hockey equipment
products than any other brand and most retailers to carry a full range of our products.
Our Mission brand is the leading brand in the roller hockey equipment industry, and our recently acquired
Maverik brand is an authentic, cutting-edge brand which we intend to grow into a market leader in the lacrosse
equipment industry.
Number One and Growing Market Share in the Ice and Roller Hockey Equipment Industries
We have the leading market share in the overall ice hockey equipment market, with an estimated 45%
market share in Fiscal 2010, which we believe is in excess of the next three largest brands combined. We believe
that we hold the number one market share position in each of our ice and roller hockey equipment categories,
with the exception of sticks where we believe we hold the number two market share position. For Fiscal 2010, we
estimate that we had more than a 60% market share in skates and helmets, more than a 55% market share in
roller hockey, and more than a 35% market share in every other equipment category.
11
As a testament to the ‘‘best in class’’ nature of our products, as shown in the graph below, during the 2010
NHL Stanley Cup Finals, more players wore our products than any other competitors’ products by a wide
margin, further enhancing our brand recognition and credibility among players of all abilities.
NHL Player Equipment Choice — 2010 Stanley Cup Finals
80%
71%
60%
55%
48%
40%
26%
24%
17%
20%
45%
43%
29%
45%
26%
19%
0%
Skates
Sticks
Helmets
Visors
Bauer
Gloves
Closest Competitor
Pants
26JAN201100260885
Source: Management Estimates
Industry Leading R&D and Product Innovation
Our objective is to improve player performance and safety at all levels of play through equipment and
apparel innovation. Our passionate and committed team of more than 50 designers, engineers and technicians,
who work closely with our scientific and research partners, including McGill University, have a world-class
reputation and lead the ice hockey equipment industry in continuously bringing to market innovative, often
revolutionary, top-quality equipment with superior performance that is trusted by players of all skill levels.
We have a dedicated R&D facility located in St. Jerome, Québec, where we employ a rolling five-year
innovation cycle for each product category, resulting in a steady stream of approximately 100 to 150 new product
launches each year.
A substantial number of the world’s best hockey players use our equipment. During the current 2010/2011
NHL season, approximately 90% of NHL players wear or use at least one piece of our ice hockey equipment.
The chart below illustrates the breakdown of use of Bauer equipment by NHL players for each of the major
equipment product categories over the past two NHL seasons.
Use of Bauer Equipment by NHL Players
80%
69%
69%
60%
38%
40%
40%
42%
29%
27%
33%
30%
37%
29%
36%
20%
0%
Skates
Sticks
Helmets
2009/2010 NHL Season
Visors
2010/2011 NHL Season
Gloves
Pants
26JAN201100261045
Source: Management Estimates
In roller hockey, we have successfully integrated existing Mission technology into our product offerings,
most notably the patented hi-lo chassis for roller hockey skates. Our St. Jerome R&D team has combined this
chassis, which uses two different size wheels on the skate to improve agility and control, with our existing skate
boot design to pair the best technologies available in the roller hockey market. In lacrosse, Maverik also has a
track record of product innovation. We are currently adding Maverik personnel at our St. Jerome R&D facility
to drive innovation for our Maverik brand, leveraging our proprietary technologies and established R&D
program to accelerate Maverik’s product innovation cycle and revenue growth.
12
Significant Scale and Strong Manufacturing and Retail Relationships
Our scale and relationships have enabled us to improve our profitability over the last five years and to
compete successfully. We have an established comprehensive manufacturing platform with our key partners,
primarily with facilities in Canada, China, Thailand and Vietnam, where our equipment and related apparel is
produced exclusively for us at what we believe to be low costs. We have excellent long-term relationships with
our manufacturing partners and vendors, who we fully integrate into our R&D and product development
programs.
We also have a highly diversified global network of retailers and distributors, comprised of approximately
900 retailers in Canada, 1,000 in the United States, an aggregate of 800 in Scandinavia and Finland, as well as
approximately 60 distributors outside of these countries who sell to over 1,000 retailers in other international
markets.
Strong Cash Flow Generation
Our Adjusted EBITDA, together with our relatively low level of capital expenditures and attractive tax
position, allow us to generate cash flows to invest in R&D, pursue acquisitions and other growth initiatives, and
reduce our indebtedness.
For the last twelve month period ended November 30, 2010, Bauer generated an Adjusted Gross Profit
Margin of 40.0% and an Adjusted EBITDA margin of 14.5% as compared to an Adjusted Gross Profit Margin
and Adjusted EBITDA margin of 39.3% and 10.4%, respectively, in Fiscal 2008.
Our ordinary course operations require minimal capital expenditures given that we manufacture most of
our products through our manufacturing partners. Our capital expenditure requirements have averaged less
than 1.0% of net revenues for the past three fiscal years ending May 31, 2010. Going forward, to support our
growth and key business initiatives, we anticipate moderately higher levels of capital expenditures
and investment.
We also benefit from an attractive tax position with, as of May 31, 2010, approximately $52.6 million of net
operating loss carry-forwards in Canada and approximately $57.7 million of available tax deductions in Canada
and the United States relating to intangible assets.
Experienced and Committed Team with a Track Record of Innovation and Growth
We are led by an experienced and committed management team with a proven track record of successfully
introducing and marketing innovative products, integrating strategic acquisitions, and implementing successful
growth strategies. Led by Kevin Davis, our President and Chief Executive Officer, who has been with our
Company for more than 9 years, our senior management team has an average of 17 years experience in the
hockey, sporting goods and consumer product industries, including with Nike, Procter & Gamble, Unilever and
the Boston Bruins. On a company-wide basis, our dedicated and passionate employees have been with us for an
average of more than 10 years, which we believe represents a strong commitment to our Company and an
enthusiasm for team sports.
In recent years, our management team has developed and is executing a growth strategy focused on
substantial product innovation and R&D. Over the last few years, our team has also executed key strategic
initiatives to distinguish ourselves from our competitors.
Our Performance Sports Products Platform is Driving Growth
Our competitive strengths have driven our success in the ice hockey equipment market. These strengths are
core elements of what we believe is a world-class performance sports products platform that is unique to our
industry. We believe we can successfully apply this platform to other performance sports categories and markets.
Our platform consists of:
• strong and authentic brands;
13
• industry leading R&D and innovation;
• deep knowledge of consumers and players;
• defensible, proprietary technologies and patents;
• effective global marketing;
• extensive global retail and distributor network; and
• global, cost efficient manufacturing operations driven by scale and strategic partnerships.
This platform is supported by our experienced, passionate, and dynamic performance sports products team
that has been successful in identifying and integrating complementary brands and technology assets which, with
the benefit of our platform, have contributed to accelerated market share growth and improved margins.
The following graph illustrates the expansion of our world-class performance sports products platform since
the sale of the Bauer Business by Nike to the Existing Holders:
Other
Acquisition
Targets
Maverik
Lacrosse
Acquisition
Jock Plus
Hockey
Asset Acquisition
MissionITECH
Acquisition
Bauer
Acquisition from
Nike
Bauer
2008
2008
Bauer
Mission-ITECH
Bauer
Mission-ITECH
Bauer
Jock Plus
Hockey
Mission-ITECH
Assets
2009
2010
Jock Plus
Hockey
Assets
Maverik
Lacrosse
2011+
Leading Global Performance Equipment Platform
(R&D, Sourcing, Manufacturing, Marketing,
Distribution)
26JAN201111094572
We intend to make further strategic acquisitions of complementary sports equipment and/or related apparel
companies that are, or have the potential to become, market leaders in their relevant category, whether in
hockey, lacrosse or other performance sports. We believe that our existing platform and scale enables us to
materially enhance the success of an acquisition by leveraging our industry-leading technical expertise, low-cost
manufacturing, marketing resources and distribution relationships.
Our Growth Strategies
We believe that we can deliver net revenue growth by executing the strategies described below. We also
intend to improve our profitability and margins by staying committed to our cost reduction agenda and gaining
efficiencies throughout our supply, manufacturing and distribution channels.
Increase Our Market Share in Ice and Roller Hockey Equipment Through Product Innovation
We are focused on building our leadership position and growing our market share in all of our ice hockey
and roller hockey equipment product categories through continued innovation at all performance levels. We
have steadily increased our market share in the ice hockey equipment market, from approximately 28% in Fiscal
2006 to approximately 45% in Fiscal 2010. In roller hockey, we had an estimated 55% market share of
equipment sales in Fiscal 2010.
14
Our product launch process, which includes category-leading R&D resources and expertise, crossfunctional business planning, and timely consumer and player insights throughout the product innovation cycle,
is expected to continue to deliver innovative products that meet the demands of players at all skill levels.
We believe this process and new technologies will drive further market share growth in the ice and roller
hockey equipment markets. For example, through the introduction of superior performing products using new
technologies, we have nearly doubled our net revenues in the hockey stick category from Fiscal 2006 to Fiscal
2010, representing a compound annual growth rate of 18.3%. With the recent launch of our Supreme line of
composite sticks, we believe that we can become the market share leader in this category in our current
fiscal year.
Target Emerging Markets and Underserved or Growing Consumer Segments
Emerging Markets
Ice hockey equipment growth opportunities exist in geographic markets where we have traditionally had
less exposure than in North America, Western Europe and the Nordic countries. We intend to grow our
revenues in Eastern Europe and Russia, where ice hockey is considered an integral and vital part of the cultural
fabric, utilizing various consumer connection and commercial penetration strategies. In particular, the Russian
ice hockey equipment market is largely fragmented and represents a significant opportunity for us, especially
leading up to the 2014 Winter Olympics in Sochi, Russia. We expect the elite and high-level players in Eastern
Europe and Russia to generate greater demand for quality, high-end global branded products and we intend to
meet this demand by working with our distribution partners to expand our distribution network and by
dedicating marketing support to the region. An increase in ice hockey retail selling space combined with the
Russian government’s commitment to invest in developing their ice hockey infrastructure creates conditions for
attractive growth. The KHL and its feeder leagues also present both an elite sports marketing vehicle and a
commercial growth opportunity. We are positioned to capitalize on these dynamics through a robust, established
commercial and sports marketing presence within Russia.
Women’s Ice Hockey
The women’s ice hockey segment is another attractive growth opportunity for us. Women’s ice hockey
participation has approximately doubled in the last decade, with a 7% compound annual growth rate from the
1999/2000 to 2009/2010 hockey seasons, and now represents 12% of total registered players globally. We have
invested resources and commenced unique marketing initiatives specifically targeted to female players, including
an exclusive partnership with the Canadian Women’s Hockey League. As women’s ice hockey grows, we intend
to be responsive to the needs of female players by enhancing our R&D investments with female consumer and
player insights and by adapting our existing high performance products as necessary.
Performance and Recreational Segments
The ice hockey equipment market is comprised of three segments, (i) elite, (ii) performance, and
(iii) recreational, each of which targets a different level of athlete who demands a different level of performance.
We have historically focused the majority of our innovation, sales, and marketing efforts on elite-level products
as compared to the performance and recreational segments. We are making a concerted effort to focus our
industry-leading R&D, sales, and marketing efforts on these underserved segments, with a goal to gain market
share that is equal to our market share in elite level products. Our recreational-level products, which provide
performance at value pricing, benefit from the same industry-leading R&D that drives the development of our
elite-level and performance-level products. We believe that our recreational products typically perform at
significantly higher levels than many of our competitors’ products that sell at comparable or even higher
price points.
Capitalize on Lacrosse — the Fastest Growing Team Sport in the United States
According to SPM, lacrosse is the fastest growing team sport in the United States with the number of
lacrosse players at the youth and high school levels — the segments having by far the largest participation —
15
having grown by an average of over 10% per year since 2000. In 2009, the U.S. lacrosse equipment market was
estimated to be in the range of $80 to $90 million.
Our objective is for Maverik to become a leading lacrosse brand by 2015. Maverik is an authentic,
cutting-edge brand with a portfolio of innovative products and a strong management team. Maverik’s net
revenues have increased steadily since its 2008 fiscal year, representing a compound annual growth rate of 36.9%
through the end of its 2010 fiscal year, and it has the potential to substantially grow its current market share. In
addition, Maverik currently has virtually no sales into Canada, which management believes represents an
estimated $10 million market. As such, Canada presents an additional growth opportunity for Maverik.
Grow Apparel Across All Sports Categories
Management estimates that the worldwide ice hockey apparel market is approximately $300 million,
consisting of (i) team apparel and bags, (ii) performance apparel, (iii) lifestyle apparel, and (iv) licensed apparel.
We currently participate in all segments other than the licensed apparel business. We have recently begun
building and utilizing the same product development process that we use for our performance equipment
categories, including consumer and player insights, strong R&D investment and effective marketing to drive our
sales in the team apparel and bags, performance and lifestyle apparel segments. While apparel net revenues
accounted for approximately 4.7% of our Fiscal 2010 net revenues, Bauer-branded net revenues grew from
Fiscal 2009 to Fiscal 2010 by 34.8%, and we anticipate that our continued investments will further increase sales
and apparel will become a more significant portion of our business going forward.
Leverage Cost Leadership to Increase Profitability
We employ an ongoing cost reduction strategy that enables us to provide ‘‘best in class’’ equipment and
related apparel at competitive prices and attractive margins. Our primary focus of cost reduction includes:
(i) alternative materials and sourcing arrangements, (ii) manufacturing efficiencies and techniques or new
manufacturing partners, and (iii) distribution and supply-chain efficiencies.
In conjunction with our manufacturing partners, we identify and implement initiatives to reduce the cost of
materials and streamline the manufacturing processes across all of our ice and roller hockey and lacrosse
product categories. Further, we design and build proprietary machinery and equipment that enables us to
manufacture more efficiently, thereby decreasing unit costs.
Pursue Strategic Acquisitions
We plan to supplement our organic growth initiatives with strategic acquisitions of complementary sports
equipment and apparel companies and brands that are or have the potential to become market leaders in their
relevant category, whether in ice hockey, roller hockey, lacrosse or other performance sports. Our existing
platform and scale provides us with the opportunity to materially enhance the success of an acquisition by
leveraging our industry-leading technical expertise, low-cost manufacturing, marketing and communications
resources and distribution relationships as we have demonstrated with the Mission-ITECH Acquisition, the Jock
Plus Intellectual Property Acquisition and the Maverik Lacrosse Acquisition.
We actively review performance sports equipment and related apparel companies that have growth
potential and would benefit from our platform and scale. We seek companies with, among other things, strong
and authentic brands, industries that demand high-performance and innovative products, new technologies and
strong consumer marketing techniques.
See ‘‘Business of the Company’’.
16
THE OFFERING
Issuer:
Offering:
Bauer Performance Sports Ltd.
Common Shares of the Company.
If the Over-Allotment Option is exercised in full, we will sell an additional
Common Shares. See ‘‘Plan of Distribution’’.
Amount:
Cdn$
Offering Price:
Cdn$
Use of Proceeds:
The Company expects to receive Cdn$ in net proceeds from the
Offering (Cdn$ if the Over-Allotment Option is exercised in full), after
deducting fees payable by the Company to the Underwriters and the
estimated expenses of the Offering. Upon the Closing of the Offering, the
Company will acquire 100% of KSGI from the Existing Holders in exchange
for (i) a combination of Common Shares and Proportionate Voting Shares
representing a % equity and voting interest in the Company ( %
on a fully diluted basis), plus Cdn$ in cash being the net proceeds of
the Offering received by the Company (exclusive of expenses of the Offering)
assuming no exercise of the Over-Allotment Option, or (ii) a combination of
Common Shares and Proportionate Voting Shares representing a %
equity and voting interest in the Company ( % on a fully diluted basis),
plus Cdn$ in cash being the net proceeds of the Offering and the
Over-Allotment Option received by the Company (exclusive of expenses of
the Offering and the Over-Allotment Option) if the Over-Allotment Option
is exercised in full. See ‘‘Use of Proceeds’’, the ‘‘Acquisition’’, and ‘‘Principal
Shareholders’’.
Over-Allotment Option:
The Company has granted to the Underwriters an Over-Allotment Option,
for a period of 30 days from the Closing, to purchase up to an additional
Common Shares at the Offering Price (representing approximately
15% of the Common Shares offered hereunder) solely to cover
over-allotments, if any, and for market stabilization purposes. If the
Over-Allotment Option is exercised in full, the total ‘‘Price to the Public’’,
‘‘Underwriters’ Commission’’ and ‘‘Net Proceeds to the Company’’ will be
Cdn$ , Cdn$ , and Cdn$ , respectively. See ‘‘Plan of
Distribution’’.
Shares Outstanding:
Immediately after the completion of the Offering, assuming no exercise of
the Over-Allotment Option, an equivalent of
Common Shares
(assuming the conversion of all Proportionate Voting Shares to Common
Shares on the basis of 1,000 Common Shares for one Proportionate Voting
Share) will be issued and outstanding on a non-diluted basis, and, if the
Over-Allotment Option is exercised in full, the same number of Common
Shares (assuming the conversion of all Proportionate Voting Shares to
Common Shares on the basis of 1,000 Common Shares for one Proportionate
Voting Share) will be issued and outstanding on a non-diluted basis. See
‘‘Conversion Rights’’ and ‘‘The Acquisition’’ below.
Shares to be owned by the
Existing Holders immediately
after the Offering:
Immediately after the completion of the Offering, the Existing Holders,
collectively, will own an equivalent of Common Shares (assuming the
conversion of all Proportionate Voting Shares to Common Shares on the
basis of 1,000 Common Shares for one Proportionate Voting Share),
representing a % equity and voting interest in the Company ( %
, or Cdn$
if the Over-Allotment Option is exercised in full.
per Common Share.
17
on a fully diluted basis), and if the Over-Allotment is exercised in full, the
Existing Holders, collectively, will own an equivalent of
Common
Shares (assuming the conversion of all Proportionate Voting Shares to
Common Shares on the basis of 1,000 Common Shares for one Proportionate
Voting Share), representing a
% equity and voting interest in the
Company ( % on a fully diluted basis).
Conversion Rights:
Common Shares may at any time, at the option of the holder, be converted
into Proportionate Voting Shares on the basis of 1,000 Common Shares for
one Proportionate Voting Share. Each outstanding Proportionate Voting
Share may at any time, at the option of the holder, be converted into
1,000 Common Shares. Except in limited circumstances, no fractional Equity
Share will be issued on any conversion of another Equity Share.
See ‘‘Description of Share Capital — Equity Shares — Conversion Rights’’.
Voting Rights:
For all matters coming before shareholders, the Common Shares carry one
vote per share and the Proportionate Voting Shares carry 1,000 votes per
share.
The holders of Common Shares and Proportionate Voting Shares are entitled
to receive notice of any meeting of shareholders of the Company and to
attend and vote at those meetings, except those meetings at which holders of
a specific class of shares are entitled to vote separately as a class under the
British Columbia Business Corporations Act (‘‘BCBCA’’).
See ‘‘Description of Share Capital — Equity Shares — Voting Rights’’.
Liquidation Entitlement:
In the event of the liquidation, dissolution or winding-up of the Company or
any other distribution of its assets among its shareholders for the purpose of
winding-up its affairs, whether voluntarily or involuntarily, the holders of
Equity Shares are entitled to participate in the remaining property and assets
of the Company available for distribution to the holders of Equity Shares on
the following basis, and otherwise without preference or distinction among or
between such shares, each Proportionate Voting Share will be entitled to
1,000 times the amount distributed per Common Share. See ‘‘Description of
Share Capital — Equity Shares — Liquidation Entitlement’’.
Dividend Rights:
Each Equity Share is entitled to dividends if, as and when dividends are
declared by the Board of Directors, on the following basis, and otherwise
without preference or distinction among or between such shares, each
Proportionate Voting Share will be entitled to 1,000 times the amount paid or
distributed per Common Share. See ‘‘Description of Share Capital — Equity
Shares — Dividend Rights’’.
Dividend Policy:
The Company has never declared or paid any cash dividends on its Equity
Shares. The Company currently intends to use its earnings to finance the
expansion of its business and to reduce indebtedness. See ‘‘Dividend Policy’’.
Risk Factors:
An investment in Common Shares is speculative and involves a high degree
of risk. Prospective purchasers should carefully consider the information set
out under ‘‘Risk Factors’’ beginning on page 124 and the other information in
this prospectus before purchasing Common Shares including, without
limitation, the following risk factors: inability to introduce new and
innovative products, intense competition in the apparel and equipment
industries, inability to introduce technical innovation, decrease in ice hockey,
roller hockey and/or lacrosse participation rates, adverse publicity, inability
18
to maintain and enhance brands, reliance on third-party suppliers and
manufacturers, disruption of distribution chain or loss of significant
customers or suppliers, cost of raw materials and shipping freight, protection
of trademarks and other proprietary rights, weather conditions or seasonal
fluctuations in the demand for our products, inability to forecast demand for
products, inventory shrinkage or excess inventory, inability to expand into
international market segments, product liability claims and product recalls,
compliance with standards of testing and athletic governing bodies, departure
of senior executives or other key personnel, litigation, employment or union
related matters, disruption of information technology systems, restrictive
covenants in our New Credit Facility, anticipated levels of indebtedness,
inability to generate sufficient cash to service all the Company’s
indebtedness, inability to continue making strategic acquisitions, public
market for the securities, volatile market price for Common Shares, no
current plans to pay cash dividends, costs associated with reporting
requirements and regulations affecting public companies, holding company
structure, assertion the Acquisition is an inversion transaction, conflicts of
interests among investors, influence by the Existing Holders and future sales
of Common Shares by the Existing Holders, fluctuations in the value certain
foreign currencies, including but not limited to the Canadian dollar, euro,
Swedish krona, Chinese renminbi, Taiwan dollar and Thai baht in relation to
the U.S. dollar, general economic and market conditions, current adverse
economic conditions, changes in consumer preferences and the difficulty in
anticipating or forecasting those changes, changes in government regulations,
inability of counterparties and customers to meet their financial obligations
and natural disasters.
Unless otherwise indicated, the number of Common Shares outstanding after the Offering is based on an
equivalent of Common Shares (assuming the conversion of the Proportionate Voting Shares issued,
excluding the Over-Allotment Option, to Common Shares on the basis of 1,000 Common Shares for one
Proportionate Voting Share). It does not include an aggregate of Common Shares reserved for issuance
under the Company’s stock option plans (the 2011 Plan and the Rollover Plan), or Common Shares that may be
issued upon exercise of the Over-Allotment Option. See ‘‘Description of Share Capital’’, ‘‘Consolidated
Capitalization’’ and ‘‘Options to Purchase Securities’’.
19
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables set out selected financial information for the periods indicated. The selected
consolidated financial information set out below as of May 31, 2010 and May 31, 2009, and for each of the three
fiscal years ended May 31, 2010 (Fiscal 2010), May 31, 2009 (Fiscal 2009) and May 31, 2008 (Fiscal 2008) has
been derived from KSGI’s audited consolidated financial statements and related notes appearing elsewhere in
this prospectus. KSGI’s audited consolidated financial statements appearing elsewhere in this prospectus have
been audited by our auditors, KPMG LLP. KPMG LLP’s report on these consolidated financial statements is
included elsewhere in this prospectus.
The selected consolidated financial information set out below as of November 30, 2010 and for the
six months ended November 30, 2010 and November 30, 2009 has been derived from KSGI’s unaudited interim
consolidated financial statements included elsewhere in this prospectus. The unaudited financial information
presented has been prepared on a basis consistent with our audited consolidated financial statements. In the
opinion of management, such unaudited financial data reflects all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations
for the interim periods are not necessarily indicative of the results to be expected for the full year or any
future period.
The summary unaudited historical information for the twelve-month period ended November 30, 2010 has
been derived by taking the historical audited consolidated statement of earnings for the fiscal year ended
May 31, 2010, plus the historical unaudited consolidated statement of earnings for the six-month period
ended November 30, 2010, less the historical unaudited consolidated statement of earnings for the six-month
period ended November 30, 2009. The financial information included in the column labeled ‘‘Twelve Months
Ended November 30, 2010 (Adjusted)’’ has been derived on the same basis as the financial information for
the twelve month period ended November 30, 2010 and gives effect to the Offering, the Acquisition, the
Refinancing, and certain other adjustments explained in footnotes 1 to 5 to the following table. You should read
the following information in conjunction with ‘‘Use of Proceeds’’, ‘‘Management’s Discussion and Analysis of
Financial Condition and Results of Operations’’, ‘‘Consolidated Capitalization’’ and our consolidated financial
statements and the accompanying notes included elsewhere in this prospectus.
20
Twelve
Months
Ended
November 30,
2010
(Adjusted)
(in $ millions except for percentages)
Earnings Data
Net revenues . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . .
Twelve
Months
Ended
November 30,
2010
Fiscal Year Ended May 31,
2010
2009
2008(6)
Six Months Ended
November 30,
2010
2009
$282.7
173.0(1)
$282.7
176.8
$257.4
168.3
$242.2
187.2
$ 219.5
139.1
$189.4
116.9
$164.2
108.4
Gross profit . . . . . . . . . . . . . . . . . . . . . .
Expenses:
Selling, general, and administrative expenses . .
Research and development expenses . . . . . . .
$109.7
$105.9
$ 89.1
$ 55.0
$
80.4
$ 72.5
$ 55.8
67.3
11.0
61.0
9.7
66.1
6.8
62.5
3.3
36.9
5.9
30.6
4.5
Total expenses . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . .
Net interest expense (income) . . . . . .
Losses on derivative instruments . . . .
Exchange losses (gains), net and other .
.
.
.
.
.
74.6
$35.10
7.5(3)
1.9(3)
0.8(3)
78.3
$ 27.6
13.4
2.7
(0.3)
70.7
$ 18.4
12.6
0.6
(0.8)
72.9
$ (17.9)
13.5
0.1
5.2
Income (loss) before income tax (expense)
benefit . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . .
$ 24.9
8.9(3)
$ 11.8
4.6
$
6.0
3.8
$ (36.7)
(11.6)
$
Net income (loss) before extraordinary item . .
Extraordinary gain . . . . . . . . . . . . . . . . . .
$ 16.0
—
$
7.2
—
$
2.2
—
$ (25.1)
5.7
$
Net income (loss) . . . . . . . . . . . . . . . . . . .
$ 16.0
$
7.2
$
2.2
$ (19.4)
Other Financial Data
Adjusted Gross Profit . .
Adjusted Gross Profit as a
EBITDA . . . . . . . . . .
Adjusted EBITDA . . . .
Adjusted EBITDA as a %
Capital expenditures . . .
$113.2
40.0%
$ 31.7
$ 40.9
14.5%
$ 2.2
$ 97.8
38.0%
$ 20.7
$ 31.0
12.0%
$ 1.5
$
7.6
136.5
73.0
283.9
128.5
97.4
$
$
7.4
(13.6)
5.5
$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. . . . . . . . . . . .
% of net revenues
. . . . . . . . . . . .
. . . . . . . . . . . .
of net revenues . .
. . . . . . . . . . . .
Balance Sheet Data
Cash and cash equivalents
Net working capital(5) . . .
Intangible assets . . . . . . .
Total assets . . . . . . . . . .
Total debt . . . . . . . . . . .
Total shareholders’ equity .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
63.6(2)
11.0
.
.
.
.
.
.
.
.
.
.
.
.
$113.3
40.1%
$ 39.2
$ 39.2
13.9%
$ 2.2
.
.
.
.
.
.
.
.
.
.
.
.
$
Cash Flow Data
Net cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . .
2.3(4)
140.3
73.0
278.7
123.1(3)
106.3
$ 16.3
(13.6)
0.1
4.2
107.9
68.9
243.6
113.0
82.6
1.6
(4.9)
(1.8)
65.8
14.6
3.0
1.8
0.3
42.8
$ 29.7
7.3
3.8
(2.0)
35.1
$ 20.7
6.5
1.6
(2.5)
9.5
4.4
$ 20.6
7.3
$ 15.1
6.5
5.1
$ 13.3
—
$
8.6
—
$
5.1
$ 13.3
$
8.6
$ 85.6
35.3%
$ (10.1)
$ 27.3
11.3%
$ 0.9
$
86.2
39.3%
16.6
22.9
10.4%
2.6
$ 74.4
39.3%
$ 33.2
$ 36.1
19.1%
$ 1.4
$ 59.1
36.0%
$ 22.5
$ 26.9
16.4%
$ 0.7
$
9.4
98.4
65.7
244.4
109.4
77.5
$
11.0
136.5
79.9
274.8
130.5
93.1
$
7.6
136.5
73.0
283.9
128.5
97.4
$
$ 24.8
(26.3)
(0.5)
$
0.1
(201.4)
204.6
$
3.9
(12.8)
12.3
$ (1.9)
(4.1)
5.0
$
—
$
$
$
8.9
121.4
70.2
253.0
118.8
85.1
(1)
Adjustments required to cost of goods sold for non-cash charges resulting from fair market value adjustments to inventory.
(2)
Adjustments required to selling, general and administrative expenses and related income taxes to reflect the impact of the termination
of the sponsor fees of $1.4 million and the inclusion of estimated operational costs as a public company of $1.5 million plus fees related
to the Offering.
(3)
Adjustments required to interest expense on debt, foreign exchange and fair value of long-term debt and related income taxes to
reflect the impact of the use of proceeds from the Offering.
(4)
Adjustments required to cash and cash equivalents and debt reflect the use of the New Credit facility proceeds used to retire the Old
Facility and the Old Notes and give effect to the New Credit Facility as if started at the beginning of the twelve month period, including
the first year amortization on the new Term Loan.
(5)
Net working capital is defined as accounts receivable plus inventory less accounts payable.
(6)
The Fiscal 2008 results shown in the table above consist of the Company’s financial results for the Successor Period and for the
Predecessor Period in accordance with U.S. GAAP. Note that in respect of such Predecessor Period, certain operating expenses for
21
services provided by Nike were not allocated to the Company in the Predecessor Period, and accordingly, are not included in the
Company’s consolidated financial statements for Fiscal 2008 included in this prospectus. These services include expenses related to
certain employee benefits, certain information technology support, audit fees of Nike, corporate consolidation and financial reporting,
select tax services, software license fees, legal fees, treasury and cash management services, risk management administration, insurance
costs, certain regulatory services and interest costs. Having regard to the budgeted and actual amounts incurred by the Company for
such services in Fiscal 2009, the first full fiscal year subsequent to the sale of the Bauer Business by Nike, the Company’s management
estimates that the operating expenses for these services in respect of the Predecessor Period were no more than $6 million. There are
no assurances that such estimate is accurate and complete and investors should not place undue reliance on such estimate.
Adjusted Gross Profit is a non-U.S. GAAP financial measure. It is an alternative to measure business
performance. We use Adjusted Gross Profit as a supplemental measure to evaluate the overall performance of
our cost of goods sold. We currently anticipate that Adjusted Gross Profit will be part of our presentation to
investors and analysts after becoming a public company. Adjusted Gross Profit is gross profit plus the following
expenses which are part of cost of goods sold: (i) amortization, (ii) non-cash charges to cost of goods sold
resulting from fair market value adjustments to inventory, (iii) reserves established to dispose of obsolete
inventory acquired through acquisitions, and (iv) costs incurred in Fiscal 2008 for businesses that were retained
by Nike after the purchase of the Bauer Business by the Existing Holders. The table below provides the
reconciliation of gross profit to Adjusted Gross Profit in millions of U.S. dollars.
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets(1) . . . . . . . . . . . . . . . .
Twelve
Months
Ended
November 30,
2010
(Adjusted)
$109.7
3.6
Restructuring charges
Inventory step-up/step-down & reserves(2) . . . . . . . . . .
Nike-related normalization(3) . . . . . . . . . . . . . . . . . . . .
—
—
Adjusted Gross Profit . . . . . . . . . . . . . . . . . . . . . . . .
$113.3
(in $ millions)
Twelve
Months
Ended
November 30,
2010
Fiscal Year Ended
May 31,
2010
2009
2008
Six Months
Ended
November 30,
2010
2009
$105.9
3.6
$89.1
3.7
$55.0
4.1
$80.4
0.7
$72.5
1.6
$55.8
1.7
3.7
—
5.0
—
26.5
—
3.5
1.6
0.3
—
1.6
—
$113.2
$97.8
$85.6
$86.2
$74.4
$59.1
(1)
Upon completion of the acquisition of the Bauer Business by the Existing Holders in April 2008, Bauer capitalized acquired intangible
assets at fair market value. These intangible assets, in addition to other intangible assets subsequently acquired, are amortized over
their useful life and we recognize the amortization as a non-cash cost of goods sold.
(2)
Upon completion of the acquisition by the Existing Holders of the Bauer Business in April 2008, Bauer adjusted its inventories to fair
market value resulting in an initial inventory valuation step-up of $31.7 million. Included in Fiscal 2008 through Fiscal 2010 are
non-cash charges to cost of goods sold resulting from the fair market value adjustment to inventory recognized in April 2008. The
difference of $3.6 million between the aggregate amount recognized as cost of goods sold in Fiscal 2008 through Fiscal 2010 and the
initial inventory valuation step-up is due to changes in foreign exchange rates. Also included in restructuring charges are non-recurring
inventory reserves established to dispose of obsolete inventory obtained through acquisitions.
(3)
Related to certain items that impacted our cost of goods sold following completion of the acquisition of the Bauer Business by the
Existing Holders in April 2008. Included in the amount is (i) $2.3 million of gross profit associated with the IIHF from June 1, 2007 to
April 16, 2008, and (ii) $3.9 million of non-recurring trademark royalty expenses paid to Nike from June 1, 2007 to April 16, 2008. The
IIHF business remained with Nike.
EBITDA is a non-U.S. GAAP measure that we use to assess our operating performance. EBITDA is
defined as net income adjusted for income tax expense, depreciation and amortization, gain or loss on disposal
of fixed assets/other and other non-cash income/expense, net interest expense, deferred financing fees,
unrealized gain/loss on derivatives instruments, and foreign exchange gain/loss. For a reconciliation of net
income to EBITDA, see the table below.
Adjusted EBITDA is defined as EBITDA before restructuring and acquisition related charges, sponsor fees
and fees related to the Offering, normalization adjustments relating to the sale of the Bauer Business by Nike to
the Existing Holders, as well as stock-based compensation expense. Management believes Adjusted EBITDA is
an important measure of operating performance and provides useful information to investors because it
highlights trends in the business that may not otherwise be apparent when relying solely on U.S. GAAP
22
measures and eliminated items that have less bearing on operating performance. We define Adjusted EBITDA
as earnings before interest, income taxes, depreciation and amortization as well as adjustments for the following
items: foreign exchange gain or loss, restructuring and acquisition related expenses, sponsor fees and fees
related to the Offering, stock option expenses net of adjustments, and normalization adjustments related to the
sale of Bauer Business from Nike to the Existing Holders. We use Adjusted EBITDA as the key metric in
assessing our business performance when we compare results to budgets, forecasts, and prior years. Adjusted
EBITDA is used by management in the assessment of business performance and used by our Board of Directors
as well as our lenders in assessing management’s performance. It is the key metric in determining option and
incentive payment plans. The following table shows the reconciliation of net income to EBITDA as well as
Adjusted EBITDA.
(in $ millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . .
Depreciation & amortization . . . . . . . . . . . . . . . . .
Net (gain)/loss on disposal of fixed assets/other and
other (income)/expense(1) . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . .
Deferred financing fees . . . . . . . . . . . . . . . . . . . .
Foreign exchange (gain)/loss(2) . . . . . . . . . . . . . . . .
Unrealized (gain)/loss on derivatives instruments, net
Foreign exchange (gain)/loss . . . . . . . . . . . . . . . .
Extraordinary gain(3) . . . . . . . . . . . . . . . . . . . . . .
.
.
.
Twelve
Months
Ended
November 30,
2010
(Adjusted)
$16.0
$ 8.9
7.4
$ 7.2
$ 4.6
7.4
Fiscal Year Ended
May 31,
2010
2009
2008
Six Months
Ended
November 30,
2010
2009
$ 2.2
$ 3.8
7.1
$13.3
$ 7.3
3.5
($19.4)
($11.6)
7.5
$ 5.1
$ 4.4
4.1
$ 8.6
$ 6.5
3.2
0.6
6.0
1.5
(1.2)
(1.4)
0.2
—
0.6
11.9
1.5
(1.5)
(0.6)
(0.9)
—
0.8
11.2
1.4
(5.8)
(4.8)
(1.0)
—
—
12.1
1.4
5.6
0.1
5.5
(5.7)
—
2.8
0.1
0.1
1.8
(1.7)
—
0.1
6.5
0.8
1.7
3.9
(2.2)
—
0.3
5.8
0.7
(2.6)
(0.3)
(2.3)
—
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.2
31.7
20.7
(10.1)
16.6
33.2
22.5
Restructuring Charges
Inventory step-up/step-down & reserves(4)
Rebranding/one-time costs(5) . . . . . . . .
Acquisition costs(6) . . . . . . . . . . . . . .
Mission-ITECH shutdown(7) . . . . . . . .
Maverik growth investment(8) . . . . . . . .
Executive severance & retention(9) . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
—
—
—
—
—
—
3.7
1.1
0.6
—
0.7
—
5.0
3.0
0.5
—
—
—
26.5
3.5
(0.1)
4.9
—
—
3.5
—
4.2
—
—
3.3
0.3
0.1
0.1
—
0.3
—
1.6
2.0
—
—
—
—
Subtotal . . . . . . . . . . . . . . . . . . . .
Sponsor & audit (IPO) Fees(10) . . . . . . .
Nike-related normalization(11) . . . . . . . .
Stock option expense, net of adjustments
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
—
—
—
—
6.1
2.9
—
0.2
8.5
1.5
—
0.3
34.8
1.7
—
0.9
11.0
0.3
(7.0)
2.0
0.8
2.1
—
0.0
3.6
0.7
—
0.1
$40.9
$31.0
$ 27.3
$36.1
$26.9
.
.
.
.
.
.
.
.
.
.
.
Twelve
Months
Ended
November 30,
2010
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . .
$39.2
$22.9
(1)
The net loss on disposal of fixed assets is a non-cash expense.
(2)
The unrealized gain and loss on derivatives are the fair market measure on the foreign exchange swaps and interest rate contracts. The
Company has not elected hedge accounting and therefore the changes in the fair value of these derivatives are recognized in current
period earnings. The foreign exchange gain and loss is the difference in rates used for the balance sheet and the income statement. All
balance sheet transactions are converted at the month’s end rates. All income statement transactions are recognized at the monthly
average rates.
(3)
On September 22, 2008, we purchased all of the issued and outstanding shares of the capital stock of Mission-ITECH. The total cash
consideration was $23.9 million excluding transaction costs. Transaction costs associated with the acquisition were $2.3 million. The
allocation of the purchase price to the individual assets acquired and liabilities assumed under the purchase method of accounting
included in the Fiscal 2009 balance sheet resulted in $16.9 million of negative goodwill which was allocated to reduce non-current
assets, excluding deferred income taxes by $11.2 million with the remainder of $5.7 million recognized as an extraordinary gain in
Fiscal 2009.
(4)
Upon completion of the acquisition of the Bauer Business by the Existing Holders in April 2008, Bauer adjusted its inventories to fair
market value resulting in an initial inventory valuation step-up of $31.7 million. Included in Fiscal 2010 through Fiscal 2008 are
non-cash charges to cost of goods sold resulting from the fair market value adjustment to inventory recognized in April 2008. The
23
difference of $3.6 million between the aggregate amount recognized as cost of goods sold in Fiscal 2008 through Fiscal 2010 and the
initial inventory valuation step-up is due to changes in foreign exchange rates. This line also includes non-recurring inventory reserves
established to dispose of Nike Bauer branded and Mission-ITECH branded inventory.
(5)
Related to rebranding and one-time costs of $6.5 million incurred over the period of 24 months in Fiscal 2009 and Fiscal 2010
including (i) $5.5 million in costs to transition the Nike Bauer brand and the corporate identity to the Bauer brand and corporate
identity, (ii) $0.4 million in costs associated with management changes, including but not limited to executive search fees,
reimbursements of relocation costs, and related hiring costs associated with the separation from Nike and (iii) $0.6 million in other
restructuring or cost improvement activities incurred prior to May 31, 2010.
(6)
Acquisition related transaction costs including legal, audit expenses, information systems and operations consulting costs, incurred as
part of the purchase of the Bauer Business by the Existing Holders from Nike in April 2008, the Mission-ITECH Acquisition in
September 2008 and the Maverik Lacrosse Acquisition in June 2010. In Fiscal 2008, we incurred $4.2 million in acquisition-related
costs associated with the acquisition of the Bauer Business. In Fiscal 2009, we incurred a $0.1 million gain related to the MissionITECH Acquisition. In Fiscal 2010, we incurred $0.5 million of transaction costs related to the Maverik Lacrosse Acquisition.
(7)
Related to restructuring expenses associated with the Mission-ITECH shutdown over a period of nine months following the acquisition
in September 2008. These restructuring expenses included retention payments to key employees, brand transition expenses, increased
sales commissions, and increased marketing related expenses incurred to liquidate Mission-ITECH branded inventory.
(8)
The Maverik growth investments include an increase in wages to key employees and additional compensation costs related to new
hires at Maverik which are designed to support the business of Maverik during its initial start-up phase of growth. In addition, the
growth investment includes $0.4 million of EBITDA earned by Maverik for the six month period prior to the Company’s acquisition of
the business, in order to reflect a full twelve month contribution of the business in our results of operations.
(9)
Related to executive severance paid to the former CEO of Nike Bauer of $0.5 million, and retention bonuses paid to Bauer employees
during the transition of ownership of the Bauer Business to the Existing Holders.
(10) Related to sponsor fees of $1.5 million, $1.7 million and $0.3 million incurred by the Company in Fiscal 2010, Fiscal 2009 and Fiscal
2008, respectively under the Management Services Agreement which will terminate upon completion of the Offering for a termination
fee of $4.0 million to be incurred by the Company. See ‘‘Interest of Management and Others in Material Transactions’’. Also included
in the six month period ended November 30, 2010 and the latest twelve month period ended November 30, 2010 are $1.2 million in
incremental audit fees and $0.2 million in professional fees incurred in relation to the Offering.
(11) An increase in sales, general and administrative expenses of $5.5 million to reflect the recurring costs which would have been incurred
by Bauer had it operated on a standalone basis for all of Fiscal 2008. These costs relate primarily to audit fees, IT separation costs, and
legal costs. This line also includes (i) $0.4 million of a non-recurring net loss related to managing IIHF sales on Nike’s behalf and for
which Bauer received no benefit, (ii) $4.7 million in non-recurring research and development income received from Nike to fund
Bauer’s research and development, offset by $3.9 million in non-recurring expenses paid to Nike for trademark royalties and (iii) an
increase in sales, general and administrative expenses for accrued amounts of $1.1 million by Bauer for employee benefits incurred by
Nike that were not ultimately reimbursed by Nike.
24
CORPORATE STRUCTURE
Incorporation and Office
The Company was incorporated under the BCBCA on December 2, 2010, and its name was subsequently
changed to Bauer Performance Sports Ltd. Our registered office is located at 666 Burrard Street, Suite 1700,
Vancouver, British Columbia, V6C 2X8. The Company’s headquarters and executive officers are currently
located in Greenland, New Hampshire, USA and, by June 2011, will be located in Exeter, New Hampshire.
KSGI currently owns, either directly or indirectly, through its subsidiaries, all of the assets and operations
relating to the Bauer Business. Immediately after the completion of the Offering, the Company will acquire
100% of KSGI from the Existing Holders in exchange for (i) a combination of Common Shares and
Proportionate Voting Shares representing a % equity and voting interest in the Company ( % on a
fully diluted basis), plus Cdn$ in cash being the net proceeds of the Offering received by the Company
(exclusive of expenses of the Offering) assuming no exercise of the Over-Allotment Option, or (ii) a combination
of Common Shares and Proportionate Voting Shares representing a % equity and voting interest in the
Company ( % on a fully diluted basis), plus Cdn$ in cash being the net proceeds of the Offering and
the Over-Allotment Option received by the Company (exclusive of expenses of the Offering and the
Over-Allotment Option) if the Over-Allotment Option is exercised in full. See ‘‘Use of Proceeds’’, the
‘‘Acquisition’’, and ‘‘Principal Shareholders’’.
Intercorporate Relationships
The organization chart below indicates the intercorporate relationships of our Company and our whollyowned operating subsidiary entities, including all material subsidiaries, after giving effect to the completion of
the Offering and the Acquisition, together with the jurisdiction of incorporation or constitution of each such
entity. Following completion of the Offering, the Company may liquidate or dissolve certain holding companies
within its corporate structure in a tax efficient manner.
Public
Existing Holders
•%
•%
Bauer Performance Sports Ltd.
(British Columbia)
100%
Kohlberg Sports Group Inc.
(Cayman Islands)
100%
100%
100%
Bauer Hockey, Inc.
(Vermont)
Bauer Hockey Corp.
(Canada)
100%
100%
Maverik Lacrosse LLC
(New York)
Various European subsidiaries
22JAN201101480192
25
INDUSTRY OVERVIEW
We design, develop, manufacture and sell performance sports equipment for ice hockey, roller hockey, and
lacrosse, as well as related apparel and accessories.
Ice Hockey
Ice Hockey Participation Rates and Demographics
Ice hockey is a team sport played in more than 68 countries by more than an estimated six million people.
While ice hockey is played around the world, the largest and most significant markets for ice hockey are Canada,
the United States and a number of European countries, including the Nordic countries (principally Sweden and
Finland), Central European countries (principally the Czech Republic, Germany, Switzerland, Austria and
Slovakia) and Eastern European countries (particularly Russia). In these markets, players generally fall into
two categories:
• Registered Players — There are approximately 1.4 million players currently registered globally with their
respective national federations, including 11 countries with over 10,000 registered players. Approximately
64% of registered players are youth under the age of 20. Youth tend to spend more time on the ice and
more frequently grow out of their equipment, and as a result, youth tend to be more frequent purchasers
of equipment and related apparel.
• Casual or Unregistered Players — There is a significant but unknown number of casual or unregistered
players worldwide. For example, according to Hockey Canada estimates, there are more than 1.5 million
casual or unregistered players in Canada, which is approximately triple the number of registered players.
According to SGMA, there are approximately 2.1 million ice hockey participants in the United States
which we estimate to include approximately 1.6 million unregistered players which has grown by
approximately 32% from 2006 to 2009. This category of players tends to include a larger proportion of
adult players, aged 18 and over, who generally purchase equipment and related apparel less frequently
than youth players.
Global registered hockey participation rates have been stable over the last 10 years, growing at
approximately 1% to 2% per year. We believe casual and unregistered hockey participation growth rates,
especially in the United States, as well as growth rates in Eastern Europe (particularly Russia) and women’s
hockey, have exceeded that of the registered segment as a whole.
Growing Participation in Eastern Europe including Russia
According to the IIHF, registered participation rates in Eastern Europe, including Russia, grew by
approximately 60% from the 1998/1999 season to the 2008/2009 season, representing a compound annual growth
rate of approximately 5%.
Part of the growth in registered participation is attributable to the establishment of Russia’s professional
hockey league, the Kontinental Hockey League (‘‘KHL’’) in 2008. The KHL has garnered international
attention for attracting National Hockey League (‘‘NHL’’) players and includes 24 teams from Russia, Belarus,
Kazakhstan and Latvia. In 2009, the Russian Hockey Federation and KHL founded the Youth Hockey League
(‘‘YHL’’). The founding of the KHL and YHL, along with the 2014 Winter Olympics in Sochi, Russia, and the
associated investment in hockey infrastructure, are expected to further promote and develop hockey in Russia.
26
The following chart illustrates the growth in registered ice hockey participation rates in Eastern Europe,
including Russia, for the periods presented:
Eastern Europe (including Russia) Ice Hockey
Registered Participation(1)
250
Number of Players
(in thousands)
204
200
150
127
100
50
0
1998/1999
(1)
2008/2009
24JAN201113230503
Includes Belarus, Czech Republic, Kazakhstan, Latvia, Russia and Slovakia
Source: IIHF
Growing Participation in Women’s Ice Hockey
Women’s ice hockey is one of the fastest growing women’s sports, with participation rates approximately
doubling in the last 10 years, representing a compound annual growth rate of approximately 7%. In 2010,
167,000 women ice hockey players were registered globally, representing 12% of all registered players, and in the
United States, women’s ice hockey is one of the fastest growing sports in the National Collegiate Athletic
Association (‘‘NCAA’’). The growing popularity of women’s ice hockey is exemplified by the success and
heightened visibility of the Canadian and U.S. women’s Olympic hockey teams. The following chart illustrates
the growth in registered ice hockey participation rates among women for the periods presented:
Global Female Ice Hockey
Registered Participation
200
Number of Players
(in thousands)
167
150
100
83
50
0
1998/1999
2008/2009
24JAN201113230648
Source: IIHF
27
Ice Hockey Equipment and Related Apparel Industry
The global ice hockey equipment and related apparel industry is a stable and growing market with
significant barriers to entry. Ice hockey equipment and related apparel sales are driven primarily by global ice
hockey participation rates (registered and unregistered). Other drivers of equipment sales include demand
creation efforts, the introduction of innovative products, a shorter product replacement cycle, general
macroeconomic conditions and the level of consumer discretionary spending. Management estimates that the
global ice hockey equipment market (which excludes related apparel, such as performance apparel, team jerseys
and socks) totaled approximately $555 million in 2010 and is growing at an annual rate of approximately 1% to
2%, which is consistent with the global registered hockey participation growth rates observed over the last
10 years. Skates and sticks are the largest contributors to equipment sales, accounting for an estimated 62% of
industry sales in 2010.
Management estimates that over 80% of the ice hockey equipment market is attributable to three major
competitors: Bauer, Reebok (which owns both the Reebok and CCM brands) and Easton, each of whom offers
consumers a full range of products (skates, sticks and full protective equipment). The remaining equipment
market is highly fragmented among many smaller equipment manufacturers offering specific products, catering
to niche segments within the broader market. Management estimates that Bauer has the largest share of the
market which we believe is in excess of the next three brands combined.
The following table shows our estimated ranking of the three major competitors referenced above, in total
and by major product category:
Market Position of the Three Major Ice Hockey Equipment Manufacturers
(1)
Company
Total
Market
Skates
Sticks
Helmets
Protective
Goalie
Bauer
#1
#1
#2
#1
#1
#1
Reebok(1)
#2
#2
#3
#2
#2
#2
Easton
#3
#3
#1
#3
#3
n/a
Reebok includes Reebok and CCM branded equipment.
Management estimates that the global ice hockey related apparel market for 2010 (which includes such
items as performance apparel, team jerseys and socks) is approximately $300 million in size and is growing at an
annual rate which we believe exceeds that of the ice hockey equipment market. The related apparel market is
more fragmented than the equipment market and includes a variety of larger and smaller participants. Similar to
what has occurred in the ice hockey equipment industry, we expect consolidation in this market to occur in the
coming years.
Ice Hockey Equipment Industry Trends
Accelerated Equipment Innovation and Use of New Technologies
A strong R&D program is critical to compete in today’s ice hockey equipment market. The use of advanced
materials and innovative manufacturing techniques have enabled leading manufacturers to create products that
improve performance and are lighter, stronger, and more durable than their predecessors. For example, in 1997,
we introduced the first ice hockey skate with a one-piece quarter and, in 2002, incorporated additional patented
technology, the TUUK Lightspeed blade holder. The one-piece quarter skate was a revolutionary product design
from both high performance and efficient manufacturing perspectives. Our skates are worn by more than 65% of
NHL players. We believe that equipment innovation and technology has led to increased frequency of product
replacement and has also increased average price points.
28
Increasingly Sophisticated and Self-Educated Consumers
Digital and social media has given rise to a more sophisticated and educated consumer, especially in
established ice hockey markets. While most ice hockey consumers have traditionally relied on sporting goods
retailers for product information and comparisons, consumers now have access to a variety of information
resources, such as manufacturer websites, consumer reports, blogs and testimonials, and use these resources to
make purchasing decisions. Today, over 85% of ice hockey consumers from ages 12 to 20 research product
purchases and brands online and rely on manufacturer websites as a key purchase influencer.
Growing Demand for Branded Products in Emerging Markets
Eastern Europe, including Russia, has experienced economic growth and the development of a more
‘‘Western-Style’’ retail landscape over the past several years. As disposable income and the standards of living
rise, Russian and other Eastern European consumers are increasingly seeking quality, high-end global branded
products rather than unbranded goods. In addition, emerging markets have witnessed growth in retail space and
the adoption of enhanced selling techniques. As illustrated in the graphs below, as Russian GDP has grown,
retail sales have also grown at a much higher rate.
Russian GDP per Capita(1)
(constant prices since 2000)
Russian Retail Sales(2)
(trailing 12 months — nominal terms)
$3.5
20.0
22.2% CAGR
$3.0
(Rubles billions)
$2.5
$2.0
$1.5
15.0
10.0
5.0
(1)
Source: Trading Economics; The World Bank Group
(2)
Source: Bloomberg Finance LP; Russian Federal Service of State Statistics
10
09
08
20
20
07
06
21JAN201120332361
20
20
05
20
03
04
20
20
02
01
20
20
21JAN201120331844
20
00
09
08
20
07
06
20
20
05
20
03
04
20
20
02
20
01
20
20
20
00
0.0
20
(US$ thousands)
7.2% CAGR
Globalization of Sourcing and Manufacturing
In response to growing retailer purchasing power and strong competition in the ice hockey equipment
market, larger equipment companies have invested in production and sourcing capabilities in order to achieve
competitive pricing and stronger operating margins. The ability to source materials and manufacture equipment
in low-cost regions is fundamental to reducing operating costs and enabling the allocation of capital to R&D and
effective sales and marketing programs.
Diversifying Retail Landscape
The retail ice hockey equipment landscape consists of general sporting goods retailers, large format hockey
retailers, small independent and regional specialty retailers and online retailers. Over the past decade,
consolidation and the expansion of online retailers and large specialty hockey stores have altered the retail
hockey equipment market. Today, the category is led by national merchandisers and large specialty hockey
retailers that have sophisticated buying techniques and retailing strategies. In addition, certain independent and
regional retailers have enhanced their buying techniques and retailing strategies to compete with the national
merchandisers and specialty retailers.
29
Roller Hockey
Roller Hockey Participation Rates and Demographics
Roller hockey is a team sport played principally in the United States, particularly in warmer regions such as
California. According to SGMA, there were approximately 600,000 ‘‘frequent’’ roller hockey participants in the
United States in 2009 who played at least 13 times during the year. In 2009, total participation was estimated at
1.4 million participants.
Roller Hockey Equipment and Related Apparel Industry
The roller hockey equipment industry shares similar characteristics to the ice hockey equipment and related
apparel industry given the similarity of the sports. Management estimates that the roller hockey equipment and
related apparel market generated approximately $25 million in sales in 2009.
Through our Mission and Bauer brands, we believe we hold the number one and two market share positions
in the roller hockey equipment market, and have a substantial lead over our primary competitors, including
Reebok, Tour and a few small niche players who compete in sub-categories such as wheels and accessories.
Lacrosse
Lacrosse Participation Rates and Demographics
Lacrosse is a team sport played principally in the United States and Canada. In the United States, according
to SPM, lacrosse is the fastest growing team sport and participation has grown at an annual compound growth
rate of 10.6% from 2001 to 2009, with over 550,000 registered players in the United States in 2009. In Canada,
we estimate that there are currently 150,000 participants. The drivers of this growth include (i) the establishment
and popularity of the National Lacrosse League and Major League Lacrosse, (ii) the rapid expansion of high
school and youth programs, (iii) emerging growth outside key lacrosse markets in the Mid-Atlantic and
Northeastern United States, (iv) enhanced funding and popularity of U.S. college lacrosse programs, and
(v) increased visibility of the sport in media and advertising.
Over 90% of lacrosse participants in the United States are under the age of 18, with 52% of participants in
the pre-high school category and 40% of participants in the high school category. Similar to ice hockey, the high
representation of youth in the sport provides the industry with a more frequent product replacement cycle as
players grow out of their equipment. The following graphs illustrate the growth in U.S. lacrosse participation for
the periods presented and the demographic breakdown of U.S. participation for 2009:
U.S. Lacrosse Participation
2009 U.S. Lacrosse Participation by Level
Number of Players (in thousands)
Pro/PostCollegiate
College 2.0%
5.6%
568
600
524
CAGR: 10.6%
481
500
426
400
300
352
254
288
382
302
High
School
40.1%
200
Youth
52.3%
100
2001
2002
2003
2004
2005
2006
2008 2009
21JAN201119372499
25JAN201123304661
2007
Source: U.S. Lacrosse, Inc.
Lacrosse Equipment and Related Apparel Industry
The North American lacrosse equipment and related apparel market is a high growth, emerging sports
equipment market underpinned by strong growth in participation rates.
30
In 2009, the U.S. lacrosse equipment apparel market was estimated to be approximately $80 million to
$90 million while the Canadian market was estimated at approximately $10 million. According to SPM, the
U.S. market is expected to grow by 40% to 90% in the next five years to approximately $125 million to
$150 million representing a compound annual growth rate of 10.1%. The lacrosse equipment market is made up
of four primary equipment categories: sticks (shafts and heads), gloves, helmets and protective equipment. At
approximately 46% of 2009 industry-wide U.S. sales, sticks currently make up the largest segment of the lacrosse
equipment market.
The lacrosse equipment market is currently led by five major brands: Warrior, Brine, STX and deBeer, each
of whom offers a full line of products, and Cascade, who primarily offers helmets. The balance of the market is
made up of smaller players such as our Maverik brand. Given the lack of significant innovation in lacrosse
equipment over the past decade, the perception in the industry is that there is little differentiation among
products of these equipment manufacturers. The primary distinction between larger market participants (such as
Warrior, Brine and STX) and their smaller peers (such as Maverik) are the former’s long-established
relationships with youth, high school and college programs, distribution to major sporting goods retailers in the
United States and aggressive targeted marketing programs. Management believes that driving product
innovation through our strong R&D and consumer feedback processes will improve product performance and
create opportunities for market share gains despite such existing relationships.
31
BUSINESS OF THE COMPANY
Our Company
We are the world’s leading designer, developer, manufacturer, and marketer of ice and roller hockey
equipment. We have the most recognized and strongest brand in the ice hockey equipment industry, and hold
the number one market share position in both the ice and roller hockey equipment industries. With an estimated
45% share of ice hockey equipment sales in Fiscal 2010, we have the leading and fastest growing share of the
overall ice hockey equipment market, which we believe is in excess of the next three largest brands combined. In
roller hockey, we had an estimated 55% share of equipment sales in Fiscal 2010.
We have achieved this leadership position and growth profile in ice hockey by leveraging our world-class
performance sports products platform and processes and are using this platform to expand into new
performance equipment and apparel categories and sports markets, which we have recently done successfully in
the roller hockey and lacrosse equipment markets.
The following graphs set forth our estimated overall market share of ice hockey equipment sales and our
total net revenues for the periods presented:
Overall Market Share
Ice Hockey Equipment Sales
Net Revenues(1)
50%
41%
42%
(US$ millions)
Market Share
45%
40%
35%
35%
30%
CAGR: 15.7%
$300
45%
28%
$282.7
$242.2
$250
$257.4
$219.5
$200
$166.4
$150
$146.6
$100
25%
2006
2007
2008
Fiscal Year
2009
2010
2006
27JAN201113562066
2007
2008
2009
Fiscal Year
(1)
Includes ice hockey and roller hockey equipment and related apparel.
(2)
Last twelve months ended November 30, 2010 also includes lacrosse equipment and related apparel.
2010
LTM(2)
27JAN201113562200
As we have increased our market share in both ice and roller hockey, our net revenues and Adjusted
EBITDA have continued to grow. As illustrated by the graph above (to the right), over the past five fiscal years,
our annual net revenues have grown from $146.6 million in our 2006 fiscal year to $282.7 million during the last
twelve month period ended November 30, 2010, representing a cumulative annual growth rate of 15.7%, and as
illustrated by the graph below, our Adjusted EBITDA has grown from $22.9 million in Fiscal 2008 to $31.0
million in Fiscal 2010 and to $40.9 million for the last twelve month period ended November 30, 2010,
representing a cumulative annual growth rate of 26.3%.
Adjusted EBITDA
$45
$40.9
(US$ millions)
$40
CAGR: 26.3%
$35
$31.0
$27.3
$30
$25
$22.9
$20
$15
2008
2009
2010
Fiscal Year
(1)
LTM(1)
27JAN201113561924
Last twelve months ended November 30, 2010 also includes lacrosse equipment and related apparel.
32
We expect to continue to grow our net revenues and Adjusted EBITDA by executing on our growth
strategy. See ‘‘Our Growth Strategies’’ below.
Ice hockey equipment is the cornerstone of our world-class performance sports product platform, which we
have repeatedly used to grow our business into new performance equipment and apparel categories and sports
markets. Since the sale of the Bauer Business by Nike to our Existing Holders in April 2008, we:
• completed the strategic acquisition of Mission-ITECH in September 2008 (the ‘‘Mission-ITECH
Acquisition’’);
• acquired intellectual property assets from Jock Plus Hockey in November 2009 (the ‘‘Jock Plus Hockey
Intellectual Property Acquisition’’); and
• completed the strategic acquisition of Maverik in June 2010 (the ‘‘Maverik Lacrosse Acquisition’’).
For both ice and roller hockey, our equipment offering includes skates, sticks, under-protective equipment,
gloves, pants, helmets, facial protection and goalie equipment, and for lacrosse, we also offer a comprehensive
line of equipment for all skill levels. We sell our ice hockey products at various price points and develop them for
three performance levels:
• ‘‘Elite’’ — for professional and non-professional elite players, including players in the NHL and other
professional leagues around the world who will pay a premium price for the best performing equipment;
• ‘‘Performance’’ — for high-level players (typically between the ages of 12 to 22) who buy technically
advanced equipment that provides them a competitive edge; and
• ‘‘Recreational’’ — for recreational players of all ages who seek performance at value pricing.
Our ice hockey, roller hockey and lacrosse authentic brands and product offerings provide us with an
opportunity to cross-sell and promote a comprehensive line of related apparel and accessories, including
performance, team and lifestyle apparel. We currently believe we can grow our share in each of these categories
in the coming years.
We believe we have the largest and most experienced sales force in the ice and roller hockey equipment
industries. In addition, we have an established global distribution network in the major geographic markets
where hockey is popular, including Canada, the United States, Western Europe, Eastern Europe and Russia. We
have added resources to our lacrosse sales network and will continue to do so as the Maverik business expands.
Our History
Founded by the Bauer family in Kitchener, Ontario in 1927, we have focused on design and innovation to
produce high-performance sports equipment throughout our history. We designed and manufactured the first
ice skate with the blade attached to the boot and in 1976, we introduced the TUUK blade holder, a predecessor
to the holder currently used by more than 80% of NHL players.
Our predecessor, Canstar Sports Inc., acquired other well-known brands such as Micron, Lange, Mega, and
Daoust ice skates, as well as Flak and Cooper hockey equipment. In 1995, the Bauer Business was acquired by
Nike who introduced a line of Nike branded equipment alongside the existing line of Bauer branded equipment
in 1997. In 2006, to capitalize on the strength of the Bauer brand, all hockey equipment lines were rebranded as
Nike Bauer. Throughout this period, the Bauer brand remained a leading brand in ice hockey equipment.
In April 2008, the Existing Holders acquired the Bauer Business from Nike and, in addition to re-branding
all ice hockey equipment lines exclusively under the Bauer name, management was provided with the
opportunity to leverage the strength of our platform and acquire complementary brands and technology assets.
Since the sale of the Bauer Business by Nike, we have successfully made and integrated three strategic
acquisitions into our platform: the Mission-ITECH Acquisition (September 2008) complementing our ice and
roller hockey equipment businesses, the Jock Plus Hockey Intellectual Property Acquisition (November 2009)
strengthening our offering of ice hockey-related apparel and accessories, and the Maverik Lacrosse Acquisition
(June 2010) marking our entry into the lacrosse equipment industry.
33
Our Competitive Strengths
We believe that the following competitive strengths position us well to succeed and grow in the future:
Most Recognized Brands in Ice and Roller Hockey; Cutting-Edge Brand in Lacrosse
Bauer is the most recognized brand in the ice hockey equipment industry and has been synonymous with
the sport itself for more than 83 years. Generations of adult, junior, and youth hockey players strongly identify
with our iconic brand, an image fostered over years of providing top-quality products to recreational through
professional players.
According to a North American market research survey commissioned by the Company in 2009, Bauer has
90% unaided brand awareness among hockey consumers and is the top-rated brand in hockey with consumers
identifying Bauer as having ‘‘innovative products’’ (64%), being the ‘‘best brand on the market’’ (59%) and ‘‘my
favourite brand’’ (54%).
‘‘Innovative Products’’
75%
‘‘Best Brand on the Market’’
75%
64%
75%
59%
60%
45%
‘‘My favourite Brand’’
60%
43%
45%
37%
25%
30%
60%
15%
30%
45%
26%
23%
21%
15%
Easton
25JAN201110090510
Reebok
CCM
30%
22%
22%
Easton
CCM
19%
15%
0%
0%
54%
0%
Easton
25JAN201110090223
CCM
Reebok
Reebok
25JAN201110085793
We believe that this strong brand recognition is the result of consistent brand communication, our ‘‘true to
the game’’ authenticity, and regularly bringing to market innovative top-quality equipment with superior
performance. The strength of the Bauer brand lends credibility to our entire portfolio of authentic brands,
including Mission and Maverik, where each brand remains true to its sport. Our brand recognition creates
significant barriers to entry in our market as many consumers believe that brands with heritage and authenticity
in their sport understand their needs and will provide the best products to improve their game. Additionally, our
brand strength leads more retailers to carry our hockey equipment products than any other brand and most
retailers to carry a full range of our products.
Our Mission brand is the leading brand in the roller hockey equipment industry, and our recently acquired
Maverik brand is an authentic, cutting-edge brand which we intend to grow into a market leader in the lacrosse
equipment industry.
Number One and Growing Market Share in the Ice and Roller Hockey Equipment Industries
We have the leading market share in the overall ice hockey equipment market, with an estimated 45%
market share in Fiscal 2010, which we believe is in excess of the next three largest brands combined. We believe
that we hold the number one market share position in each of our ice and roller hockey equipment categories,
with the exception of sticks where we believe we hold the number two market share position. For Fiscal 2010, we
estimate that we had more than a 60% market share in skates and helmets, more than a 55% market share in
roller hockey, and more than a 35% market share in every other equipment category.
We have driven market share growth by introducing new products with performance improvements each
year in most of our equipment categories, alternating between our two families of products for ice hockey, the
Vapor and Supreme lines. Through this strategy, we have grown sales by creating excitement and dialogue at the
retail level with retailers and consumers and have maintained a significant advantage over our competitors who
introduce new products less frequently.
34
As a testament to the ‘‘best in class’’ nature of our products, as shown in the graph below, during the 2010
NHL Stanley Cup Finals, more players wore our products than any other competitors’ products by a wide
margin, further enhancing our brand recognition and credibility among players of all abilities.
NHL Player Equipment Choice — 2010 Stanley Cup Finals
80%
71%
60%
55%
48%
40%
26%
24%
17%
20%
45%
43%
29%
45%
26%
19%
0%
Skates
Sticks
Helmets
Visors
Bauer
Gloves
Closest Competitor
Pants
26JAN201100260885
Source: Management Estimates
Industry Leading R&D and Product Innovation
Our objective is to improve player performance and safety at all levels of play through equipment and
apparel innovation. Our passionate and committed team of more than 50 designers, engineers and technicians,
who work closely with our scientific and research partners, including McGill University, have a world-class
reputation and lead the ice hockey equipment industry in continuously bringing to market innovative, often
revolutionary, top-quality equipment with superior performance that is trusted by players of all skill levels.
New product launches are planned and initiated by a cross-functional category group who transform formal
consumer and player insights into a category business plan. The execution of the category business plan is
supported by a dedicated R&D facility located in St. Jerome, Québec, where we employ a rolling five-year
innovation cycle for each product category, resulting in a steady stream of approximately 100 to 150 new product
launches each year. In order to ensure the successful execution of new product launches, we fully integrate our
manufacturing partners into our R&D program, maintain a strong focus and discipline on cost management, and
heavily test prototypes throughout the innovation cycle, including lab tests and on-ice trials by players of every
skill level while incorporating consumer and player insights throughout the product innovation cycle.
A substantial number of the world’s best hockey players use our equipment. During the current 2010/2011
NHL season, approximately 90% of NHL players wear or use at least one piece of our ice hockey equipment.
The chart below illustrates the breakdown of use of Bauer equipment by NHL players for each of the major
equipment product categories over the past two NHL seasons. With less than 18% of NHL players under formal
endorsement contracts to exclusively wear Bauer branded equipment head-to-toe during this current season
(as of December 2010), we believe these statistics demonstrate the best in class nature of our products.
Use of Bauer Equipment by NHL Players
80%
69%
69%
60%
38%
40%
40%
42%
29%
27%
33%
30%
37%
29%
36%
20%
0%
Skates
Sticks
Helmets
2009/2010 NHL Season
Visors
2010/2011 NHL Season
Gloves
Pants
26JAN201100261045
Source: Management Estimates
On average from Fiscal 2008 to Fiscal 2010 we spent 3.4% of our annual revenues (based on the three year
period ending May 31, 2010) on R&D, which we believe is substantially greater than the R&D expenditure by
our closest ice hockey competitor. Our significant investment in product innovation enables us to provide
superior performing products, which in turn, we believe, generate and sustain significant market share in each of
our product categories.
35
Examples of our unique hockey product innovations over the last six years include:
Supreme ONE90 Skate
New weight record of 770 grams per
skate
Lightweight carbon
outsole
Proprietary 3D compression molding
process allowed tighter fit around the
heel and ankle, resulting in a more
effective transfer of energy on the ice
Optimized design with a thinner, more
tapered shaft with double concave
dimensions for enhanced energy
efficiency “Pure-Flex profile” and
Opti-Feel blade
Pureshot blade
profile delivers a
more accurate
shot, regardless of
the playing style
470 grams weight
435 grams weight
2009
2006
2005
800 grams weight
Vapor XXX Stick
True one-piece composite stick—
“Monocomp” technology
Superior balance
to the stick when
stickhandling and
passing
2008
Propelled Bauer to
capture over 65%
of NHL players and
established the
Vapor XXX as the
top performing
skate on the ice
Supreme Composite Goal Sticks
First composite goal sticks to the
market
Vapor X:60 Stick
Used carbon fiber
that was 20%
lighter than
conventional
carbon
reinforcements
Vapor Under Protective
Collection
Collection of shin, shoulder and
elbow pads with improved range
of motion and lower profile
against the body
Development of 2-piece molded
caps, segmented protective
layers and customizable
components not only improved
fit but actually improved overall
protection versus competitive
product
Bauer Base Layer
First to introduce a “hockey fit”
line of apparel which improved
player performance
and provided comfort
and mobility without
compromising full range of
motion
Only composite goal stick in the
NHL
Extremely lightweight and
durable, enhancing goalies’
performance
Supreme TotalONE Skate
New weight record at 695 grams
per skate
3-Flex tongue is the first
tongue to allow customization
of flex profile and angle of attack
2010
Vapor XXX Skate
One piece quarter
Integrated Neck Protective
Apparel
Integrated neck protective
apparel includes an adjustable
integrated Kevlar® neck guard
Bauer has exclusive
license to promote
Kevlar® fiber protection
in this product
Supreme ONE100 Goal Skates
Lightest skate on the market at
840 grams, an average of 200
grams lighter than the
competition
Unique VERTEXX cowling
Key features include 28%
increased “attack angle” from
standard goal cowling and
removable 3mm runner, which
enhance the goalie’s positioning
and skating ability
27JAN201103120349
Most recently, in October 2010, we launched a completely new line of Supreme composite sticks which have
been very well received by our consumers and players, as evidenced by an additional 67 NHL players using our
sticks in the current 2010/2011 NHL season, an increase of 39% over last season. By combining our proprietary
technology, exclusive materials and input from elite players, we believe that we have created a light weight and
durable stick that meets the demands of players like never before.
In roller hockey, we have successfully integrated existing Mission technology into our product offerings,
most notably the patented hi-lo chassis for roller hockey skates. Our St. Jerome R&D team has combined this
chassis, which uses two different size wheels on the skate to improve agility and control, with our existing skate
boot design to pair the best technologies available in the roller hockey market. In lacrosse, Maverik also has a
track record of product innovation. We are currently adding Maverik personnel at our St. Jerome R&D facility
to drive innovation for our Maverik brand, leveraging our proprietary technologies and established R&D
program to accelerate Maverik’s product innovation cycle and revenue growth.
Significant Scale and Strong Manufacturing and Retail Relationships
Our scale and relationships have enabled us to improve our profitability over the last five years and to
compete successfully. We have an established comprehensive manufacturing platform with our key suppliers,
primarily with facilities in Canada, China, Thailand and Vietnam, where our equipment and related apparel is
produced exclusively for us at what we believe to be low costs. We have excellent long-term relationships with
36
our manufacturing partners and vendors, who we fully integrate into our R&D and product development
programs.
We also have a highly diversified global network of retailers and distributors, comprised of approximately
900 retailers in Canada, 1,000 in the United States, 800 in Scandinavia and Finland, as well as approximately
60 distributors outside of these countries who sell to over 1,000 retailers in other international markets. Our size
also allows us to leverage our marketing and sales expertise to support our retailers in unique ways, such as
in-store display units, retail merchandising alliances, order purchasing and inventory management systems,
grassroots product demos and education, and digital and social media initiatives.
Strong Cash Flow Generation
Our Adjusted EBITDA, together with our relatively low level of capital expenditures and attractive tax
position, allow us to generate cash flows to invest in R&D, pursue acquisitions and other growth initiatives, and
reduce our indebtedness.
For the last twelve month period ended November 30, 2010, Bauer generated an Adjusted Gross Profit
Margin of 40.0% and an Adjusted EBITDA margin of 14.5% as compared to an Adjusted Gross Profit Margin
and Adjusted EBITDA margin of 39.3% and 10.4%, respectively, in Fiscal 2008.
Our ordinary course operations require minimal capital expenditures given that we manufacture most of
our products through our manufacturing partners. Our capital expenditure requirements have averaged less
than 1.0% of net revenues for the past three fiscal years ending May 31, 2010. Going forward, to support our
growth and key business initiatives, we anticipate moderately higher levels of capital expenditures
and investment.
We also benefit from an attractive tax position with, as of May 31, 2010, approximately $52.6 million of net
operating loss carry-forwards in Canada and approximately $57.7 million of available tax deductions in Canada
and the United States relating to intangible assets.
Experienced and Committed Team with a Track Record of Innovation and Growth
We are led by an experienced and committed management team with a proven track record of successfully
introducing and marketing innovative products, integrating strategic acquisitions, and implementing successful
growth strategies. Led by Kevin Davis, our President and Chief Executive Officer, who has been with our
Company for more than 9 years, our senior management team has an average of 17 years experience in the
hockey, sporting goods and consumer product industries, including with Nike, Procter & Gamble, Unilever and
the Boston Bruins. On a company-wide basis, our dedicated and passionate employees have been with us for an
average of more than 10 years, which we believe represents a strong commitment to our Company and an
enthusiasm for team sports.
In recent years, our management team has developed and is executing a growth strategy focused on
substantial product innovation and R&D. Over the last few years, our team has also executed key strategic
initiatives to distinguish ourselves from our competitors, including:
• Introduction of a Two Season Product Launch Schedule — We were the first in our industry to create a
schedule of two annual product launches, the first being the ‘‘Back-To-Hockey’’ season which runs from
April to September and the second being the ‘‘Holiday’’ season which runs October to March. Our two
season product and launch schedule has since become the industry standard.
• Category Management Approach — We were the first in our industry to organize cross-functional teams
dedicated to specific product categories (e.g., skates). This category dedication has enabled us to better
target the needs of consumers and retailers and respond more quickly to the specific market dynamics
within each product category. We believe this approach will continue to drive growth in each of our
product categories.
• BauerWorld — An annual, multi-day customer event where we showcase our new products and conduct
retailer education seminars. Our 2010 BauerWorld hosted approximately 215 attendees from over
23 countries. BauerWorld helps support sales by demonstrating our technological innovations and
37
commitment to our retailer base. BauerWorld is the only tradeshow of its kind exclusive to a single
hockey equipment manufacturer.
• CustomerOne — A platform of competency training, processes and tools that jointly maximize the
partnership between Bauer and its customers. The initiative includes regular retail management
education, web-based order facilitation, and online inventory management tools, including the ability to
place and check orders and inventories 24 hours a day, seven days per week. Today, over 45% of our
orders are received on-line through our CustomerOne web portal.
• Integrating Strategic Acquisitions into our Platform — We have successfully integrated three strategic
acquisitions into our platform since September 2008: the Mission-ITECH Acquisition, the Jock Plus
Hockey Intellectual Property Acquisition, and the Maverik Lacrosse Acquisition.
Our Performance Sports Products Platform is Driving Growth
Our competitive strengths have driven our success in the ice hockey equipment market. These strengths are
core elements of what we believe is a world-class performance sports products platform that is unique to our
industry. We believe we can successfully apply this platform to other performance sports categories and markets.
Our platform consists of:
• strong and authentic brands;
• industry leading R&D and innovation;
• deep knowledge of consumers and players;
• defensible, proprietary technologies and patents;
• effective global marketing;
• extensive global retail and distributor network; and
• global, cost efficient manufacturing operations driven by scale and strategic partnerships.
This platform is supported by our experienced, passionate and dynamic performance sports products team
that has been successful in identifying and integrating complementary brands and technology assets which, with
the benefit of our platform, have contributed to accelerated market share growth and improved margins.
The following graph illustrates the expansion of our world-class performance sports products platform since
the sale of the Bauer Business by Nike to the Existing Holders:
Other
Acquisition
Targets
Maverik
Lacrosse
Acquisition
Jock Plus
Hockey
Asset Acquisition
MissionITECH
Acquisition
Bauer
Acquisition from
Nike
Bauer
2008
2008
Bauer
Mission-ITECH
Bauer
Mission-ITECH
Bauer
Jock Plus
Hockey
Mission-ITECH
Assets
2009
2010
Jock Plus
Hockey
Assets
Maverik
Lacrosse
2011+
Leading Global Performance Equipment Platform
(R&D, Sourcing, Manufacturing, Marketing,
Distribution)
26JAN201111094572
38
Since the sale of the Bauer Business by Nike to our Existing Holders in April 2008, we have:
• Completed the Mission-ITECH Acquisition in September 2008, which allowed us to attain the leading
market share position in the roller hockey category (with Mission branded product lines in combination
with Bauer branded products), as well as a leading market share position in visor/shields and goalie
equipment (with formerly ITECH branded product lines). Our platform also enabled us to reduce costs
for those products significantly. For example, from Fiscal 2009 to Fiscal 2010, the gross profit margins on
the roller hockey business post-acquisition increased by 3.8% and gross profit margins on visors have
increased by 5.4% as a result of integrating these products into our manufacturing and supply
chain systems.
• Completed the Jock Plus Hockey Intellectual Property Acquisition in November 2009, which
strengthened our position in the performance apparel category. This intellectual property, combined with
our performance product development expertise, strong marketing, and our extensive distribution
channels has resulted in a 392.2% sales increase in the performance apparel category between Fiscal 2008
to Fiscal 2010.
• Completed the Maverik Lacrosse Acquisition in June 2010, which provided us an authentic, cutting-edge
brand in the lacrosse equipment and related apparel market. We believe that Maverik is poised to
become a market leader when it fully realizes the benefits of our platform.
We intend to make further strategic acquisitions of complementary sports equipment and/or related apparel
companies that are, or have the potential to become, market leaders in their relevant category, whether in
hockey, lacrosse or other performance sports. We believe that our existing platform and scale enables us to
materially enhance the success of an acquisition by leveraging our industry-leading technical expertise, low-cost
manufacturing, marketing resources and distribution relationships.
Our Growth Strategies
We believe that we can deliver net revenue growth by executing the strategies described below. We also
intend to improve our profitability and margins by staying committed to our cost reduction agenda and gaining
efficiencies throughout our supply, manufacturing and distribution channels.
Increase Our Market Share in Ice and Roller Hockey Equipment Through Product Innovation
We are focused on building our leadership position and growing our market share in all of our ice hockey
and roller hockey equipment product categories through continued innovation at all performance levels. We
have steadily increased our market share in the ice hockey equipment market, from approximately 28% in Fiscal
2006 to approximately 45% in Fiscal 2010. In roller hockey, we had an estimated 55% market share of
equipment sales in Fiscal 2010.
Our product launch process, which includes category-leading R&D resources and expertise, crossfunctional business planning, and timely consumer and player insights throughout the product innovation cycle,
is expected to continue to deliver innovative products that meet the demands of players at all skill levels. For
example, in the past year, we have:
• increased our market share in sticks by investing heavily in R&D, including in technology and materials,
over the last several years and have launched a series of new composite stick technologies;
• strengthened our leading market share in skates by developing and marketing the new Bauer Supreme
line featuring the TotalONE skate, released in April 2010; and
• captured market share in the performance apparel category through the introduction of our base layer
shirt with integrated neck protection.
We believe this process and new technologies will drive further market share growth in the ice and roller
hockey equipment markets. For example, through the introduction of superior performing products using new
technologies, we have nearly doubled our net revenues in the hockey stick category from Fiscal 2006 to Fiscal
2010, representing a compound annual growth rate of 18.3%. With the recent launch of our Supreme line of
composite sticks, we believe that we can become the market share leader in this category in our current
fiscal year.
39
Target Emerging Markets and Underserved or Growing Consumer Segments
Emerging Markets
Ice hockey equipment growth opportunities exist in geographic markets where we have traditionally had
less exposure than in North America, Western Europe and the Nordic countries. We intend to grow our
revenues in Eastern Europe and Russia, where ice hockey is considered an integral and vital part of the cultural
fabric, utilizing various consumer connection and commercial penetration strategies. In particular, the Russian
ice hockey equipment market is largely fragmented and represents a significant opportunity for us especially
leading up to the 2014 Winter Olympics in Sochi, Russia. We expect the elite and high-level players in Eastern
Europe and Russia to generate greater demand for quality, high-end global branded products and we intend to
meet this demand by working with our distribution partners to expand our distribution network and by
dedicating marketing support to the region. An increase in ice hockey retail selling space combined with the
Russian government’s commitment to invest in developing their ice hockey infrastructure creates conditions for
attractive growth. The KHL and its feeder leagues also present both an elite sports marketing vehicle and a
commercial growth opportunity. We are positioned to capitalize on these dynamics through a robust, established
commercial and sports marketing presence within Russia.
Women’s Ice Hockey
The women’s ice hockey segment is another attractive growth opportunity for us. Women’s ice hockey
participation has approximately doubled in the last decade, with a 7% compound annual growth rate from the
1999/2000 to 2009/2010 hockey seasons, and now represents 12% of total registered players globally. We have
invested resources and commenced unique marketing initiatives specifically targeted to female players, including
an exclusive partnership with the Canadian Women’s Hockey League. As women’s ice hockey grows, we intend
to be responsive to the needs of female players by enhancing our R&D investments with female consumer and
player insights and by adapting our existing high performance products as necessary.
Performance and Recreational Segments
The ice hockey equipment market is comprised of three segments, (i) elite, (ii) performance, and
(iii) recreational, each of which targets a different level of athlete who demands a different level of performance.
As illustrated by the chart below, we have historically focused the majority of our innovation, sales, and
marketing efforts on elite level products as compared to the performance and recreational segments. We are
making a concerted effort to focus our industry-leading R&D, sales, and marketing efforts on these underserved
segments, with a goal to gain market share that is equal to our market share in elite level products. Our
recreational-level products, which provide performance at value pricing, benefit from the same industry-leading
R&D that drives the development of our elite-level and performance-level products. We believe that our
recreational products typically perform at significantly higher levels than many of our competitors’ products that
sell at comparable or even higher price points.
Bauer Ice Hockey Equipment Sales Mix
Fiscal 2010
Recreational
23.9%
Elite
45.6%
Performance
30.5%
25JAN201123304524
40
Capitalize on Lacrosse — the Fastest Growing Team Sport in the United States
According to SPM, lacrosse is the fastest growing team sport in the United States with the number of
lacrosse players at the youth and high school levels — the segments having by far the largest participation —
having grown by an average of over 10% per year since 2000. In 2009, the U.S. lacrosse equipment market was
estimated to be in the range of $80 to $90 million.
Our objective is for Maverik to become a leading lacrosse brand by 2015. Maverik is an authentic,
cutting-edge brand with a portfolio of innovative products and a strong management team. Maverik’s net
revenues have increased steadily since its 2008 fiscal year, representing a compound annual growth rate of 36.9%
through the end of its 2010 fiscal year, and it has the potential to substantially grow its current market share. In
addition, Maverik currently has virtually no sales into Canada, which management believes represents an
estimated $10 million market. As such, Canada presents an additional growth opportunity for Maverik.
We intend to leverage our platform to enhance the features and functionality of Maverik’s products, reduce
its manufacturing costs, support and expand its marketing programs and extend its distribution reach. We expect
these initiatives to accelerate growth in Maverik’s market share, net revenues and profitability.
Grow Apparel Across All Sports Categories
Management estimates that the worldwide ice hockey apparel market size is approximately $300 million,
consisting of (i) team apparel and bags, (ii) performance apparel, (iii) lifestyle apparel, and (iv) licensed apparel.
We currently participate in all segments other than the licensed apparel business. We have recently begun
building and utilizing the same product development process that we use for our performance equipment
categories, including consumer and player insights, strong R&D investment and effective marketing to drive our
sales in the team and bags, performance and lifestyle apparel segments. While apparel net revenues accounted
for approximately 4.7% of our Fiscal 2010 net revenues, Bauer-branded net revenues grew from Fiscal 2009 to
Fiscal 2010 by 34.8%, and we anticipate that our continued investments will further increase sales and apparel
will become a more significant portion of our business going forward.
The team apparel industry is primarily made up of team warm-up, practice and game jerseys, and related
goods. Team apparel is characterized as being highly fragmented, regional, and highly specialized and there is a
significant opportunity for us to increase our modest team apparel presence and market share among
professional, organized and recreational teams, in both youth and adult segments. We do not currently
participate in the game jerseys segment of team apparel. The hockey bag market size is estimated to be less than
10% of total apparel sales and we have recently aligned this segment with our team apparel category to facilitate
focused strategy and execution.
We estimate the performance apparel market to be the fastest growing segment and is made up primarily of
base layer undergarments, jock shorts and protective apparel. We have recently made considerable investments
in our performance apparel segment and have seen significant sales growth, due primarily to the launch of our
base-layer shirt with integrated neck protection. Between Fiscal 2009 and Fiscal 2010, our sales of performance
apparel increased by 392.2%. We intend to continue to innovate in the performance apparel category and have
identified this category for future market share expansion.
The lifestyle apparel market size is made up primarily of hockey-inspired, branded t-shirts, caps, and related
goods. We intend to continue to increase our lifestyle apparel presence under each of Bauer, Mission and
Maverik, our flagship brands in their respective sports. For example, we have entered into a five year exclusive
deal with New Era, the largest headwear manufacturer in the United States, as their exclusive brands in hockey
and lacrosse. We expect that this relationship will drive growth in our apparel business. We will also benefit from
New Era’s leading edge design, development and manufacturing services. With our brand recognition, we
believe sales in this segment can be increased beyond our current offering, which historically was focused on
warm-up apparel.
The final segment of the apparel market is licensed apparel, made up primarily of jerseys, t-shirts and other
products bearing the proprietary trademarks and logos of professional hockey leagues and teams. This business,
estimated to represent approximately $120 million in 2010, is typically granted by the owners of the intellectual
property under license to a single supplier and Bauer does not currently participate in this segment of the
apparel business.
41
Leverage Cost Leadership to Increase Profitability
We employ an ongoing cost reduction strategy that enables us to provide ‘‘best in class’’ equipment and
related apparel at competitive prices and attractive margins. Our primary focus of cost reduction includes:
(i) alternative materials and sourcing arrangements, (ii) manufacturing efficiencies and techniques or new
manufacturing partners, and (iii) distribution and supply-chain efficiencies.
In conjunction with our manufacturing partners, we identify and implement initiatives to reduce the cost of
materials and streamline the manufacturing processes across all of our ice and roller hockey and lacrosse
product categories. Further, we design and build proprietary machinery and equipment that enables us to
manufacture more efficiently, thereby decreasing unit costs.
We have also redesigned our distribution model to enable more efficient shipments which has expedited
deliveries to customers and reduced overall costs. Over the last five fiscal years ending May 31, 2010, we steadily
decreased our distribution costs as a percentage of sales from 6.5% in Fiscal 2006 to 4.1% in Fiscal 2010 and
expect further benefits from our cost reduction initiatives. Also, we currently outsource the distribution of our
products outside of North America to a third-party logistics company in Boras, Sweden, and we outsource
certain of our North American distribution activities to a third-party logistics company in Aurora, Illinois. In
2011, we have broadened this arrangement to encompass the distribution of all U.S. hockey and lacrosse
equipment which we anticipate will generate annual cost savings and better serve our customers.
Pursue Strategic Acquisitions
We plan to supplement our organic growth initiatives with strategic acquisitions of complementary sports
equipment and apparel companies and brands that are or have the potential to become market leaders in their
relevant category, whether in ice hockey, roller hockey, lacrosse or other performance sports. Our existing
platform and scale provides us with the opportunity to materially enhance the success of an acquisition by
leveraging our industry-leading technical expertise, low-cost manufacturing, marketing and communications
resources and distribution relationships.
We have a successful track record of making and effectively integrating strategic acquisitions into our
platform: the Mission-ITECH Acquisition (September 2008) complementing our ice and roller hockey
equipment businesses, the Jock Plus Hockey Intellectual Property Acquisition (November 2009) strengthening
our offering of ice hockey-related performance apparel and accessories, and the Maverik Lacrosse Acquisition
(June 2010) marking our entry into the lacrosse equipment industry. With each of these acquisitions, we have
grown market share, improved product quality and innovation, and increased operating leverage by adding these
businesses to our existing platform.
We actively review performance sports equipment and related apparel companies that have growth
potential and would benefit from our platform and scale. We seek companies with, among other things, strong
and authentic brands, industries that demand high-performance and innovative products, new technologies and
strong consumer marketing techniques.
Products
We offer a complete line of head-to-toe performance-driven equipment for players in every major ice and
roller hockey market in the world. Our equipment offering includes skates, sticks, protective equipment, helmets
and goalie equipment for both ice and roller hockey. Our products are sold at various price points and are
developed for and targeted to three performance levels:
• ‘‘Elite’’, for professional and non-professional elite players including players in the NHL and other
professional leagues around the world who will pay a premium price for the best performing equipment;
• ‘‘Performance’’, for high-level players (typically between the ages of 12 to 22) who buy technically
advanced equipment that provides a competitive edge; and
• ‘‘Recreational’’, for recreational players of all ages who seek comfort and value.
42
Under our Maverik brand, we offer a comprehensive line of lacrosse equipment for all ages and levels
of skill.
The following table provides a breakdown of our major product categories for each of our performance
sports.
Product Type
Primary Characteristics and Performance Features
Market
Position
ICE HOCKEY
Skates
• Multiple patented boot construction methodologies highlighted by
our elite-level 3D-lasting boot construction that optimizes player
performance based on skating style and fit characteristics.
#1
• TUUK lightweight blade and runners provide increased agility and
acceleration.
• Approximately 69% of NHL players are wearing Bauer skates this
season.
21JAN201123520472
Sticks
• Two families of sticks that utilize different technologies to offer
players distinct shapes, flex points, blade constructions, and shaft
textures — all designed to optimize performance for each
individual player.
#2
• MYBAUER.com offers individual players the opportunity to order
a custom stick from a broader menu of colors, curves, flexes and a
custom ‘‘name bar’’.
22JAN201100551541
Protective
• Three families of gloves that deliver unique fits to meet player
preferences.
#1
• Two families of pants, shoulder pads, elbow pads and shin pads that
utilize different technologies to deliver distinctly different levels of
mobility and protection.
22JAN201100551384
Helmets
• Nine fully-certified helmets, utilizing over seven different impact
absorbing liner materials and multiple tool-free fit adjustment
mechanisms to deliver optimal protection through fit
characteristics and lab-tested impact absorption.
21JAN201123515966
43
#1
Product Type
Goalie
Primary Characteristics and Performance Features
• Patented Vertexx goal skate cowling (protective shell) optimizes
goaltender mobility.
Market
Position
#1
• Two distinct series of goal protective gear (leg pads, gloves,
blockers), customizable features service a growing ‘‘mass
customization’’ trend in goalie protective gear.
• The only full composite goal stick being used in the NHL.
• Goal mask technology with exclusively licensed designs from
Marvel Comics.
22JAN201100551022
ROLLER HOCKEY
Roller Hockey
• Multiple patented boot construction methodologies highlighted by
our proprietary 3D lasting boot construction that optimizes player
performance based on skating style and fit characteristics.
#1
• Patented Hi-Lo Chassis technology optimizes agility and overall
performance.
24JAN201110170974
LACROSSE
Heads and shafts
• Heads that cater to all player levels and regulatory requirements;
our Mo-CONTROL geometry provides critically acclaimed
leverage and feel to our heads, increasing accuracy and speed.
n/a
• Top quality materials highlight our advanced and expert-level
shafts. Titanium, and scandium and 9000 series aluminum provide
one of the most durable and lightweight sticks on the market.
Tactile grip provides superior control and feel.
26JAN201122202064
Protective and gloves
• Maximum protection, comfort and flex are available across all of
our protective lines. Designed with new DILLO flex technology,
our Expert and Advanced level protective products allow for
compact and lightweight pads and gloves that bend with the player.
• Expert, Advanced, Intermediate and Beginner gloves are all
designed for comfort, performance and durability. Utilizing
seamless palms, DILLO flex technology and lightweight materials,
our gloves provide the player with proper fit and protection.
24JAN201114290469
44
n/a
Research and Development
Bauer was founded on the principles of performance, innovation and quality. We constantly strive to
improve product performance and reduce costs through the use of biomechanical research, high performance
materials, efficient manufacturing processes and valuable consumer insights. We believe that the application of
next-generation manufacturing technology solidifies the Company’s position as the industry leader in ice and
roller hockey equipment and will be applied to drive the Maverik brand in lacrosse.
In 1981, we launched the Supreme Custom 100 skate, which offered a variety of widths and set the
foundation for the our elite-level skates for decades. During the mid-1990s, we continued to innovate with the
debut of the Vapor line of skates and the industry’s first helmet to feature dual-density foam which is still widely
used today by the game’s elite players. By 2000, the Vapor line of skates became our top selling skate family and
we strengthened our commitment to the stick category with the debut of the Vapor XXX stick, the industry’s
first composite stick to feature a true one-piece construction in 2006.
We have a disciplined, rolling, multi-year product development program or road-map through which we
bring new products to market in an organized and efficient manner. Across all of our categories, we typically
launch approximately 100 to 150 new products each year. To support the successful execution of our new product
launches, we fully integrate our manufacturing partners into our R&D program, incorporate advanced materials
into our product design to create lighter, more durable products, maintain a strong focus and discipline on cost
management, and heavily test our prototypes throughout the development phase, including with lab tests and
on-ice trials by elite and high-level players. We believe that this collaborative process yields better ice and roller
hockey equipment and will yield similar benefits for our newly acquired lacrosse business.
Our five-year innovation cycle begins with product concepts and valuable consumer insights. Over the
course of the design and development cycle, we complete prototyping, materials sourcing, manufacturing, and
on-ice testing and typically reach the final production stage in year five. Bauer’s five-year product innovation
agenda can be depicted as follows:
Year 1
• Advanced
research,
technology and
materials projects
generate new
product concepts
Year 3
Year 2
• Reviewing and
defining research
needs and agenda
• Initial advanced
project/product
briefing
Year 4
Year 5
• Advanced materials
sourcing
• Product - concept
validation
• Finalization of
specifications
• Manufacturing
method selected
• Comprehensive onice and lab testing
• Full size range
commercialization
• Initial testing and
prototyping
• Final product briefing
• Quality plans
defined
• Prototype
development and
design
Commercial
product
launch
• Production
CONTINUOUS
• Consumer insights from professional athletes, players, coaches and parents are gathered and integrated
• 360 degree warranty and quality feedback
• Key project objectives / product drivers are developed (e.g. durability, weight, safety, balance)
26JAN201111094712
We utilize a variety of strategic partnerships to enhance our R&D activities, including a long-standing,
exclusive research program with McGill University in conjunction with Natural Science and Engineering
Research Council of Canada. We conduct research and gather and analyze a variety of physical data by, for
example, studying biomechanics such as the pressure points in the foot of a skater or the way a player influences
a stick’s bend during a slapshot. This research allows us to evaluate the mechanical function and technical
45
specifications of all of our equipment offerings, particularly with respect to performance and safety, which
contributes to our goal of continuously improving the performance of our equipment. We believe that these
partnerships provide us with invaluable data and insight to assist us in developing next-generation products.
In order to protect our innovations, we have a substantial library of intellectual property assets. Our
portfolio includes over 300 patents (including design patents) and 300 registered trademarks for ice and roller
hockey equipment and we have over 50 additional patents pending today. We believe that our portfolio of
intellectual property, which we vigorously protect, is a strategic competitive advantage. Maverik also brings its
own innovations to the Bauer family and has several patents pending.
We incorporate insights and feedback from all types of players at every level of product development. Eric
Lindros, who became synonymous with the Bauer brand in the 1990s, raised the level of athlete involvement in
our product development process as he worked closely with our R&D team. Lindros’ involvement set the
foundation for in-depth athlete involvement that remains a key component of our product development process.
Our commitment to performance, product innovation and product superiority extends to each product
category and price point. Features such as form, fit and functionality that are developed for our professional
athletes become fixtures throughout our product lines in every category. For example, our current performance
level skate performs as well as our highest performance skate did from only a few seasons ago. Our elite level
skate, the Supreme TotalONE, weighs only 695 grams (10% lighter than four years ago, and 10% lighter than the
top Easton model, S17, and 14% lighter than the top Reebok model, 11K).
Customers
We have established a global sales and distribution network to service a broad and diverse customer base
comprised of more than 3,700 retailers and distributors in the major geographic markets where hockey is
popular — Canada, the United States, Western Europe, the Nordic countries, Eastern Europe and Russia. In
Fiscal 2010, 38.8% of our total sales were in Canada, 34.8% in the United States, and 26.4% to the rest of
the world.
Bauer Fiscal 2010 Net Revenues by Region
Rest of the
World
26.4%
Canada
38.8%
U.S.
34.8%
26JAN201108022271
We sell directly to our customers in Canada, the United States, and certain Western European countries,
including the Nordic countries. In Fiscal 2010, approximately 85% of our ice hockey equipment sales were to
these markets. In these jurisdictions, our customers are typically independently-owned specialty hockey retail
stores and large sporting goods retailers. Our four largest customers, together accounted for approximately 27%
of the Company’s sales in Fiscal 2010, with no individual customer accounting for more than 10% of our sales.
We sell through distributors outside North America and the Nordic countries. In Fiscal 2010, approximately
14.9% of our ice hockey equipment sales were to distributors representing over 1,000 retail outlets globally,
providing us access to the world’s largest hockey markets outside North America and the Nordic countries. We
believe that larger, more established equipment manufacturers like Bauer are able to more effectively serve the
spectrum of retail channels globally, through established relationships and developed distribution capabilities.
46
Sales and Marketing
Sales
We believe that our global marketplace management and sales process is a strategic competitive advantage.
We believe that we have the largest and most experienced sales force in the ice and roller hockey equipment
industry, resulting in the availability of our products in over 45 countries around the world. Our sales network
consists of independent sales representatives (in the United States and Canada), Bauer employees (in
the Nordic countries) and independent distributors (in all other countries).
The foundation of our commercial strategy is our belief that on-going customer success will drive our
long-term growth. Our sales processes, personnel training and annual initiatives are designed around our core
desire to be our customer’s most important business partner and resource. We believe this bedrock principle is
essential for the successful long-term development and health of our brand and the ice and roller
hockey industries.
In 2005, Bauer introduced the two-season selling model where we focus our sales efforts on two seasons
each year, the ‘‘Back-To-Hockey’’ season from April to September and the ‘‘Holiday’’ season from October to
March. This innovative shift in the selling process was designed to make it easier for our customers to manage
their inventory by providing two purchase windows annually compared to prior standard industry practice of a
single purchase window. The new model, which has since become standard industry practice, allowed us to
introduce new products more frequently, increasing brand awareness at retail outlets while simultaneously
increasing our customers’ revenue opportunity with Bauer’s products.
We employ unique strategies to drive revenue growth and enhance relationships with our customers,
including:
• CustomerOne — We offer a platform of competencies, processes and tools that jointly maximizes the
business success of Bauer and our customers. The initiative includes regular retail management
education, web-based order facilitation, and online inventory management tools, including the ability to
place and check orders and inventories 24 hours a day, seven days per weeks. In Fiscal 2010,
approximately 45% of our orders were received on-line through our web portal, CustomerOne.
• Collaborative Customer Planning — We continue to invest an increasing amount of time each year
working with our customers on a structured quantitative and qualitative plan for the coming season. This
plan is intended to align the objectives of the customer and Bauer and identify areas of potential conflict
and opportunity. The plan provides a roadmap by category, season and initiative that supports the mutual
success of the customer and Bauer.
• BauerWorld — Each fall, prior to the holiday season, we host BauerWorld, a multiple day customer event
where we showcase our new products and conduct customer education seminars. Our 2010 BauerWorld
hosted approximately 215 attendees from over 23 countries. BauerWorld helps support sales by
demonstrating our technological innovations and commitment to our customer base. BauerWorld is the
only tradeshow of its kind exclusive to a single hockey equipment manufacturer.
We intend to deploy many of our ice and roller hockey marketplace management practices for Maverik and
other acquired businesses. This includes leveraging shared services within the commercial functions, where
applicable, as well as our customer-centric technology platforms and key account oversight. While differences in
consumer profiles exist, we believe many of our industry-leading ice and roller hockey sales practices can be
applied to lacrosse and other sports categories. Furthermore, an overlap in both national and regional lacrosse
customers with those in hockey provides an opportunity for Maverik to leverage Bauer’s commercial and
operational infrastructure with meaningful benefits for our customers, and for Bauer and Maverik. We expect
that the strength of the Maverik management team combined with the current Bauer ice and roller hockey sales
and service practices will accelerate Maverik’s net revenue growth.
Marketing
In addition to the traditional ice and roller hockey marketing strategy of investing in sports marketing and
product placement at elite levels (e.g., the NHL and the Canadian Hockey League (‘‘CHL’’)), we interact with
47
core consumers at all skill levels directly at the point of play. We extensively market the Bauer brand and create
one-on-one brand interactions where consumers make purchasing decisions, research products, and play the
game: in the store, online, in hockey arenas, at tournaments and in dressing rooms. Our direct-to-consumer
marketing strategy creates strong brand affinity with consumers and allows for direct interaction with, and
valuable feedback from, our consumers.
For ice hockey, our direct-to-consumer marketing is primarily targeted at the ‘‘hockey crazy kid’’ who plays
hockey at least 30 times annually. Management estimates that this group accounts for approximately two-thirds
of all annual hockey equipment purchases. Our communications are targeted at ‘‘the first liners’’ — the elite
player whose influence and leadership in the dressing room affects the purchase decisions of their teammates
and peers. We believe this segment represents approximately 600,000 players globally.
We have executed several ‘‘industry firsts’’ and strive to market our products to increase brand awareness
through:
• Retail In-Store Marketing: We introduced hockey’s first ever exclusive ‘‘shop in shop’’ and ‘‘monobrand’’
stores in select European markets. These shops are built and funded jointly by retailers, distributors and
Bauer and feature exclusively Bauer product and merchandising. In addition, we developed multiple
‘‘industry first’’ retail education and merchandising tools that educate consumers on the benefits and
performance attributes of our products.
• Digital Marketing: We were one of the first hockey brands with an interactive website and we continue to
bring new interactive technologies to the hockey consumer, as today approximately 85% of our core
target consumers research product purchases and brands online and rely on manufacturer websites as a
key purchase influencer. We provide brand, product, and NHL athlete features as well as video
testimonials featuring professional and amateur players communicating the performance advantages of
our equipment. In 2010, Bauer.com enjoyed over 1.6 million unique visitors. We have created a vibrant,
interactive Facebook community where over 80,000 ‘‘friends’’ can exchange thoughts and ideas regarding
our products and we continue to lead the industry in testing emerging technologies to better connect
with consumers.
• ‘‘Grassroots’’ Marketing: We sponsor and host interactive events and conduct on-ice demonstration
programs. For example, in September 2010, we expanded our on-ice demonstration program with ‘‘The
Bauer Experience’’, targeting 20,000 consumers across 16 North American cities. Additionally, we
sponsor and host interactive events at nearly 20 of the world’s top youth tournaments. Our grassroots
efforts connect the Bauer brand with over 150,000 consumers annually.
We apply this point of play strategy in roller hockey as well. With our Mission brand, we are leaders in the
sport with our digital experience and have extensive grassroots programs that connect with roller hockey players
at every major event in the sport. At the sport’s pinnacle event, the annual National Roller Hockey
Championships, our Mission and Bauer teams are present at every game, executing product demos and hosting
team events.
In lacrosse, our Maverik team has built the Maverik brand and business through extensive involvement at
the grassroots level — from tournament sponsorships to consumer events and strong partnerships with the
game’s most elite players. By combining the strengths of the Maverik team with some of the best practices of our
successful ice and roller hockey marketing approach, we expect to accelerate the growth of the Maverik brand,
becoming a leading brand in lacrosse by 2015.
Professional Athletes
Our commitment to sports marketing commenced in the late 1960s by signing superstars like Bobby Hull
and Bobby Orr as early brand ambassadors. Today, Bauer equipment is used by the majority of hockey athletes
in nearly all of the world’s most elite and professional leagues. We formally partner with top NHL players in
select markets to be Bauer brand ambassadors and key marketing assets. To ensure maximum exposure of our
products, we target markets in which hockey players are highly visible and which have high levels of equipment
sales. These markets include Toronto, Montreal, Ottawa, Calgary, Vancouver, Boston, New York, Philadelphia
48
and Chicago. In addition to extensive use of our products throughout the NHL, the CHL and the NCAA, Bauer
is used exclusively by approximately half of the top elite teams in Europe.
Our penetration of the elite hockey segment supports sales in our primary target market, the 12 to 22 year
old ‘‘first-line’’ junior players who seek to use the same equipment as the professionals. These consumers often
picture themselves following a professional player’s approach to the game and they tend to use the best
equipment to maximize their performance and safety. Furthermore, these players drive additional sales by
influencing teammates or younger players.
While there is no professional roller hockey league, the Mission brand sponsors many of the sport’s top
players as they compete in tournaments that culminate in the Roller Hockey World Championships.
Product use in lacrosse by professional athletes is also a key to success. Our Maverik brand was founded
and is led by John Gagliardi, a former top professional lacrosse player. Many of Maverik’s management team
and employees are current or former professional lacrosse players and they continue to build the Maverik brand
through partnerships with many elite players. Several of professional lacrosse’s elite players promote and use
Maverik including Paul Rabil, John Christmas and Kyle Sweeney.
Strategic Partnerships
We are deeply involved and integrated in the sport of ice hockey at all levels. Management believes that our
relationships with major hockey associations and the numerous professional athletes who use our products
support sales of our products to consumers.
We have strong associations with many of the world’s premier ice hockey organizations, including the NHL,
the CHL, Hockey Canada, USA Hockey and the IIHF.
We are the official visor and goalie mask of the NHL and have a marketing and licensing partnership with
the NHL through 2012. Bauer is the exclusive provider to the CHL of player facial and neck protection and
goalie masks. We have long-term agreements with Hockey Canada (until the end of 2015, with extension to 2018
at the option of Hockey Canada) and USA Hockey (until the end of 2015) to exclusively provide gloves and
helmets for all players on the Canadian and U.S. national teams. Our partnership with Hockey Canada includes
a co-marketing agreement which covers skates, helmets, gloves, and facial protection. Our associations with the
IIHF and a variety of European professional and club teams provide European markets with significant
exposure to our brand. We have also developed long-term relationships with the majority of leading Division
1 NCAA hockey teams and we currently provide products to over 120 college teams.
Maverik has strong associations with many of the world’s premier lacrosse organizations, including
the NCAA, Ivy League, the Big East Conference, US Lacrosse, and the International Lacrosse Federation
(‘‘ILF’’). We are the official provider of lacrosse equipment to Brown University, Albany University, St. John’s
University, Dartmouth College, Stony Brook University and many other prestigious NCAA institutions. We
work directly with US Lacrosse, which is the governing body of the sport in the United States, where we provide
equipment to the US Grant Program which devotes itself to growing the sport nationally to emerging
underprivileged areas. We were approved by the ILF, the organization that organizes the World Games of
Lacrosse every four years, to provide lacrosse equipment for several countries’ national teams, including Italy,
Korea, Finland, Latvia, France and Thailand.
Global Manufacturing, Sourcing and Distribution
Sourcing and Manufacturing
Bauer manufactures the majority of its equipment with an exclusive vendor base. Over 90% of our overseas
production is located in China and Thailand. The remainder of our products are manufactured either at
non-exclusive facilities or at our in-house manufacturing facility in St. Jerome, Québec. Quality control for our
products manufactured in Asia is maintained from an office in Taichung, Taiwan, where we have a dedicated
staff responsible for liaising with internal resources located in Thailand and China and with our vendors
regarding sourcing, logistics and quality control.
49
Our exclusive suppliers and manufacturers are contractually bound by strict security and privacy provisions
to ensure the protection of our proprietary trade secrets. We have agreements with our manufacturing partners
that renew automatically every two years, and many of our manufacturing relationships are greater than 10 years
in length and, in some cases, over 30 years. In the event there are performance issues with our manufacturers, we
retain the right to terminate any of our agreements with no more than 30 days notice. In our core product
categories, we dual-source many products to mitigate any risk of supply disruptions. In addition, we employ
strategies with our vendors to reduce the variability of material price increases over certain time periods.
We believe that we have one of the lowest manufacturing costs amongst our competitors based on our
manufacturing scale and infrastructure, coupled with our distribution network and R&D processes. We strive to
obtain the lowest costs for materials and manufacturing of our products. In doing so, we seek alternative sources
of supply and manufacturing capacity in existing and new markets.
Distribution
Our ice and roller hockey products are sold in more than 45 countries through a distribution network of
more than 3,700 retailers and distributors worldwide. We distribute our products to retailers and other
distributors through our facilities in Greenland, New Hampshire, and Mississauga, Ontario, as well as through a
third-party logistics provider in Boras, Sweden. We also outsource certain of our North American distribution
activities, including sticks and helmets, as well as all Maverik products, to a third-party logistics company in
Aurora, Illinois. In 2011, we intend to broaden this arrangement with this third party logistics provider to
encompass the distribution of all U.S. ice and roller hockey equipment which we anticipate will generate annual
cost savings and improve service to our customers.
Facilities
Our sales and distribution offices are located worldwide as show in the table below.
Facility
Size
(Sq. Ft.)
Leased/
Owned
Lease Expiry Date
Location
Type
Exeter, New Hampshire
New Global Headquarters (to be occupied by
June 2011)
54,825
Leased
April 30, 2023
Greenland,
New Hampshire
Current Global Headquarters and
U.S. Distribution Centre
123,300
Leased
April 30, 2011
St. Jerome, Quebec
R&D and Manufacturing
174,600
Leased
September 5, 2014
Mississauga, Ontario
Sales, Marketing, and Distribution
333,888
Leased
September 30, 2011
Vantaa, Finland
Sales
1,620
Leased
June 30, 2015
Gothenburg, Sweden
Sales, Administration, and Marketing
6,765
Leased
September 30, 2014
Rosenheim, Germany
Sales and Marketing
3,175
Leased
May 15, 2012
Taichung, Taiwan
Asian Sourcing Organization
1,600
Leased
May 15, 2011
Irvine, California
Roller Hockey (Sales and Marketing)
3,915
Leased
March 31, 2012
New York, New York
Lacrosse (Sales and Marketing)
6,000
Leased
March 31, 2016
Environment
We are not aware of any material environmental problems with respect to any of our operations or facilities.
Existing applicable environmental laws and requirements have not had any adverse financial or operational
effects on our capital expenditures, earnings or competitive position and we do not anticipate that continuing
compliance with such laws and requirements will have a material adverse effect upon our expenditures, earnings
or competitive position in future years.
Intellectual Property
We have an extensive portfolio of intellectual property which creates a strategic competitive advantage and
can be applied to new performance equipment sports categories. Our portfolio includes over 300 patents
50
(including design patents) and 300 registered trademarks for ice hockey equipment and we have over
50 additional patents pending today. We protect our technologies, products and brands under the patent,
copyright and trademark laws of those countries in which we do business.
Our extensive intellectual property portfolio is highlighted by the following assets that provide product
performance for players and help protect key features of our innovative products:
• the construction of a skate boot — multiple patents that (i) define the use of a plastic insert in the boot,
(ii) define a one-piece construction, and (iii) define the method of lasting the skate. Ongoing evolutions
and patent protection continue to provide significant barriers to entry for existing competitors and
all newcomers;
• TUUK skate blade holder — the leading skate blade holder trademark registrations have been and
continue to be vigorously and successfully defended. While the product evolutions provide an unmatched
feel and performance, the trademark registrations have also restricted competitors from developing a
product that could even be visually mistaken for the TUUK skate blade holder;
• Tool-Free Helmet Adjustment — introduced on the HH5000 in 1997, we continue to be the only supplier
to offer a helmet with a proven size adjustment mechanism that does not require a screwdriver or similar
tool to adjust the size, providing a competitive advantage in-store at purchase time and at the rink before
the game or during play;
• Base Layer Shirt with Integrated Neck Protection — as momentum builds for mandatory use of neck
protection across more countries and levels of play, these patents provide the exclusive ability to
permanently attach standardized cut-proof neck protection to a baselayer undershirt;
• Hi-Lo chassis for roller hockey — the unparalleled standard for performance in roller hockey, the patents
provide the ability to use two back wheels that are larger than the two front wheels; and
• all research stemming from the McGill University studies.
In addition, we own a significant number of trademarks including Bauer, Supreme, Mission, ITECH and
Maverik. Other significant trademarks include Cooper, Jock Plus, and TUUK, as well as Lange, Micron, Daoust,
Mega, Laser, and Flak.
At the time of the sale of the Bauer Business by Nike, Nike granted to us an exclusive, worldwide,
royalty-free, perpetual limited license to use the Vapor brand in connection with the manufacture and sale of
certain products, subject to the terms and conditions set out in a trademark license agreement, dated April 16,
2008 (the ‘‘Vapor License Agreement’’). See ‘‘Material Contracts’’. Pursuant to a co-existence agreement, Nike
assigned to us its ownership of the Supreme brand with respect to hockey and skating equipment and related
apparel.
Information Technology
We use our information systems to manage our customer orders, deliveries and manufacturing processes.
We primarily operate a global SAP infrastructure. We have a globally integrated business-to-business system for
our sales representatives and retailers, CustomerOne, which facilitates over 45% of our orders. Along with other
business systems, these tools provide business process support and intelligence across our entire integrated
business process, from concept to consumer. In order to protect our ability to conduct business, several risk
mitigation techniques are used across our hardware and network equipment and telecommunications.
Competition
The market for Bauer’s products is highly competitive. We compete in ice and roller hockey and lacrosse on
the basis of brand image and recognition, innovation, performance, price, quality, style and distribution. Our
principal competitors in the ice and roller hockey equipment industry are Easton and Reebok (which includes
the Reebok and CCM brands). We also compete with other manufacturers who focus on certain equipment
categories such as gloves, skates, sticks or goalie equipment. These competitors include but are not limited to
Warrior, Graf, Vaughn, and Sher-Wood/TPS.
51
In lacrosse, our principal competitors include but are not limited to STX, Brine, Warrior, Reebok/Adidas,
Cascade and Gait, who compete with us in most lacrosse products including shafts, heads, and protective
equipment.
In each of the related apparel markets, including performance, team and lifestyle categories, we compete
against other global sporting goods and/or apparel manufacturers, including Nike and Under Armour, in
addition to most of the companies described above in the respective equipment industries.
Employees and Culture
We have an innovative and energetic culture. Our entire Bauer team is passionate about our brands, our
businesses, ice and roller hockey, lacrosse and sports generally. Most of our employees are involved in hockey or
lacrosse outside of work in one manner or another. Our employees’ commitment and dedication to our company
is supported by the significant length of service. Bauer employees have been with our company an average of
10 years.
As of November 30, 2010, we had 389 employees, of which 210 were employed in Canada, 129 in the
United States and 50 in other countries. Of these 389 employees, 161 were engaged in manufacturing and supply
chain operations, 61 in marketing and sales, 53 in R&D, 33 in customer service and 81 in administration,
finance, accounting, information systems, legal, and human resources.
No employees in the United States are represented by any labour union or covered by a collective
bargaining agreement. In Canada, certain of our employees are represented by unions. In Mississauga, Ontario,
approximately 55 of our employees belong to the Glass, Molders, Pottery, Plastics and Allied Workers
International Union and are subject to a three-year collective bargaining agreement expiring in July 2011. In
St. Jerome, Québec, 28 of our full time employees are members of the Steelworkers Union of America and are
subject to a five-year collective bargaining agreement expiring in November 2012. We have not experienced any
labour-related work stoppages and we believe that our relationship with our employees is good.
Seasonality
Our businesses demonstrate substantial seasonality. We plan our ice hockey business and launch new
products over two seasons each fiscal year — the April to September period which we classify as the
‘‘Back-To-Hockey’’ season and the October to March period which we classify as the ‘‘Holiday’’ season.
Generally, our highest sales volumes occur during the peak of the ‘‘Back-to-Hockey’’ season in the first quarter
of our fiscal year, from June to August.
• We typically launch our core hockey products (excluding sticks) in the ‘‘Back-to-Hockey’’ season, in April
through August.
• Composite ice hockey stick products are launched during the ‘‘Holiday’’ season, in October
through March.
• Roller hockey products are launched at retail during the ‘‘Holiday’’ season, in October through March.
• The launch of lacrosse products overlap substantially with the ‘‘Holiday’’ season, from November
through April.
The following table reflects the seasonality of net revenues for each of the quarters in the three most recent
fiscal years.
Fiscal Year
2010 . . . . . . . . . . .
2009 . . . . . . . . . . .
2008 . . . . . . . . . . .
Three Month
Period Ended
August 31
40.3%
43.2%
42.0%
Percent of Fiscal Net Revenues
Three Month
Three Month
Period Ended
Period Ended
November 30
February 28/29
23.5%
25.8%
27.6%
52
12.8%
11.8%
13.0%
Three Month
Period Ended
May 31
23.4%
19.2%
17.4%
USE OF PROCEEDS
The Company expects to receive Cdn$ in net proceeds from the Offering (Cdn$ if the
Over-Allotment Option is exercised in full), after deducting fees payable by the Company to the Underwriters
and the estimated expenses of the Offering.
Upon the Closing of the Offering, the Company will acquire 100% of KSGI from the Existing Holders in
exchange for (i) a combination of Common Shares and Proportionate Voting Shares representing a %
equity and voting interest in the Company ( % on a fully diluted basis), plus Cdn$ in cash being the
net proceeds of the Offering received by the Company (exclusive of expenses of the Offering) assuming no
exercise of the Over-Allotment Option, or (ii) a combination of Common Shares and Proportionate Voting
Shares representing a % equity and voting interest in the Company ( % on a fully diluted basis), plus
Cdn$ in cash being the net proceeds of the Offering and the Over-Allotment Option received by the
Company (exclusive of expenses of the Offering and the Over-Allotment Option) if the Over-Allotment Option
is exercised in full. See the ‘‘Acquisition’’.
The Existing Holders will pay the Underwriters’ Commission (as set off against the purchase price paid by
the Company to acquire KSGI), including with respect of the Over-Allotment Option, if exercised, but will not
bear any other expenses of the Offering.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Equity Shares. The Company currently
intends to use its earnings to finance the expansion of its business and to reduce indebtedness. Any future
determination to pay dividends on Equity Shares will be at the discretion of the Board of Directors and will
depend on, among other things, the Company’s results of operations, current and anticipated cash requirements
and surplus, financial condition, contractual restrictions and financing agreement covenants, solvency tests
imposed by corporate law and other factors that the Board of Directors may deem relevant. See also
‘‘Description of Share Capital — Equity Shares — Dividend Rights’’, ‘‘Risk Factors — Risks Related to the
Offering — We do not currently intend to pay dividends on our Equity Shares’’ and ‘‘Risk Factors — Risks
Related to the Offering — We are a Holding Company’’.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set out selected financial information for the periods indicated. The selected
consolidated financial information set out below as of May 31, 2010 and May 31, 2009, and for each of the three
fiscal years ended May 31, 2010 (Fiscal 2010), May 31, 2009 (Fiscal 2009) and May 31, 2008 (Fiscal 2008) has
been derived from KSGI’s audited consolidated financial statements and related notes appearing elsewhere in
this prospectus. KSGI’s audited consolidated financial statements appearing elsewhere in this prospectus have
been audited by our auditors, KPMG LLP. KPMG LLP’s report on these consolidated financial statements is
included elsewhere in this prospectus.
The selected consolidated financial information set out below as of November 30, 2010 and for the
six months ended November 30, 2010 and November 30, 2009 has been derived from KSGI’s unaudited interim
consolidated financial statements included elsewhere in this prospectus. The unaudited financial information
presented has been prepared on a basis consistent with our audited consolidated financial statements. In the
opinion of management, such unaudited financial data reflects all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations
for the interim periods are not necessarily indicative of the results to be expected for the full year or any
future period.
The summary unaudited historical information for the twelve-month period ended November 30, 2010 has
been derived by taking the historical audited consolidated statement of earnings for the fiscal year ended
May 31, 2010, plus the historical unaudited consolidated statement of earnings for the six-month period
ended November 30, 2010, less the historical unaudited consolidated statement of earnings for the six-month
period ended November 30, 2009. The financial information included in the column labeled ‘‘Twelve Months
Ended November 30, 2010 (Adjusted)’’ has been derived on the same basis as the financial information for
the twelve month period ended November 30, 2010 and gives effect to the Offering, the Acquisition, the
Refinancing, and certain other adjustments explained in footnotes 1 to 5 to the following table. You should read
the following information in conjunction with ‘‘Use of Proceeds’’, ‘‘Management’s Discussion and Analysis of
Financial Condition and Results of Operations’’, ‘‘Consolidated Capitalization’’ and our consolidated financial
statements and the accompanying notes included elsewhere in this prospectus.
53
Twelve
Months
Ended
November 30,
2010
(Adjusted)
(in $ millions except for percentages)
Earnings Data
Net revenues . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . .
Twelve
Months
Ended
November 30,
2010
Fiscal Year Ended May 31,
2010
2009
2008(6)
Six Months Ended
November 30,
2010
2009
$282.7
173.0(1)
$282.7
176.8
$257.4
168.3
$242.2
187.2
$ 219.5
139.1
$189.4
116.9
$164.2
108.4
Gross profit . . . . . . . . . . . . . . . . . . . . . .
Expenses:
Selling, general, and administrative expenses . .
Research and development expenses . . . . . . .
$109.7
$105.9
$ 89.1
$ 55.0
$
80.4
$ 72.5
$ 55.8
67.3
11.0
61.0
9.7
66.1
6.8
62.5
3.3
36.9
5.9
30.6
4.5
Total expenses . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . .
Net interest expense (income) . . . . . .
Losses on derivative instruments . . . .
Exchange losses (gains), net and other .
.
.
.
.
.
74.6
$35.10
7.5(3)
1.9(3)
0.8(3)
78.3
$ 27.6
13.4
2.7
(0.3)
70.7
$ 18.4
12.6
0.6
(0.8)
72.9
$ (17.9)
13.5
0.1
5.2
Income (loss) before income tax (expense)
benefit . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . .
$ 24.9
8.9(3)
$ 11.8
4.6
$
6.0
3.8
$ (36.7)
(11.6)
$
Net income (loss) before extraordinary item . .
Extraordinary gain . . . . . . . . . . . . . . . . . .
$ 16.0
—
$
7.2
—
$
2.2
—
$ (25.1)
5.7
$
Net income (loss) . . . . . . . . . . . . . . . . . . .
$ 16.0
$
7.2
$
2.2
$ (19.4)
Other Financial Data
Adjusted Gross Profit . .
Adjusted Gross Profit as a
EBITDA . . . . . . . . . .
Adjusted EBITDA . . . .
Adjusted EBITDA as a %
Capital expenditures . . .
$113.2
40.0%
$ 31.7
$ 40.9
14.5%
$ 2.2
$ 97.8
38.0%
$ 20.7
$ 31.0
12.0%
$ 1.5
$
7.6
136.5
73.0
283.9
128.5
97.4
$
$
7.4
(13.6)
5.5
$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. . . . . . . . . . . .
% of net revenues
. . . . . . . . . . . .
. . . . . . . . . . . .
of net revenues . .
. . . . . . . . . . . .
Balance Sheet Data
Cash and cash equivalents
Net working capital(5) . . .
Intangible assets . . . . . . .
Total assets . . . . . . . . . .
Total debt . . . . . . . . . . .
Total shareholders’ equity .
.
.
.
.
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.
.
.
.
.
.
.
.
63.6(2)
11.0
.
.
.
.
.
.
.
.
.
.
.
.
$113.3
40.1%
$ 39.2
$ 39.2
13.9%
$ 2.2
.
.
.
.
.
.
.
.
.
.
.
.
$
Cash Flow Data
Net cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . .
2.3(4)
140.3
73.0
278.7
123.1(3)
106.3
$ 16.3
(13.6)
0.1
4.2
107.9
68.9
243.6
113.0
82.6
1.6
(4.9)
(1.8)
65.8
14.6
3.0
1.8
0.3
42.8
$ 29.7
7.3
3.8
(2.0)
35.1
$ 20.7
6.5
1.6
(2.5)
9.5
4.4
$ 20.6
7.3
$ 15.1
6.5
5.1
$ 13.3
—
$
8.6
—
$
5.1
$ 13.3
$
8.6
$ 85.6
35.3%
$ (10.1)
$ 27.3
11.3%
$ 0.9
$
86.2
39.3%
16.6
22.9
10.4%
2.6
$ 74.4
39.3%
$ 33.2
$ 36.1
19.1%
$ 1.4
$ 59.1
36.0%
$ 22.5
$ 26.9
16.4%
$ 0.7
$
9.4
98.4
65.7
244.4
109.4
77.5
$
11.0
136.5
79.9
274.8
130.5
93.1
$
7.6
136.5
73.0
283.9
128.5
97.4
$
$ 24.8
(26.3)
(0.5)
$
0.1
(201.4)
204.6
$
3.9
(12.8)
12.3
$ (1.9)
(4.1)
5.0
$
—
$
$
$
8.9
121.4
70.2
253.0
118.8
85.1
(1)
Adjustments required to cost of goods sold for non-cash charges resulting from fair market value adjustments to inventory.
(2)
Adjustments required to selling, general and administrative expenses and related income taxes to reflect the impact of the termination
of the sponsor fees of $1.4 million and the inclusion of estimated operational costs as a public company of $1.5 million plus fees related
to the Offering.
(3)
Adjustments required to interest expense on debt, foreign exchange and fair value of long-term debt and related income taxes to
reflect the impact of the use of proceeds from the Offering.
(4)
Adjustments required to cash and cash equivalents and debt reflect the use of the New Credit facility proceeds used to retire the Old
Facility and the Old Notes and give effect to the New Credit Facility as if started at the beginning of the twelve month period, including
the first year amortization on the new Term Loan.
(5)
Net working capital is defined as accounts receivable plus inventory less accounts payable.
(6)
The Fiscal 2008 results shown in the table above consist of the Company’s financial results for the Successor Period and for the
Predecessor Period in accordance with U.S. GAAP. Note that in respect of such Predecessor Period, certain operating expenses for
services provided by Nike were not allocated to the Company in the Predecessor Period, and accordingly, are not included in the
Company’s consolidated financial statements for Fiscal 2008 included in this prospectus. These services include expenses related to
54
certain employee benefits, certain information technology support, audit fees of Nike, corporate consolidation and financial reporting,
select tax services, software license fees, legal fees, treasury and cash management services, risk management administration, insurance
costs, certain regulatory services and interest costs. Having regard to the budgeted and actual amounts incurred by the Company for
such services in Fiscal 2009, the first full fiscal year subsequent to the sale of the Bauer Business by Nike, the Company’s management
estimates that the operating expenses for these services in respect of the Predecessor Period were no more than $6 million. There are
no assurances that such estimate is accurate and complete and investors should not place undue reliance on such estimate.
Adjusted Gross Profit is a non-U.S. GAAP financial measure. It is an alternative to measure business
performance. We use Adjusted Gross Profit as a supplemental measure to evaluate the overall performance of
our cost of goods sold. We currently anticipate that Adjusted Gross Profit will be part of our presentation to
investors and analysts after becoming a public company. Adjusted Gross Profit is gross profit plus the following
expenses which are part of cost of goods sold: (i) amortization, (ii) non-cash charges to cost of goods sold
resulting from fair market value adjustments to inventory, (iii) reserves established to dispose of obsolete
inventory acquired through acquisitions, and (iv) costs incurred in Fiscal 2008 for businesses that were retained
by Nike after the purchase of the Bauer Business by the Existing Holders. The table below provides the
reconciliation of gross profit to Adjusted Gross Profit in millions of U.S. dollars.
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets(1) . . . . . . . . . . . . . . . .
Twelve
Months
Ended
November 30,
2010
(Adjusted)
$109.7
3.6
Restructuring charges
Inventory step-up/step-down & reserves(2) . . . . . . . . . .
Nike-related normalization(3) . . . . . . . . . . . . . . . . . . . .
—
—
Adjusted Gross Profit . . . . . . . . . . . . . . . . . . . . . . . .
$113.3
(in $ millions)
Twelve
Months
Ended
November 30,
2010
Fiscal Year Ended
May 31,
2010
2009
2008
Six Months
Ended
November 30,
2010
2009
$105.9
3.6
$89.1
3.7
$55.0
4.1
$80.4
0.7
$72.5
1.6
$55.8
1.7
3.7
—
5.0
—
26.5
—
3.5
1.6
0.3
—
1.6
—
$113.2
$97.8
$85.6
$86.2
$74.4
$59.1
(1)
Upon completion of the acquisition of the Bauer Business by the Existing Holders in April 2008, Bauer capitalized acquired intangible
assets at fair market value. These intangible assets, in addition to other intangible assets subsequently acquired, are amortized over
their useful life and we recognize the amortization as a non-cash cost of goods sold.
(2)
Upon completion of the acquisition by the Existing Holders of the Bauer Business in April 2008, Bauer adjusted its inventories to fair
market value resulting in an initial inventory valuation step-up of $31.7 million. Included in Fiscal 2008 through Fiscal 2010 are
non-cash charges to cost of goods sold resulting from the fair market value adjustment to inventory recognized in April 2008. The
difference of $3.6 million between the aggregate amount recognized as cost of goods sold in Fiscal 2008 through Fiscal 2010 and the
initial inventory valuation step-up is due to changes in foreign exchange rates. Also included in restructuring charges are non-recurring
inventory reserves established to dispose of obsolete inventory obtained through acquisitions.
(3)
Related to certain items that impacted our cost of goods sold following completion of the acquisition of the Bauer Business by the
Existing Holders in April 2008. Included in the amount is (i) $2.3 million of gross profit associated with the IIHF from June 1, 2007 to
April 16, 2008, and (ii) $3.9 million of non-recurring trademark royalty expenses paid to Nike from June 1, 2007 to April 16, 2008. The
IIHF business remained with Nike.
EBITDA is a non-U.S. GAAP measure that we use to assess our operating performance. EBITDA is
defined as net income adjusted for income tax expense, depreciation and amortization, gain or loss on disposal
of fixed assets/other and other non-cash income/expense, net interest expense, deferred financing fees,
unrealized gain/loss on derivatives instruments, and foreign exchange gain/loss. For a reconciliation of net
income to EBITDA, see the table below.
Adjusted EBITDA is defined as EBITDA before restructuring and acquisition related charges, sponsor fees
and fees related to the Offering, normalization adjustments relating to the sale of the Bauer Business by Nike to
the Existing Holders, as well as stock-based compensation expense. Management believes Adjusted EBITDA is
an important measure of operating performance and provides useful information to investors because it
highlights trends in the business that may not otherwise be apparent when relying solely on U.S. GAAP
measures and eliminated items that have less bearing on operating performance. We define Adjusted EBITDA
as earnings before interest, income taxes, depreciation and amortization as well as adjustments for the following
items: foreign exchange gain or loss, restructuring and acquisition related expenses, sponsor fees and fees
55
related to the Offering, stock option expenses net of adjustments, and normalization adjustments related to the
sale of Bauer Business from Nike to the Existing Holders. We use Adjusted EBITDA as the key metric in
assessing our business performance when we compare results to budgets, forecasts, and prior years. Adjusted
EBITDA is used by management in the assessment of business performance and used by our Board of Directors
as well as our lenders in assessing management’s performance. It is the key metric in determining option and
incentive payment plans. The following table shows the reconciliation of net income to EBITDA as well as
Adjusted EBITDA.
(in $ millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . .
Depreciation & amortization . . . . . . . . . . . . . . . . .
Net (gain)/loss on disposal of fixed assets/other and
other (income)/expense(1) . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . .
Deferred financing fees . . . . . . . . . . . . . . . . . . . .
Foreign exchange (gain)/loss(2) . . . . . . . . . . . . . . . .
Unrealized (gain)/loss on derivatives instruments, net
Foreign exchange (gain)/loss . . . . . . . . . . . . . . . .
Extraordinary gain(3) . . . . . . . . . . . . . . . . . . . . . .
.
.
.
Twelve
Months
Ended
November 30,
2010
(Adjusted)
$16.0
$ 8.9
7.4
$ 7.2
$ 4.6
7.4
Fiscal Year Ended
May 31,
2010
2009
2008
Six Months
Ended
November 30,
2010
2009
$ 2.2
$ 3.8
7.1
$13.3
$ 7.3
3.5
($19.4)
($11.6)
7.5
$ 5.1
$ 4.4
4.1
$ 8.6
$ 6.5
3.2
0.6
6.0
1.5
(1.2)
(1.4)
0.2
—
0.6
11.9
1.5
(1.5)
(0.6)
(0.9)
—
0.8
11.2
1.4
(5.8)
(4.8)
(1.0)
—
—
12.1
1.4
5.6
0.1
5.5
(5.7)
—
2.8
0.1
0.1
1.8
(1.7)
—
0.1
6.5
0.8
1.7
3.9
(2.2)
—
0.3
5.8
0.7
(2.6)
(0.3)
(2.3)
—
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.2
31.7
20.7
(10.1)
16.6
33.2
22.5
Restructuring Charges
Inventory step-up/step-down & reserves(4)
Rebranding/one-time costs(5) . . . . . . . .
Acquisition costs(6) . . . . . . . . . . . . . .
Mission-ITECH shutdown(7) . . . . . . . .
Maverik growth investment(8) . . . . . . . .
Executive severance & retention(9) . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
—
—
—
—
—
—
3.7
1.1
0.6
—
0.7
—
5.0
3.0
0.5
—
—
—
26.5
3.5
(0.1)
4.9
—
—
3.5
—
4.2
—
—
3.3
0.3
0.1
0.1
—
0.3
—
1.6
2.0
—
—
—
—
Subtotal . . . . . . . . . . . . . . . . . . . .
Sponsor & audit (IPO) Fees(10) . . . . . . .
Nike-related normalization(11) . . . . . . . .
Stock option expense, net of adjustments
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
—
—
—
—
6.1
2.9
—
0.2
8.5
1.5
—
0.3
34.8
1.7
—
0.9
11.0
0.3
(7.0)
2.0
0.8
2.1
—
0.0
3.6
0.7
—
0.1
$40.9
$31.0
$ 27.3
$36.1
$26.9
.
.
.
.
.
.
.
.
.
.
.
Twelve
Months
Ended
November 30,
2010
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . .
$39.2
$22.9
(1)
The net loss on disposal of fixed assets is a non-cash expense.
(2)
The unrealized gain and loss on derivatives are the fair market measure on the foreign exchange swaps and interest rate contracts. The
Company has not elected hedge accounting and therefore the changes in the fair value of these derivatives are recognized in current
period earnings. The foreign exchange gain and loss is the difference in rates used for the balance sheet and the income statement. All
balance sheet transactions are converted at the month’s end rates. All income statement transactions are recognized at the monthly
average rates.
(3)
On September 22, 2008, we purchased all of the issued and outstanding shares of the capital stock of Mission-ITECH. The total cash
consideration was $23.9 million excluding transaction costs. Transaction costs associated with the acquisition were $2.3 million. The
allocation of the purchase price to the individual assets acquired and liabilities assumed under the purchase method of accounting
included in the Fiscal 2009 balance sheet resulted in $16.9 million of negative goodwill which was allocated to reduce non-current
assets, excluding deferred income taxes by $11.2 million with the remainder of $5.7 million recognized as an extraordinary gain in
Fiscal 2009.
(4)
Upon completion of the acquisition of the Bauer Business by the Existing Holders in April 2008, Bauer adjusted its inventories to fair
market value resulting in an initial inventory valuation step-up of $31.7 million. Included in Fiscal 2010 through Fiscal 2008 are
non-cash charges to cost of goods sold resulting from the fair market value adjustment to inventory recognized in April 2008. The
difference of $3.6 million between the aggregate amount recognized as cost of goods sold in Fiscal 2008 through Fiscal 2010 and the
initial inventory valuation step-up is due to changes in foreign exchange rates. This line also includes non-recurring inventory reserves
established to dispose of Nike Bauer branded and Mission-ITECH branded inventory.
56
(5)
Related to rebranding and one-time costs of $6.5 million incurred over the period of 24 months in Fiscal 2009 and Fiscal 2010
including (i) $5.5 million in costs to transition the Nike Bauer brand and the corporate identity to the Bauer brand and corporate
identity, (ii) $0.4 million in costs associated with management changes, including but not limited to executive search fees,
reimbursements of relocation costs, and related hiring costs associated with the separation from Nike and (iii) $0.6 million in other
restructuring or cost improvement activities incurred prior to May 31, 2010.
(6)
Acquisition related transaction costs including legal, audit expenses, information systems and operations consulting costs, incurred as
part of the purchase of the Bauer Business by the Existing Holders from Nike in April 2008, the Mission-ITECH Acquisition in
September 2008 and the Maverik Lacrosse Acquisition in June 2010. In Fiscal 2008, we incurred $4.2 million in acquisition-related
costs associated with the acquisition of the Bauer Business. In Fiscal 2009, we incurred a $0.1 million gain related to the MissionITECH Acquisition. In Fiscal 2010, we incurred $0.5 million of transaction costs related to the Maverik Lacrosse Acquisition.
(7)
Related to restructuring expenses associated with the Mission-ITECH shutdown over a period of nine months following the acquisition
in September 2008. These restructuring expenses included retention payments to key employees, brand transition expenses, increased
sales commissions, and increased marketing related expenses incurred to liquidate Mission-ITECH branded inventory.
(8)
The Maverik growth investments include an increase in wages to key employees and additional compensation costs related to new
hires at Maverik which are designed to support the business of Maverik during its initial start-up phase of growth. In addition, the
growth investment includes $0.4 million of EBITDA earned by Maverik for the six month period prior to the Company’s acquisition of
the business, in order to reflect a full twelve month contribution of the business in our results of operations.
(9)
Related to executive severance paid to the former CEO of Nike Bauer of $0.5 million, and retention bonuses paid to Bauer employees
during the transition of ownership of the Bauer Business to the Existing Holders.
(10) Related to sponsor fees of $1.5 million, $1.7 million and $0.3 million incurred by the Company in Fiscal 2010, Fiscal 2009 and Fiscal
2008, respectively under the Management Services Agreement which will terminate upon completion of the Offering for a termination
fee of $4.0 million to be incurred by the Company. See ‘‘Interest of Management and Others in Material Transactions’’. Also included
in the six month period ended November 30, 2010 and the latest twelve month period ended November 30, 2010 are $1.2 million in
incremental audit fees and $0.2 million in professional fees incurred in relation to the Offering.
(11) An increase in sales, general and administrative expenses of $5.5 million to reflect the recurring costs which would have been incurred
by Bauer had it operated on a standalone basis for all of Fiscal 2008. These costs relate primarily to audit fees, IT separation costs, and
legal costs. This line also includes (i) $0.4 million of a non-recurring net loss related to managing IIHF sales on Nike’s behalf and for
which Bauer received no benefit, (ii) $4.7 million in non-recurring research and development income received from Nike to fund
Bauer’s research and development, offset by $3.9 million in non-recurring expenses paid to Nike for trademark royalties and (iii) an
increase in sales, general and administrative expenses for accrued amounts of $1.1 million by Bauer for employee benefits incurred by
Nike that were not ultimately reimbursed by Nike.
57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with ‘‘Selected Consolidated Financial
Information’’, and our audited consolidated financial statements, including the related notes, included elsewhere
in this prospectus. Some of the information contained in this discussion and analysis contains forward-looking
statements that involve risks and uncertainties. See ‘‘Forward-Looking Statements’’, ‘‘Market and Industry
Data’’ and ‘‘Risk Factors’’ for a discussion of the uncertainties, risks and assumptions associated with those
statements. Our actual results may differ materially from those discussions in the forward-looking statements as
a result of various factors, including those described in ‘‘Risk Factors’’ and elsewhere in this prospectus. Unless
otherwise indicated, all references to ‘‘$’’ and ‘‘dollars’’ in this discussion and analysis mean U.S. dollars.
Overview
We are the world’s leading designer, developer, manufacturer, and marketer of ice and roller hockey
equipment and related apparel. With our recent purchase of Maverik we now offer lacrosse equipment and
apparel. We have the most recognized and strongest brand in the ice hockey equipment industry, and hold the
number one market share position in both the ice and roller hockey equipment industries. With an estimated
45% share of ice hockey equipment sales in Fiscal 2010, we have the leading and fastest growing share of the
overall ice hockey equipment market, which we believe is more than that of the next three brands combined. In
roller hockey, we had an estimated 55% share of sales in Fiscal 2010. We have achieved this leadership position
in ice hockey by leveraging our world-class performance sports products platform. Additionally, we have
demonstrated our ability to expand the platform into new performance equipment sports markets by successfully
entering the roller hockey and lacrosse markets.
Basis of Presentation
The audited consolidated financial statements of KSGI contained elsewhere in this prospectus were
prepared in accordance with U.S. GAAP and are presented in our functional currency of U.S. dollars.
The audited consolidated financial statements and accompanying notes thereto include the accounts of
KSGI, KBAU Holdings Luxembourg S.A.R.L., KBAU Holdings Canada, Inc., Bauer Hockey Corp. and its
subsidiaries, and Bauer Hockey, Inc. and its subsidiaries. All intercompany transactions are eliminated in
consolidation.
KSGI was established on April 16, 2008 for the purpose of purchasing, through its wholly owned
subsidiaries, all of the issued and outstanding shares of the capital stock of NIKE Acquisition Inc. and Nike
Bauer Hockey USA, Inc. as well as certain intangible assets from Nike (collectively, the ‘‘Predecessor’’). The
purchase of the Bauer Business was completed on April 16, 2008 (the ‘‘Business Purchase’’).
The Business Purchase was accounted for using the purchase method of accounting which resulted in a new
basis for the assets acquired and liabilities assumed. Accordingly, although the Company continues with the
same core operations after the Business Purchase, the accompanying financial statements included in the
audited consolidated financial statements for Fiscal 2008 are presented for two periods: Successor, which relates
to the periods subsequent to the Business Purchase and Predecessor, relating to June 1, 2007 through April 16,
2008, the period prior to the Business Purchase. These separate periods are presented to reflect the new basis of
accounting as well as the new legal structure established for the Company as of the Business Purchase date, and
have been separated by a vertical line on the face of the financial statements to highlight the fact that the
financial information for such periods has been prepared under different historical-cost bases of accounting. The
year over year management’s discussion and analysis financial statements comparison for Fiscal 2008, Fiscal
2009, and Fiscal 2010 are shown and analyzed on a 12 month basis.
The Fiscal 2008 results shown in the table under ‘‘Summary Consolidated Financial Information’’ consist of
the Company’s financial results for the period April 17, 2008 through May 31, 2008, and for the period June 1,
2007 through April 16, 2008 in accordance with U.S. GAAP. Note that in respect of such Predecessor Period,
certain operating expenses for services provided by Nike were not allocated to the Company in the Predecessor
Period, and accordingly, are not included in the Company’s consolidated financial statements for Fiscal 2008
58
included in this prospectus. These services include expenses related to certain employee benefits, certain
information technology support, audit fees of Nike, corporate consolidation and financial reporting, select tax
services, software license fees, legal fees, treasury and cash management services, risk management
administration, insurance costs, certain regulatory services and interest costs. Having regard to the budgeted and
actual amounts incurred by the Company for such services in Fiscal 2009, the first full fiscal year subsequent to
the sale of the Bauer Business by Nike, the Company’s management estimates that the operating expenses for
these services in respect of the Predecessor Period were no more than $5.5 million. There are no assurances that
such estimate is accurate and complete and investors should not place undue reliance on such estimate.
On September 22, 2008, we purchased all of the issued and outstanding shares of the capital stock of
Mission-ITECH. The total cash consideration was $23.9 million excluding transaction costs. Transaction costs
associated with the acquisition were $2.3 million. The allocation of the purchase price to the individual assets
acquired and liabilities assumed under the purchase method of accounting was included in the Fiscal 2009
balance sheet and resulted in $16.9 million of negative goodwill which was allocated to reduce non-current assets
excluding deferred income taxes by $11.2 million with the remainder of $5.7 million recognized as an
extraordinary gain in Fiscal 2009.
On November 23, 2009, the Company acquired trademarks and purchased technology from Jock Plus
Hockey for a combined purchase price of $3.4 million excluding transaction costs. Transaction costs associated
with the acquisition were $0.1 million. The purchase price of the assets was allocated to the purchased
technology acquired. The fair value of the trademarks acquired was determined to be zero, and as such, no value
was assigned to these assets.
On June 3, 2010, the Company purchased all of the issued and outstanding shares of the capital stock of
Maverik, a manufacturer of lacrosse equipment. The total cash consideration was $13.6 million excluding
transaction costs. Transaction costs associated with the acquisition were $0.5 million. The acquisition was funded
by additional borrowings on the Company’s revolving credit line. The Company has completed the valuation of
assets acquired and liabilities. The initial allocation of the purchase price to the individual assets acquired and
liabilities assumed under the purchase method of accounting resulted in $8.8 million of goodwill.
Accounting Periods
This management discussion and analysis, the audited consolidated financial statements and accompanying
notes thereto include financial information for Fiscal 2010, Fiscal 2009 and Fiscal 2008, and for the three and
six months ended November 30, 2010 and 2009.
Financial Measures and Key Performance Indicators
Key performance indicators which we use to manage our business and evaluate our financial results and
operating performance include: net revenues, gross profit, Adjusted Gross Profit, selling, general and
administrative expenses, and research and development expenses, net income, EBITDA and Adjusted EBITDA.
We evaluate our performance on these metrics by comparing our actual results to management budgets,
forecasts, and prior period results on a reported and constant dollar basis.
EBITDA, Adjusted EBITDA and Adjusted Gross Profit are non-U.S. GAAP measures that we use to assess
the operating performance of the business.
EBITDA is defined as net income adjusted for income tax expense, depreciation and amortization, gain or
loss of disposal of fixed assets/other, net interest expense, unrealized gain/loss on derivatives instruments, and
the foreign exchange gain/loss. For a reconciliation of EBITDA to net income see ‘‘Selected Consolidated
Financial Information’’.
Adjusted EBITDA is defined as EBITDA before restructuring and acquisition related charges associated
with acquisitions, sponsor fees and fees related to the Offering, normalization adjustments relating to the
Business Purchase as well as normalized stock-based compensation expenses. It is an alternative to measure
business performance to net income and income from operations. We use Adjusted EBITDA as a supplemental
measure to evaluate the overall operating performance of the Company, and we currently anticipate that
59
Adjusted EBITDA will be part of our presentation to investors and analysts after becoming a public company.
For a reconciliation of Adjusted EBITDA to net income see ‘‘Selected Consolidated Financial Information’’.
In addition, we use Adjusted Gross Profit as a key performance measure to assess our core gross profit.
Adjusted Gross Profit is gross profit plus the following expenses which are part of cost of goods sold:
(i) amortization, (ii) non-cash charges to cost of goods sold resulting from fair market value adjustments to
inventory, (iii) reserves established to dispose of obsolete inventory acquired through acquisitions, and (iv) costs
incurred in Fiscal 2008 for businesses that were retained by Nike after the purchase by the Existing Holders of
the Bauer Business. It is an alternative to gross profit measure business performance. We use Adjusted Gross
Profit as a supplemental measure to evaluate the overall operating performance of our cost of goods sold. We
currently anticipate that Adjusted Gross Profit will be part of our presentation to investors and analysts after
becoming a public company. For a reconciliation of gross profit to Adjusted Gross Profit see ‘‘Selected
Consolidated Financial Information’’.
Factors Affecting our Performance
Net Revenues
We generate net revenues from the sale of performance sports equipment and apparel. We offer various
cooperative marketing incentive programs in North America to assist our sales channels to market and sell our
products. These costs are a recorded as a reduction of net revenues.
Our current sales channels include (i) retailers in North America and the Nordic countries and
(ii) distributors throughout the rest of the world (principally Western Europe, Eastern Europe, and Russia).
Based on the regional mix above, our revenues are generated in multiple currencies in each period. We are
exposed to fluctuations of the U.S. dollar against the Canadian dollar, the Euro, the Swedish krona, Norwegian
krona and Danish krona. The following table highlights net revenues in reported dollars for the periods
indicated in millions of U.S. dollars, except for percentages. In Fiscal 2009, net revenues increased $21.5 million
due to the Mission-ITECH Acquisition. Our CAGR from Fiscal 2008 to Fiscal 2010 was 8.3%.
(dollars in millions)
Fiscal Year Ended May 31,
2010
2009
2008
Six Months Ended
November 30,
2010
2009
Year Over Year
Growth Rate(1)
CAGR
2008-2010
Net revenues
North America . . . . . . . . . . . . . . . .
Rest of world . . . . . . . . . . . . . . . . .
$189.5
67.9
$176.9
65.3
$159.1
60.4
$141.2
48.2
$120.7
43.5
17.0%
10.8%
9.2%
6.0%
Total net revenues . . . . . . . . . . . . . . .
$257.4
$242.2
$219.5
$189.4
$164.2
15.4%
8.3%
(1)
Six month ended November 30, 2010.
Cost of Goods Sold
Our cost of goods sold is primarily comprised of the cost of finished goods, materials, and components
purchased from our suppliers, manufacturing labour and overhead costs in our St. Jerome facility, inventory
provisions and write offs, warranty costs, and supply chain related costs such as transportation and warehousing.
Our warranty costs result from a general warranty policy providing coverage against manufacturing defects.
Warranties range from thirty days to one year from the date sold at retail, depending on the type of equipment
or apparel. Amortization associated with technology patents is also included in cost of goods sold.
Over the past 24 month period we have increased our direct sourcing from overseas. We source the majority
of our products in China and Thailand. As a result, our cost of goods sold is impacted by the fluctuation of
foreign currencies against the U.S. dollar. In particular, we purchase a majority of our imported merchandise
from suppliers in China and Thailand using U.S. dollars. For example in Fiscal 2010, 97.7% of our total
purchases were in U.S. dollars. Therefore, our cost of goods sold is impacted by the fluctuations of the Chinese
renminbi and Thai bhat against the U.S. dollar and the fluctuation of the U.S. dollar against those currencies.
While we enter into forward contracts to hedge part of our exposure to fluctuations in the value of the
60
U.S. dollar against the Canadian dollar, we do not currently hedge our exposure to the fluctuations in the value
of the Chinese renminbi and the Thai bhat to the U.S. dollar.
Sales, General and Administrative Expenses
Our sales, general and administrative expenses consist primarily of costs relating to our sales and marketing
activities, including salaries, commissions and related personnel costs, customer order management and support
activities, advertising, trade shows and other promotional activities. Our marketing expenses include
promotional costs for launching new products, advertising, and athlete endorsement costs. Our administrative
expenses consist of costs relating to information systems, legal and finance functions, professional fees,
insurance and other corporate expenses. We also include stock based compensation expenses in sales, general
and administrative expenses.
On April 16, 2008, we adopted the Predecessor Plan, an equity incentive plan that provides share options to
executive officers, directors, and other employees. See ‘‘The Acquisition’’ and ‘‘Options to Purchase Securities’’.
We expect our sales, general and administrative expenses to increase as we continue to hire additional
personnel and expand internationally, and our administrative expenses to increase in connection with becoming
a public company. We estimate that we will incur approximately $1.0 million to $1.5 million in incremental
administrative expenses as a public company.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related consulting expenses for
technical personnel, contracts with leading research facilities, as well as materials and consumables used in
product development. We incur most of our research and development expenses in Canada and are eligible to
receive Scientific Research and Experimental Development investment tax credits for certain eligible
expenditures. Investment tax credits are netted against our research and development expense. We expect our
research and development expenses to grow as we focus on enhancing and expanding our product lines.
Interest Expense
Interest expense is derived from the financing activities of the Company. To fund the Business Purchase, the
Company issued $42.0 million of term bank debt and $52.0 million of subordinated notes payable. The Company
also drew on its line of credit to fund the working capital requirements of its material operating subsidiaries. To
fund the Mission-ITECH Acquisition, the Company issued $10.0 million of term bank debt and drew on its line
of credit to fund the working capital requirements of Mission-ITECH. The Company internally funded the Jock
Plus Hockey Intellectual Property Acquisition and the Maverik Lacrosse Acquisition. As part of the Offering, we
intend to retire the Old Facility, Old Notes and fund the expenses of the Offering through an issuance of
$100 million under a new Term Loan and an increase in our Revolving Loan from $90 million to $100 million.
Provision for Income Tax
We are subject to federal, state and provincial income taxes globally. The Company is subject to cash taxes
in the United States and Europe. In Canada, the Company utilizes its deferred tax assets to offset
taxable income.
Gain and Loss on Derivative Instruments
The Company is exposed to global market risks, including the effect of changes in foreign currency
exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal
course of business. The Company’s hedging strategy employs foreign exchange swaps, interest rate contracts,
and foreign currency forwards as economic hedges, which are recorded in the consolidated balance sheet at fair
value. The Company has not elected hedge accounting and therefore the changes in the fair value of these
derivatives are recognized in current period earnings.
61
Gain and Loss on Foreign Exchange
The Company’s reporting currency is the U.S. dollar. Adjustments resulting from translating foreign
functional currency financial statements into U.S. dollars are included in the foreign currency translation
adjustment, a component of accumulated other comprehensive/(loss) income in shareholders’ equity.
Transaction gains and losses generated by the effect of foreign exchange on recorded assets and liabilities
denominated in a currency different from the functional currency of the applicable entity are recorded in
exchange losses (gains), net and other in the period in which they occur.
All balance sheet transactions are converted at the month’s end rates, all income statement transactions are
recognized at the monthly average rates. See ‘‘Exchange Rate Data’’ elsewhere in this prospectus.
The majority of our transactions are processed in Euro, Swedish krona, Canadian dollars and U.S. dollars.
Seasonality
Our business has substantial seasonality. Generally, our highest sales volume occurs in the three month
period ended August 31st which corresponds to the ‘‘Back to Hockey’’ season with our customers completing
their annual purchases in the three month period ended November 30th which represents most of the ‘‘Holiday’’
season. As a result, our first two fiscal quarters represented 63.8%, 69.0% and 69.6% of net revenues in Fiscal
2010, Fiscal 2009 and Fiscal 2008, respectively. The demand for our new launch products in our fourth fiscal
quarter has increased over the past three fiscal years as a percentage of total yearly net revenues, and as a result
has decreased our percentage of net revenues in our first fiscal quarter. See ‘‘Business of the Company —
Seasonality’’ section elsewhere in this prospectus.
Results of Operations
The following table sets forth a consolidated statement of financial data, for the periods indicated in
millions of U.S. dollars, except for percentages.
(dollars in millions)
Consolidated statement of operations:
Net revenues . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . .
Trademark royalties . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Sales, general & administrative . . . . . .
Research & development . . . . . . . . . .
Research & development credit . . . . .
Operating income/(loss) . . . . . . . . . . . . .
Interest expense/(income) . . . . . . . . . . .
Net loss/(gain) on derivatives instruments
Foreign exchange . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . .
Net income/(loss) . . . . . . . . . . . . . . . . .
Six Months Ended
November 30,
2010
2009
Fiscal Year Ended May 31,
2010
2009
2008
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$ 257.4
168.3
—
89.1
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61.0
9.7
—
18.4
12.6
0.6
(0.8)
3.8
$
2.2 $
Adjusted Gross Profit . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . .
62
$
$
97.8
31.0
$ 242.2
187.2
—
55.0
$
$
$ 219.5
135.2
3.9
80.4
66.1
6.8
—
(17.9)
13.5
0.1
(0.5)
(11.6)
(19.4) $
85.6
27.3
$
$
$ 189.4
116.9
—
72.5
$ 164.2
108.4
—
55.8
62.5
36.9
30.6
8.0
5.9
4.5
(4.7)
—
—
14.6
29.7
20.7
3.0
7.3
6.5
1.8
3.8
1.6
0.3
(2.0)
(2.5)
4.4
7.3
6.5
5.1 $ 13.3 $
8.6
86.2
22.9
$
$
74.4
36.1
$
$
59.1
26.9
Fiscal Year Ended May 31,
2010
2009
2008
(dollars in millions)
As a percentage of net revenues
Net revenues . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . .
Trademark royalties . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Sales, general & administrative . . . . . .
Research & development . . . . . . . . . .
Research & development credit . . . . .
Operating income/(loss) . . . . . . . . . . . . .
Interest expense/(income) . . . . . . . . . . .
Net loss/(gain) on derivatives instruments
Foreign exchange . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . .
Net income/(loss) . . . . . . . . . . . . . . . . .
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Adjusted Gross Profit . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBTIDA . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
65.4%
0.0%
34.6%
100.0%
77.3%
0.0%
22.7%
100.0%
61.6%
1.8%
36.6%
Six Months Ended
November 30,
2010
2009
100.0%
61.7%
0.0%
38.3%
100.0%
66.0%
0.0%
34.0%
23.7%
3.8%
0.0%
7.1%
4.9%
0.2%
(0.3%)
1.5%
0.9%
27.3%
2.8%
0.0%
(7.4%)
5.6%
0.0%
(0.2%)
(4.8%)
(8.0%)
28.5%
3.6%
(2.1%)
6.7%
1.4%
0.8%
0.1%
2.0%
2.3%
19.5%
3.1%
0.0%
15.7%
3.9%
2.0%
(1.1%)
3.9%
7.0%
18.6%
2.7%
0.0%
12.6%
4.0%
1.0%
(1.5%)
4.0%
5.2%
38.0%
12.0%
35.3%
11.3%
39.3%
10.4%
39.3%
19.1%
36.0%
16.4%
Six months ended November 30, 2010 to six months ended November 30, 2009
Net Revenues
Net revenues in the six month period ended November 30, 2010 increased by $25.2 million, or 15.3%, to
$189.4 million due to strong performance in ice hockey equipment sales and apparel sales.
Ice hockey equipment revenues increased 12.9% supported by the strong performance in all regions with
strong category sales in skates and sticks. The increase in net revenues was driven by the successful launch of our
new skate line as well as the successful launch of our new stick line in October 2010. Apparel net revenues
increased by 25.3% due to the introduction of our new protective apparel line and increased net revenues of
team apparel. The impact of foreign exchange in the six month period ended November 30, 2010 increased our
reported net revenues by $6.8 million. Based on the seasonality of our selling cycle, we generate our highest net
revenues in the first half of our fiscal year when we launch the majority of our new products.
Gross Profit
Gross profit in the six month period ended November 30, 2010 increased by $16.7 million, or 29.9%, to
$72.5 million. Our gross profit as a percentage of net revenues increased to 38.3% for the six month period
ended November 30, 2010 from 34.0% in the six month period ended November 30, 2009. Gross profit was
favourably impacted by higher net revenues, offset by unfavourable cost of goods sold, supply chain costs and
warranty expenses, all driven by higher revenues.
As a percentage of net revenues we were able to increase our product margins year over year driven by
decreased direct material costs. In addition we were able to improve efficiencies in our supply chain decreasing
our supply chain costs as a percentage of net revenues. The impact of foreign exchange in the six month period
ended November 30, 2010 increased gross profit by $3.5 million.
Adjusted Gross Profit
Adjusted Gross Profit in the six month period ended November 30, 2010 increased by $15.3 million, or
25.9%, to $74.4 million. Our Adjusted Gross Profit as a percentage of net revenues for the six month period
ended November 30, 2010 increased from 36.0% to 39.3% impacted by higher net revenues and decreases in our
direct material costs as a percentage of net revenues and the efficiencies in our supply chain reducing supply
63
chain costs as a percentage of net revenues. The impact of foreign exchange in the six month period ended
November 30, 2010 increased Adjusted Gross Profit by $3.5 million.
Sales, General and Administrative
Sales, general and administrative expenses in the six month period ended November 30, 2010 increased by
$6.3 million, or 20.6% to $36.9 million. This increase was driven by (i) $1.2 million of audit fees for the re-audit
of Fiscal 2008 through Fiscal 2010 in connection with the Offering, (ii) an overall increase in wages driven by
incentive compensation costs, (iii) increase in commissions due to the increased revenues, and (iv) $0.1 million
in costs for the Maverik Lacrosse Acquisition driven by consulting costs. Legal fees associated with the Offering
were not material in the six month period ended November 30, 2010 and were therefore expensed instead
of capitalized.
As a percentage of net revenues, our sales, general and administrative expenses increased from 18.6% of
net revenues for the six month period ended November 30, 2009 to 19.5% for the six month period ended
November 30, 2010. The impact of foreign exchange for the six month period ended November 30, 2010
increased our reported sales, general and administrative expenses by $0.5 million.
Research and Development Expenses
Our research and development expenses in the six month period ended November 30, 2010 increased by
$1.4 million, or 31.1%, to $5.9 million, due to the increased investment in our product development efforts. We
do not expect this percentage increase to continue for the remainder of Fiscal 2011.
As a percentage of net revenues, our research and development expenses increased from 2.7% in the six
month period ended November 30, 2010, to 3.1% in the six month period ended November 30, 2010. The impact
of foreign exchange for the six month period ended November 30, 2010 increased research and development
expenses by $0.2 million.
Adjusted EBITDA
Adjusted EBITDA in the six month period ended November 30, 2010 increased by $9.2 million, or 34.2%,
to $36.1 million. As a percentage of net revenues Adjusted EBITDA increased from 16.4% in the six months
period ended November 30, 2010 to 19.1% in the six month period ended November 30, 2010 driven by the
improvement in our Adjusted Gross Profit and partially offset by a modest increase in sales, general and
administration expenses as a percentage of net revenues. Expenses for the six month period ended
November 30, 2010 for costs associated with the Maverik Lacrosse Acquisition and for the Offering were
excluded for purposes of the determination of Adjusted EBITDA.
Interest Income/Expense
Interest expense in the six month period ended November 30, 2010 increased by $1.0 million, or 15.2%, to
$7.6 million due primarily to the increased line of credit drawn to finance the Maverik Lacrosse Acquisition.
Interest income increased $0.2 million to $0.3 million for the six month period ended November 30, 2010, which
reflects a slight increase in customer charged interest collections.
Net Loss on Derivative Instruments
Net loss on derivative instruments in the six month period ended November 30, 2010 increased by
$2.2 million to $3.8 million. The increased expense was due primarily to the strengthening of the Canadian
dollar versus the forward contract rates.
Net Gain on Foreign Exchange
Gain on foreign exchange in the six month period ended November 30, 2010 decreased by $0.5 million to
$2.0 million, due to the variance in the rates used for the balance sheet and the income statement.
64
Income Taxes
Income tax expense in the six month period ended November 30, 2010 increased by $0.8 million, or 12.3%
to $7.3 million. Current tax expense for the period was $2.0 million and deferred taxes were $5.3 million. The
Company’s effective tax rate was 35.2% compared to 43.0% for the same period in the prior year.
Net Income
Net income in the six month period ended November 30, 2010 increased by $4.7 million, or 54.7%, to
$13.3 million driven by the increase in net revenues. The impact of foreign exchange for the six month period
increased net income by $1.8 million.
Three months ended November 30, 2010 compared to three months ended November 30, 2009
Net Revenues
Net revenues in the three month period ended November 30, 2010 increased by $18.7 million, or 30.9%, to
$79.2 million due to strong performance in both ice hockey equipment sales and apparel sales.
Ice hockey equipment net revenues increased by 26.5% supported by strong performance in all regions in
the following major category sales: skates, protective equipment and sticks. The increase in net revenues was
driven by the successful launch of our new skate line as well as the successful launch of our new stick line in
October 2010. Our success in protective equipment was driven by our new under-protective equipment line
coupled with strong sales in gloves and pants. Apparel net revenues increased by 48.5% due to the introduction
of a new protective apparel line and increased sales of team apparel. The impact of foreign exchange in the three
month period ended November 30, 2010 increased our reported net revenues by approximately $0.7 million.
Gross Profit
Gross profit in the three month period ended November 30, 2010 increased by $10.2 million, or 58.0%, to
$27.8 million. Our gross profit as a percentage of net revenues increased to 35.1% for the three month period
ended November 30, 2010 from 29.1% in the three month period ended November 30, 2009. Gross profit was
favourably impacted by our net revenues offset by unfavourable cost of goods sold, distribution expenses, freight
and warranty expenses, which were all driven by higher net revenue. Despite the higher costs, we were able to
increase our gross profit percentage by 6.0%. Our supply chain costs increased due to additional freight spent to
meet our increased customer demand for at-once business. The impact of foreign exchange to gross profit in the
three month period ended November 30, 2010 was minimal.
Adjusted Gross Profit
Adjusted Gross Profit in the three month period ended November 30, 2010 increased by $9.8 million, or
51.9%, to $28.7 million. Our Adjusted Gross Profit as a percentage of net revenues for the three month period
ended November 30, 2010 increased from 31.2% to 36.2%. The increase is driven by higher net revenues off-set
by increased cost of goods sold, distribution expenses, freight and warranty expenses, which were all driven by
higher net revenue. Assuming our net revenues would have remained flat to prior year, our costs would have
decreased due to the decrease in direct material costs as a percentage of net revenues.
Sales, General and Administrative
Sales, general and administrative expenses in the three month period ended November 30, 2010 increased
by $3.4 million, to $19.5 million. This increase was primarily due to (i) audit fees for the re-audit of Fiscal 2008
through Fiscal 2010 in connection with the Offering, (ii) an overall increase in wages driven by increased
incentive plan costs, and (iii) an increase in commissions due to the increased revenues. The legal fees associated
with the public offering were not material during the three month period ended November 30, 2010 and were
therefore expensed instead of capitalized.
As a percentage of net revenue, our sales, general and administrative expenses decreased from 26.6% of net
revenues for the three month period ended November 30, 2009 to 24.6% of net revenues for the three month
65
period ended November 30, 2010. The impact of foreign exchange on sales, general and administrative expenses
for the three month period ended November 30, 2010 was minimal.
Research and Development Expenses
Our research and development expenses in the three month period ended November 30, 2010 increased by
$0.9 million, or 40.9%, to $3.1 million due to the increased investment in our product development efforts. We
do not expect this percentage to continue for the remainder of Fiscal 2011 as the timing of related expenses
caused this increase.
As a percentage of net revenues, our research and development expenses increased from 3.6% of net
revenues for the three month period ended November 30, 2009 to 3.9% of net revenues for the three month
period ended November 30, 2010. The impact of foreign exchange on research and development expenses for
the three month period ended November 30, 2010 was minimal.
Adjusted EBITDA
Adjusted EBITDA in the three month period ended November 30, 2010 increased by $6.1 million, or
338.9% to $7.9 million. As a percentage of net revenues Adjusted EBITDA increased from 3.0% for the three
month period ended November 30, 2010 to 10.0% for the three month period ended November 30, 2010 driven
by improved Adjusted Gross Profit and a reduction in sales, general and administrative expenses as a percentage
of net revenues.
Interest Income/Expense
Interest expense in the three month period ended November 30, 2010 increased by $0.4 million, or 12.1%,
to $3.7 million due primarily to the increased drawings under the line of credit to finance the Maverik Lacrosse
Acquisition. Interest income increased $0.1 million to $0.2 million for the three month period ended
November 30, 2010, due to a slight increase in customer charged interest collections.
Net Loss on Derivative Instruments
Loss on derivative instruments in the three month period ended November 30, 2010 increased by
$4.4 million to $6.6 million due primarily to the strengthening of the Canadian dollar versus the exchange rates
on the Company’s forward contracts.
Net Gain on Foreign Exchange
Gain on foreign exchange in the three month period ended November 30, 2010 increased by $0.6 million to
$2.0 million.
Income Taxes
Income tax benefit in the three month period ended November 30, 2010 decreased by $0.4 million, or
25.0%, to $1.2 million. Current tax expense for the period was $0.4 million and deferred tax benefit was
$1.6 million. The Company’s effective tax rate was 37.7% compared to 33.5% for the same period in the
prior year.
Net Loss
Net loss in the three month period ended November 30, 2010 decreased $1.3 million, or 40.6%, to a loss of
$1.9 million. The impact of foreign exchange for the three month period ended November 30, 2010 reduced net
income by $0.5 million.
66
Fiscal 2010 compared to Fiscal 2009
Net Revenues
Net revenues for Fiscal 2010 increased by $15.2 million, or 6.3%, to $257.4 million due primarily to higher
ice and roller hockey equipment sales and apparel sales.
Ice hockey equipment net revenues increased by 6.8% supported by strong performance in North America
as well as strong category sales in sticks, goalie masks, goalie, under-protective and facial protection. In
particular, sales of sticks were supported by the successful launch of the Vapor X:60 stick in the three month
period ended November 30, 2009 which corresponded to the 2009 holiday selling season. The strong
performance in North America described above was negatively impacted by weaker performance outside North
America due to fluctuations in the U.S. dollar versus the euro and the Swedish krona which dampened reported
growth in U.S. dollars. Apparel sales were also stronger in Fiscal 2010 when compared to Fiscal 2009 due to the
growth in our protective apparel products. The impact of foreign exchange in Fiscal 2010 negatively impacted
reported revenues by $2.6 million.
Gross Profit
Gross profit for Fiscal 2010 increased by $34.1 million, or 62.0%, to $89.1 million due to the higher sales
volume and lower cost of goods sold. Included in Fiscal 2009 are two inventory-related purchase accounting
entries: (i) the sell through of the stepped up inventory to the fair market value of $22.9 million adjusting for the
formation of KSGI and (ii) the sell through of the stepped down inventory of $0.9 million relating to fair market
value adjustment for the Mission-ITECH Acquisition. As a percentage of net revenues, our gross profit
increased from 22.7% for Fiscal 2009 to 34.6% for Fiscal 2010. The impact of foreign exchange in Fiscal 2010
reduced gross profit by $3.2 million.
Adjusted Gross Profit
Adjusted Gross Profit for Fiscal 2010 increased by $12.2 million, or 14.3%, to $97.8 million due to higher
sales volume and lower cost of goods sold. As a percentage of net revenues, our Adjusted Gross Profit increased
from 35.3% for Fiscal 2009 to 38.0% for Fiscal 2010. Excluding the inventory step-up and step-down entries
described above, Adjusted Gross Profit as a percentage of net revenues increased as a result of (i) decreased
factory costs of $1.4 million due to the move of certain product production to lower cost factories,
(ii) $0.3 million in decreased inventory reserves associated with the disposal of Nike Bauer and Mission-ITECH
branded inventory (excluded for purposes of the determination of Adjusted EBITDA), and (iii) $0.3 million in
decreased amortization for intangible assets.
Sales, General and Administrative
Sales, general and administrative expenses for Fiscal 2010 decreased by $5.1 million, or 7.7%, to
$61.0 million due primarily to $4.9 million in expenses related to the Mission-ITECH shutdown (excluded for
purposes of the determination of Adjusted EBITDA) incurred in Fiscal 2009. Excluding Mission-ITECH
shutdown expenses of $4.9 million, sales, general and administrative expenses would have decreased by
$0.2 million.
As a percentage of net revenues, our sales, general and administrative expenses decreased from 27.3% of
net revenues for Fiscal 2009 to 23.7% of net revenues for Fiscal 2010. The impact of foreign exchange in Fiscal
2010 increased our reported sales, general and administrative expenses by $0.9 million.
Research and Development Expenses
Our research and development expenses for Fiscal 2010 increased by $2.9 million, or 42.6%, to $9.7 million
due mainly to the increased investments in roller hockey and protective apparel following the Mission-ITECH
Acquisition.
As a percentage of net revenues, our research and development expenses increased from 2.8% of net
revenues for Fiscal 2009 to 3.8% of revenues for Fiscal 2010. The impact of foreign exchange in Fiscal 2010
increased research and development expenses by $0.3 million.
67
Adjusted EBITDA
Adjusted EBITDA for Fiscal 2010 increased by $3.7 million or 13.6% to $31.0 million. Adjusted EBITDA
was 11.3% of revenues in Fiscal 2009 and 12.0% in Fiscal 2010 driven by an improvement in Adjusted Gross
Profit and sales, general and administrative expenses and slightly offset by higher research and development
costs as a percentage of net revenues.
Interest Income/Expense
Interest expense for Fiscal 2010 decreased by $1.0 million, or 7.1%, to $13.0 million due to lower interest
rates on our debt as well as scheduled debt repayments. Interest income decreased $0.1 million, or 20.0%, to
$0.4 million for Fiscal 2010, which reflects a reduction in customer charged interest collections.
Net Loss on Derivative Instruments
Loss on derivative instruments for Fiscal 2010 increased by $0.5 million to $0.6 million loss. In Fiscal 2009,
the Company recorded an unrealized loss of $4.0 million on forward exchange contracts that it entered into for
maturity in future periods offset by a gain of $3.9 million on the foreign exchange swap agreement the Company
entered into in Fiscal 2008. In Fiscal 2010, realized losses on settled forward contracts of $5.4 million were offset
by unrealized gains on future maturing contracts of $5.7 million. Offsetting the net gain on forward contracts was
unrealized losses on the foreign exchange swap of $0.9 million.
Net Gain on Foreign Exchange
Gain on foreign exchange in Fiscal 2009 was $0.5 million. Gain on foreign exchange for Fiscal 2010 was
$0.8 million. During Fiscal 2009, the Company experienced foreign exchange gains on its non U.S. dollardenominated operations. The gains were led by the strengthening of the U.S. dollar versus the Canadian dollar.
Income Taxes
Income tax expense increased by $15.4 million, or 132.8%, from a benefit of $11.6 million in Fiscal 2009 to
expense of $3.8 million in Fiscal 2010. The benefit in Fiscal 2009 was due primarily to non recurring expenses
related to sell through of stepped up inventory of $22.9 million and $4.9 million in expenses related to the
Mission-ITECH shutdown. Current tax expense for Fiscal 2010 was $0.9 million and deferred tax expense was
$3.0 million. The Company’s effective tax rate was 63.2% compared to 31.7% for the same period in the
prior year. Discrete items such as timing differences in Canada due to changes in enacted rates and return to
provision adjustments were non recurring in nature and gave rise to the high rate in Fiscal 2010.
Net Income
Net income for Fiscal 2010 increased by $21.6 million, or 111.3%, to income of $2.2 million driven by the
increased net revenues, decreased cost of goods sold and decreased sales, general and administration expenses
described above. The impact of foreign exchange in Fiscal 2010 compared to the prior year period decreased net
income by $3.6 million.
Fiscal 2009 compared to Fiscal 2008
Net Revenues
Net revenues for Fiscal 2009 increased by $22.7 million, or 10.3%, to $242.2 million due primarily to the
acquisition of Mission-ITECH in September 2008.
Ice hockey equipment sales increased by 9.9% supported by our strong performance in North America with
strong category net revenues in helmets, gloves, goalie, under-protective and roller hockey. The increase in the
goalie protective and roller hockey lines was driven by the Mission-ITECH Acquisition which increased net
revenues by $21.5 million. Apparel net revenues were much weaker in Fiscal 2009 than in Fiscal 2008 due to the
discontinuation of licensed apparel sales for IIHF at the end of Fiscal 2008. After the formation of KSGI, the
IIHF team jersey licensing business remained with Nike Inc. In Fiscal 2008 IIHF licensing team jersey net
revenues amounted to $6.1 million. The activities with the IIHF are excluded for purposes of the determination
of Adjusted EBITDA. The impact of foreign exchange in Fiscal 2009 negatively impacted our reported revenues
by $5.5 million.
68
Gross Profit
Gross profit for Fiscal 2009 decreased by $25.4 million, or 31.6%, to $55.0 million due to higher cost of
goods sold.
As a percentage of net revenues, our gross profit decreased from 36.6% for Fiscal 2008 to 22.7% for Fiscal
2009. Cost of goods sold includes direct material costs, warranty, factory, freight and distribution expense.
Supply chain expenses increased by $1.4 million driven by (i) increased factory costs of $1.3 million,
(ii) $0.9 million in increased distribution center expenses to accommodate the Mission-ITECH Acquisition, and
(iii) $0.3 million in freight, offset by $0.9 million in warranty expenses. In Fiscal 2009, the amortization of
intangible assets decreased our gross profit by $4.0 million. The inventory step-up/step-down caused a decrease
of 9.1%. The impact of foreign exchange in Fiscal 2009 increased gross profit by $2.5 million.
Adjusted Gross Profit
Adjusted Gross Profit for Fiscal 2009 decreased by $0.6 million, or 0.7% to $85.6 million in Fiscal 2009. As a
percentage of net revenues, Adjusted Gross Profit decreased from 39.3% in Fiscal 2008 to 35.3% in Fiscal 2009.
Fiscal 2009 includes the sell through of inventory stepped up to fair value in cost of goods sold after the
formation of KSGI ($22.9 million) and the sell through of inventory stepped down to fair value in cost of goods
sold after the Mission-ITECH Acquisition ($0.9 million). Cost of goods sold in Fiscal 2008 also included the
trademark royalty paid to Nike. These charges are excluded for purposes of the determination of Adjusted
Gross Profit. Excluding these charges, material cost of goods sold increased in Fiscal 2009 by $17.9 million
following the additional revenue generated by the Mission-ITECH Acquisition and the sale of discontinued
Mission-ITECH inventory. Without the Mission-ITECH Acquisition, our Adjusted Gross Profit would have
been $82.0 million in Fiscal 2009, a $4.2 million decrease from Fiscal 2008 driven by favourable product costs.
Sales, General and Administrative
Sales, general and administrative expenses for Fiscal 2009 increased by $3.6 million, or 5.8%, to
$66.1 million due to expenses associated with the Mission-ITECH Acquisition. Excluding the Mission-ITECH
Acquisition expenses, sales, general and administrative expenses would have decreased by $4.9 million due to
(i) lower marketing related expenses, (ii) lower bad debt expense, and (iii) lower operational expenses. A
portion of the Mission-ITECH Acquisition expenses are excluded for purposes of the determination of Adjusted
EBITDA.
As a percentage of net revenues, our sales, general and administrative expenses decreased from 28.5% of
net revenues for Fiscal 2008 to 27.3% of net revenues in Fiscal 2009. The impact of foreign exchange in Fiscal
2009 decreased our reported sales, general and administrative expenses by $2.6 million.
Research and Development Expenses
Our research and development expenses for Fiscal 2009 decreased by $1.2 million, or 15.0%, to
$6.8 million. In Fiscal 2008, we received a research and development credit of $4.7 million from Nike which is
excluded for purposes of the determination of Adjusted EBITDA.
As a percentage of net revenues, our research and development expenses decreased from 3.6% of net
revenues for Fiscal 2008 to 2.8% of net revenues for Fiscal 2009. The impact of foreign exchange in Fiscal 2009
reduced research and development expenses by $0.5 million.
Adjusted EBITDA
Adjusted EBITDA for Fiscal 2009 increased by $4.4 million or 19.2%, to $27.3 million driven by an
improvement in Adjusted Gross Profit, general and administrative expenses and decreased research and
development expenses. Fiscal 2008 included expenses related to marketing costs for the rebranding from the
Nike Bauer brand to the Bauer brand and inventory reserves for Nike Bauer product which were excluded for
purposes of the determination of Adjusted EBITDA. Some of these expenses continued into Fiscal 2009. As a
percentage of net revenues, Adjusted EBITDA increased from 10.4% in Fiscal 2008 to 11.3% in Fiscal 2009.
69
Interest Income/Expense
Interest expense for Fiscal 2009 increased by $10.5 million, or 350.0%, to $13.5 million. To fund the
Business Purchase, the Company issued $42.0 million of term bank debt and $52.0 million of subordinated notes
payable on April 16, 2008. The Company also drew on its line of credit to fund the working capital requirements
of the Bauer business. In Fiscal 2008, for the period April 17, 2008 to May 31, 2008, the Company incurred
$1.9 million of interest expense on its newly issued debt. For the period June 1, 2007 through April 16, 2008, the
Company incurred $2.4 million of interest expense on its intercompany debt to Nike. In Fiscal 2009, the
Company incurred a full year of interest expense on its acquisition related debt. Interest income decreased
$0.8 million from $1.3 million for Fiscal 2008, to $0.5 million in Fiscal 2009. In Fiscal 2008, interest income was
derived from the Company’s intercompany loan from Nike as well as from customer accounts receivable. In
Fiscal 2009, interest income was generated from customer accounts receivable.
Net Loss on Derivative Instruments
Loss on derivative instruments for Fiscal 2009 decreased by $1.7 million to $0.1 million. In Fiscal 2008 the
Company’s only derivative instrument was a foreign exchange swap agreement that was adjusted to fair value at
year end, which resulted in a loss of $1.8 million. In Fiscal 2009, the Company recorded an unrealized loss of
$4.0 million on forward exchange contracts that it entered into during the year. Offsetting the loss was an
unrealized gain of $3.9 million on the foreign exchange swap agreement the Company entered into in
Fiscal 2008.
Net Loss on Foreign Exchange
Loss on foreign exchange in Fiscal 2008 was $0.3 million. Gain on foreign exchange in Fiscal 2009 was
$0.5 million. In Fiscal 2009, the Company recorded foreign exchange income due to the weakening of the
U.S. dollar versus the Canadian dollar.
Income Taxes
Income tax expense in Fiscal 2009 decreased $16.0 million, from $4.4 million of expenses in Fiscal 2008 to
$11.6 million of benefit. The benefit in Fiscal 2009 was due primarily to non recurring expenses related to the
sell through of stepped up inventory of $22.9 million and $4.9 million in expenses related to the Mission-ITECH
shutdown. Current taxes for Fiscal 2009 were $0.3 million and deferred tax benefit was $11.9 million. For Fiscal
2008, current tax expense for the period was $5.2 million and deferred tax benefit was $0.8 million. The
Company’s effective tax rate was 31.7% compared to 46.2% for the same period in the prior year.
Net Income/Loss
Net income in Fiscal 2009 decreased by $24.5 million from an income of $5.1 million (2.3% of net revenues)
to a loss of $19.4 million (8.0% of net revenues). The primary driver of the loss was increased cost of goods sold
due to the sell through of inventory stepped up to fair value ($22.0 million) in Fiscal 2009. The impact of foreign
exchange in Fiscal 2009 compared to the prior year period increased net income by $3.2 million.
Outlook
Our net revenues are made up of (i) booking orders, which are typically received several months in advance
of the actual delivery date, (ii) repeat orders, which are for at-once delivery, and (iii) other orders. The
seasonality of our business and the manner in which we solicit orders results in varying percentages from
quarter-to-quarter of our total net revenues that is comprised of booking orders. Historically, booking orders
constitute most of our sales in our first and fourth fiscal quarters, but constitute approximately one-half of our
orders in our second fiscal quarter and approximately one-third of our orders in our third fiscal quarter.
Although our booking orders give us some visibility into our future financial performance, there is not a direct
relationship between our booking orders and our future financial performance given several factors, among
which are: (i) the timing of order placement compared to historical patterns, (ii) our ability to service demand
for our product, (iii) the willingness of our customers to commit to purchasing our product, and (iv) the actual
sell through of our products at retail driving changes in repeat orders.
70
We receive all booking orders for our ‘‘Back to Hockey’’ season (for sales from April through September)
by the end of April and we receive all booking orders for our ‘‘Holiday’’ season (for sales from October through
March) by the end of October. Through our product performance and our marketing efforts we have seen an
improvement in our order file for the upcoming Back to Hockey season (April — September 2011). Although
there are still several months of orders yet to be collected, this is an encouraging sign of the strength of demand
for our products and the brand momentum we have been building over the past two years. See ‘‘ForwardLooking Statements’’.
Liquidity and Capital Resources
Cash Flows
As of May 31, 2010, we held cash and cash equivalents of $4.2 million. Currently, our primary source of cash
flow is generated from sales of ice hockey equipment and related apparel. We believe that ongoing operations
and associated cash flow, in addition to our cash resources and revolving credit facility, provide sufficient
liquidity to support our business operations for at least the next twelve months. The following table sets forth a
consolidated statement of financial data, for the periods indicated in millions of U.S dollars.
Fiscal Year Ended May 31,
2010
2009
2008
Six Months
Ended
November 30,
2010
2009
1.6
(4.9)
(1.8)
(0.1)
(5.2)
24.8
(26.3)
(0.5)
0.4
(1.6)
3.9
(12.8)
12.3
0.0
3.4
(1.9)
(4.1)
5.0
0.4
(0.6)
Beginning cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.4
11.0
7.5
4.2
9.4
Ending cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4.2
$ 9.4
$ 11.0
$ 7.6
$ 8.8
(dollars in millions)
Net cash flows from operating activities .
Net cash flows from investing activities .
Net cash flows from financing activities .
Effect of exchange rate changes on cash
(Decrease)/increase in cash . . . . . . . . . .
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0.1
(201.4)
204.6
0.2
3.5
Net Cash Provided by Operating Activities
Net cash flows provided by operating activities for the six month period ended November 30, 2010 were
$3.9 million, an increase of $5.8 million compared to the six month period ended November 30, 2009 due mainly
to higher accounts payable balances.
Net cash flows provided by operating activities for the three month period ended November 30, 2010 were
$24.8 million, a decrease of $0.1 million compared to the three month period ended November 30, 2009.
Net cash flows provided by operating activities for Fiscal 2010 were $1.6 million, a decrease of $23.2 million
compared to Fiscal 2009, resulting primarily from increases in our working capital to support our business
growth.
Net cash flows provided by operating activities for Fiscal 2009 were $24.8 million, an increase of
$24.7 million compared to Fiscal 2008, resulting primarily from cash collections and inventory sell off following
our acquisition of Mission-ITECH.
Net Cash Used in Investing Activities
Net cash used in investing activities for the six month period ended November 30, 2010 was $12.8 million
compared to $4.1 million for the six month period ended November 30, 2009, due to the Company’s purchase of
Maverik for $10.8 million in June 2010.
Net cash used in investing activities for the three month period ended November 30, 2010 was $1.2 million
compared to $3.7 million for the three month period ended November 30, 2009, due to the Jock Plus Hockey
Intellectual Property Acquisition of $3.4 million in the three month period ended November 30, 2008.
Net cash used in investing activities during Fiscal 2010 was $4.9 million compared to $26.3 million in Fiscal
2009. The Company purchased Mission-ITECH in Fiscal 2009 for $25.4 million and completed the Jock Plus
Hockey Intellectual Property Acquisition in Fiscal 2010 for $3.4 million.
71
Net cash used in investing activities during Fiscal 2009 was $26.3 million compared to $201.4 million in
Fiscal 2008. Fiscal 2008 included the sale of the Bauer Business by Nike for $195.4 million.
Net Cash Used by Financing Activities
Net cash flows provided by financing activities for the six month period ended November 30, 2010 was
$12.3 million compared to $5.0 million for the six month period ended November 30, 2009. In the six month
period ended November 30, 2010, as a result of the Maverik Lacrosse Acquisition and the related amendment to
the senior credit agreement, the Company increased the long-term portion of its line of credit by $6.0 million
Canadian dollars to $15.0 million Canadian dollars. In the six month period ending November 30, 2009, the
Company made a long-term debt repayment of $14.5 million Canadian dollars, which was offset by draws on the
Company’s line of credit.
Net cash outflows used in financing activities for the three month period ended November 30, 2010 was
$25.4 million compared to $23.3 million for the three month period ended November 30, 2009.
During Fiscal 2010, net cash outflows used in financing activities were $1.8 million compared to $0.5 million
for Fiscal 2009. The Company also reduced its line of credit through operations. In Fiscal 2010, the Company
made a long-term debt repayment of $14.5 million Canadian dollars, which was offset by draws on the
Company’s line of credit. During Fiscal 2009, the Company financed its Mission-ITECH Acquisition with
$10.2 million in stock issuance and $10.0 million in long-term debt. During Fiscal 2009, cash outflows from
financing activities were $0.5 million compared to a $204.6 million inflow for Fiscal 2008. During Fiscal 2008, the
Company primarily financed its inception with $97.5 million issuance of common stock and $101.4 million
issuance of long-term debt. These inflows were offset by $6.0 million of financing fees. During the Predecessor
Period, the Company received $108.0 million as settlement of intercompany loans with Nike and paid
$120.3 million in dividends to Nike.
Capital Expenditures
In the three and six months ended November 30, 2010, we incurred capital expenditures of $0.8 million and
$1.4 million, respectively, due primarily to investments in our information systems to assist in streamlining our
growing organization and incremental equipment investments relating to R&D. Capital expenditures in Fiscal
2010 were $1.5 million due to investments in our information systems. In Fiscal 2009, capital expenditures were
$0.9 million due to investments in retail stick racks and incremental equipment investments in research &
development. In Fiscal 2008, capital expenditures were $2.6 million. We expect to continue to incur capital
expenditures relating to investments in information systems and research and development as well as retail
marketing fixtures.
72
Contractual Obligations
The following table summarizes our material contractual obligations as of November 30, 2010 in millions of
U.S. dollars:
Commitments
(dollars in millions)
2010
Lease financing
Operating lease obligations . . . . . . . . . . . . . . . . . .
Direct financing and capital lease payments . . . . . .
$ 16.4
2.6
Endorsement contracts . . . . . . . . . . . . . . . . . . . . .
Twelve Months Ended November 30
2011
2012
2013
2014
2015
Thereafter
5.5
$ 4.7
0.7
—
2.7
$ 2.6
0.7
—
1.4
$ 1.7
0.7
—
0.7
$1.6
0.5
—
0.5
$1.5
—
—
0.2
$4.3
—
—
—
....
....
14.7
29.3
—
7.0
—
9.6
14.7
12.7
—
—
—
—
—
—
....
....
53.8
52.2
Non-inventory purchases . . . . . . . . . . . . . . . . . . . .
0.5
—
52.2
—
0.5
—
—
—
—
53.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total commitments . . . . . . . . . . . . . . . . . . . . . . . .
$175.0
$67.8
$14.3
$84.3
$2.6
$1.7
$4.3
Long-term borrowings
Revolving credit line . . . . . . . . . . . . . . . . . . .
Term loan due 2013 . . . . . . . . . . . . . . . . . . . .
14.25% Senior subordinated promissory notes,
due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory purchases . . . . . . . . . . . . . . . . . . .
Off-Balance Sheet Arrangements
We enter into agreements with our manufacturing partners on tooling requirements for our manufactured
products. The following table summarizes our vendor tooling commitments as of November 30, 2010, Fiscal 2011
in millions of U.S. dollars.
Open
purchase
orders
amortization
value
Outstanding
liability
fiscal 2011
Tooling
acquisition
value
Cost paid
Owed
amounts as of
November 30, 2010
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$3.4
1.7
0.9
0.2
0.2
0.1
$1.7
0.4
0.6
0.1
0.1
0.1
$1.6
1.3
0.3
0.1
0.1
—
$0.1
0.3
0.1
0.0
0.0
0.1
$1.5
1.0
0.2
0.1
0.1
—
Total active commitments . . . . . . . . . . . . .
$6.5
$3.0
$3.4
$0.6
$2.9
Vendor commitments
(dollars in millions)
Active commitments
Supplier A . . . . .
Supplier B . . . . .
Supplier C . . . . .
Supplier D . . . . .
Supplier E . . . . .
Supplier F . . . . .
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.
.
Indebtedness
On April 16, 2008, KSGI’s material subsidiaries entered into the Old Facility with a principal amount of
$117.0 million. The Old Credit Facility was comprised of a $42.0 million variable interest rate term loan and a
$75.0 million revolving credit line. Approximately $55.7 million of the borrowings was used to fund a portion of
the purchase of the Bauer Business.
To fund the Mission-ITECH Acquisition, the Old Facility was amended on September 22, 2008 to increase
such credit facility to $142.0 million. The variable interest term loan increased from $42.0 million to
$52.0 million and the available revolving credit line increased from $75.0 million to $90.0 million. The Old
Facility is secured by 100% of the stock and stock equivalents of the U.S. Borrower and 65% of the stock and
stock equivalents of the Canadian Borrower.
73
The term loan borrowings at the time of the purchase of the Bauer Business were $42.8 million Canadian
dollars. The additional borrowings to fund the Mission-ITECH Acquisition were $10.6 million Canadian dollars.
The term loan is a variable interest loan with scheduled quarterly repayments and a maturity of April 16, 2013.
The interest rate is equal to the Bankers’ Acceptance rate or Canadian base rate plus the applicable margin for
each rate. The margin is 3.25% or 4.50% depending on the type of rate obtained. The interest rate for the years
ended May 31, 2010 and 2009 ranged from 4.93% to 5.50% and 6.81% to 8.00%, respectively. In accordance
with the Old Facility, the Borrowers must make quarterly principal payments on the term loan. These payment
amounts are included in the short-term portion of long-term debt. Additional mandatory principal payments,
other than for reason of a default event, are also required if there is a change in control or if the Borrowers yield
excess cash flow as defined in the Old Facility. The Borrowers did not make an excess cash flow payment for
Fiscal 2010. For Fiscal 2009, the Company made a mandatory principal payment of $14.5 million Canadian
dollars in August 2009.
The revolving credit line provides for $90.0 million U.S. dollars of committed borrowings, of which up to
$10.0 million may be used for letters of credit. The revolving credit line provides access to U.S. dollars and
Canadian dollars and matures on April 16, 2013. The Company can borrow funds based on the lesser of the
borrowing base or line commitment. Generally, the borrowing base is calculated by taking 85% of trade
receivables, net of ineligible accounts, and 65% of inventory. The balance must be paid down to $9.0 million
Canadian dollars for a period of 30 consecutive days between the period January 15 and March 15 each year.
The Company pays 0.5% for the unused portion of the revolving credit line. The interest rate is equal to the
Bankers’ Acceptance rate, Canadian base rate, LIBOR or the base rate plus the applicable margin for each rate.
The margin is 3.25% or 4.50% depending on the type of rate obtained. The interest rate for the years ended
May 31, 2010 and 2009 ranged from 4.73% to 6.50% and 5.89% to 8.25%, respectively. The Borrowers had
$40.4 million and $61.0 million of available credit line available at May 31, 2010 and 2009, respectively. The
Company draws on its revolving credit line to fund the buildup of inventories for the three month period ending
February 28, 2011 and the three month period ending period May 31, 2011. We currently anticipate that the
revolving line of credit will be drawn at an average of approximately $43.5 million during Fiscal 2011. At May 31,
2010 there is one letter of credit in the amount of $0.4 million Canadian dollars outstanding under the revolving
credit line. There were no letters of credit outstanding under the revolving credit line at May 31, 2009. We
maintained an average cash balance of approximately $7.3 million during the twelve months ended
November 30, 2010. Our average balance under our revolving credit line was $36.1 during the twelve months
ended November 30, 2010.
At the time of the Business Purchase, the Canadian Borrower (and its subsidiaries) also sold the Old Notes
for $52.0 million to the Old Noteholders. The borrowings were used to fund a portion of the Business Purchase.
The Old Notes have a fixed interest rate of 14.25% and a maturity of October 15, 2013, requiring a lump sum
payment. The interest rate is comprised of basic interest of 12.00% due in cash each quarter and 2.25% that the
Canadian Borrower, at its discretion, can recapitalize into the notes. For the year ended May 31, 2010, the
Canadian Borrower elected to recapitalize the 2.25% interest. The amount of the recapitalization is $1.2 million.
The Old Notes are unsecured.
Upon the Closing of the Offering, we currently anticipate that we will enter into the New Credit Facility,
which will be used to, among other things, repay the borrowings outstanding under the Old Facility and to
redeem and cancel the Old Notes, including any prepayment penalties in connection therewith. See
‘‘Description of the Refinancing and Material Indebtedness’’.
Contingencies
In connection with the formation of KSGI, the Company has agreed to pay additional consideration to Nike
in future periods, based upon the attainment of a qualifying exit event. At May 31, 2010, the maximum potential
future consideration pursuant to such arrangements, to be resolved over the following eight years, is
$10.0 million. As a condition to the closing of the Acquisition, the Existing Holders are required to enter into a
reimbursement agreement with the Company pursuant to which each such Existing Holder will agree to
reimburse the Company, on a pro rata basis, in the event that KSGI may be obligated to make a payment to
Nike. See ‘‘The Acquisition’’.
74
In addition to the matter above, in the ordinary course of its business, the Company is involved in various
legal proceedings involving contractual and employment relationships, product liability claims, trademark rights,
and a variety of other matters. The Company does not believe there are any pending legal proceedings that will
have a material impact on the Company’s financial position or results of operations.
Quantitative and Qualitative Disclosures about market and Other Financial Risks
Foreign Currency Risk
Foreign currency risk is the risk we incur due to fluctuating foreign exchange rates impacting our results of
operations. We are exposed to foreign exchange rate risk driven by the fluctuations against the U.S. dollar of the
currencies in which we collect our revenues: the Canadian dollar, Euro, Swedish krona, Norwegian krona, and
Danish krona. Our exposure also relates to debt held in Canadian dollars and purchases of goods and services in
foreign currencies. While we purchase our products in U.S. dollars, we are exposed to cost variability due to
fluctuations against the U.S. dollar of certain foreign currencies: the Canadian dollar, Chinese renminbi, Taiwan
dollar, and Thai baht. We continuously monitor foreign exchange risk and have entered into various
arrangements to mitigate our foreign currency risk.
Interest Rate Risk
Interest rate risk is the risk that the values of a financial instrument will be affected by changes in market
interest rates. Our financing includes long-term debt and a Revolving Loan that bears interest based on floating
market rates. Changes in these rates result in fluctuations in the required cash flow to service this debt. Our
financing includes long-term debt and a Revolving Loan that bear interest. For Fiscal 2010 and Fiscal 2009, had
our variable interest rate increased by 25 basis points, our interest expense would have increased by $0.2 million
in each year.
Credit Risk
Credit risk is when the counterparty to a financial instrument fails to meet its contractual obligations,
resulting in a financial loss to us.
We sell to a diverse customer base over a global geographic area. We evaluate collectability of specific
customers receivables based on a variety of factors including currency risk, geopolitical risk, payment history,
customer stability and other economic factors. Collectability of receivables is reviewed on an ongoing basis by
management and the allowance for doubtful accounts is adjusted as required. Account balances are charged
against the allowance for doubtful accounts when we determine that it is probable that the receivable will not be
recovered. We believe that the geographic diversity of the customer base, combined with our established credit
approval practices and ongoing monitoring of customer balances mitigates the counterparty risk.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations. We continually monitor
our actual and projected cash flow. We believe our cash flows generated from operations combined with our
revolving credit line provide sufficient funding to meet our obligations.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance U.S. GAAP. The accounting
policies followed by the Company in the Successor Period are consistent with those of the Predecessor Period.
Included in the results of the Predecessor Period from June 1, 2007 through April 16, 2008 are $13.6 million of
expenses consisting of cross charges from the Predecessor’s parent company primarily for trademark royalty
expense, payroll charges related to U.S. employees, and liaison office expenses; offset by a cross charge to the
parent company related to a research and development credit.
The preparation of the financial statements in conformity with generally accepted accounting principles
requires management to make a number of estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of net revenues and expenses during the reporting period. Balances and transactions which
75
are subject to such estimates and assumptions include: fair value determination of assets and liabilities in
connection with purchase accounting and derivatives, valuation allowances for receivables and inventories, as
well as product warranty, amortization periods, income taxes, and other provisions and contingencies. Due to
the subjective nature of these estimates, actual results could differ from those estimates.
We believe our critical accounting policies are those related to revenue recognition, stock-based
compensation, accounts receivable, inventory valuation, impairment of long-lived assets, intangible assets,
warranties and income taxes. We consider these policies critical because they are both important to the portrayal
of our financial condition and operating results, and they require us to make judgments and estimates about
inherently uncertain matters.
Revenue Recognition
Revenues are recognized when the risks and rewards of ownership have passed to the customer based on
the terms of the sale, collection of the relevant receivable is probable, evidence of an arrangement exists and the
sales price is fixed and determinable. Risk and rewards of ownership pass to the customer upon shipment or
upon receipt by the customer depending on the country of the sale and the agreement with the customer.
Provisions for sales discounts, returns and miscellaneous claims from customers are made at the time of sale.
Stock-based Compensation
The Company estimates the fair value of options granted under the Predecessor Plan using the BlackScholes option pricing model. This pricing model requires management to make assumptions regarding share
price volatility, share price on date of grant, dividend yield, expected life, and risk free interest rate. The
Company recognizes the grant date fair value of its awards over the vesting period based on the number of
options expected to vest using an accelerated method. The cost is classified in sales, general and administrative
expense in the consolidated statements of operations for the Successor Period. There is no stock-based
compensation in the Predecessor Period.
Accounts Receivable
The Company carries its accounts receivable at invoiced amounts less allowance for doubtful accounts,
returns, and discounts. In determining the amount of the allowance for doubtful accounts, management
evaluates the ability to collect accounts receivable based on a combination of factors. Reserves are maintained
based on the length of time receivables are past due and on the status of a customer’s financial position. The
Company considers historical levels of credit losses and makes judgments about the credit-worthiness of
significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the
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 change in allowance is
appropriate, we would record a credit for such change to sales, general and administrative expense in the period
in which such a determination is made. In determining the amount of the sales return reserve, the Company
considers historical levels of returns and makes assumptions about future returns. In addition, the Company
maintains a reserve for discounts related to accounts receivable. This includes accrued volume rebates and other
customer allowances.
Inventory Valuation
Inventory is stated at the lower of cost or market value determined under the first-in, first-out method. The
Company reserves for and writes down its inventories for estimated obsolete or unmarketable inventory equal to
the difference between the cost of inventory and the estimated market value based upon assumptions about
future demand and market conditions.
The accuracy of our estimates can be affected by many factors, some of which are outside of our control,
including changes in economic conditions and consumer buying trends.
76
Impairment of Long-Lived Assets
The Company estimates the future undiscounted cash flows to be derived from long-lived assets to assess
whether or not a potential impairment exists when events or circumstances indicate the carrying value of a
long-lived asset may be impaired. Factors that would necessitate an impairment assessment include a significant
adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or
the business climate that could affect the value of the asset, or a significant decline in the observable market
value of an asset, among others. If the carrying value exceeds the Company’s estimate of future undiscounted
cash flows, the Company would then calculate the impairment as the excess of the carrying value of the asset
over the Company’s estimate of its fair market value.
There were no impairments of long-lived assets recorded for the six month period ended November 30,
2010, or for the fiscal years ended May 31, 2010, May 31, 2009 and May 31, 2008.
Intangible Assets
The Company assesses intangible assets with indefinite lives for impairment at least annually, or when
events indicate that impairment may exist. The Company’s intangible assets with indefinite lives include
trademarks and trade names. In the impairment tests for indefinite-lived intangible assets, the estimated fair
value is compared to the carrying value. The Company’s estimate of fair value is measured using the relief from
royalty method, which is a standard form of discounted cash flow analysis typically used for the valuation of
trademarks and tradenames. If the carrying value exceeds the estimate of fair value, the Company would then
calculate impairment as the excess of the carrying value over the estimate of fair value. The gross carrying
amount of the identifiable intangible assets at November 30, 2010, May 31, 2010, and May 31, 2009 was
$83.7 million, $77.7 million, and $70.6 million, respectively. The accumulated amortization expense of these
intangible assets at November 30, 2010, May 31, 2010, and May 31, 2009 was $10.7 million, $8.8 million, and
$4.9 million, respectively.
The Company assesses the impairment of amortizing intangibles similar to long lived assets discussed
above. The Company’s intangible assets with definite lives include purchased technologies and customer
relationships which are amortized over their useful lives. The Company estimates the future undiscounted cash
flows to be derived from the long-lived assets to assess whether or not a potential impairment exists whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in
circumstances that may trigger an impairment review include significant changes in business climate, operating
results, planned investments, or an expectation that the carrying amount may not be recoverable, among others.
If the carrying value exceeds the undiscounted cash flows to be derived from the asset, the Company would then
calculate the impairment as the excess of the Company’s estimate of the fair value over the carrying value of the
asset. The Company’s estimate of fair value for purchased technology is measured using the relief from royalty
method. The Company’s estimate of fair value for customer relationships is measured using the excess earnings
approach.
In making assessments for impairment the Company relies on a number of factors including operating
results, business plans, economic projections, anticipated future cash flows, and transactions and
marketplace data.
There were no impairments of intangible assets recorded for the six month period ended November 30,
2010, or for the fiscal years ended May 31, 2010, May 31, 2009 and May 31, 2008.
Income Taxes
The Company accounts for income taxes using the asset and liability method. This approach requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income
taxes are reduced by a valuation allowance if, in the judgment of the Company’s management, it is more likely
than not that such assets will not be realized.
77
The Company adopted FIN 48 guidance which addressed the accounting for uncertainty in income taxes
recognized by prescribing a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a
tax position begins with a determination as to whether it is more-likely-than-not that a tax position will be
sustained upon examination based on the technical merits of the position. A tax position that meets the
more-likely-than-not recognition threshold is then measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement for recognition in the financial statements.
Recently Adopted Accounting Pronouncements
In December 2007, the FASB issued guidance on business combinations that establishes principles and
requirements for how an acquirer in a business combination recognizes and measures the assets acquired,
liabilities assumed, and any noncontrolling interest in the acquiree. This guidance also requires that transaction
costs be expensed as incurred. We adopted the provisions of this guidance for our business combinations
occurring on or after June 1, 2009.
In April 2008, the Company adopted the recognition provisions of the FASB related to defined benefit
pension and other postretirement plans, which requires employers to recognize on a prospective basis the
funded status of their defined benefit pension and other post-retirement plans on their consolidated balance
sheets and recognize as a component of comprehensive income, net of income tax, the gains or losses and prior
service costs or credits that arise during the period but are not recognized as components of net periodic benefit
cost. In Fiscal 2009, we adopted the measurement date provisions of this guidance, which requires the funded
status of a plan to be measured as of the date of the year-end statement of financial position and requires
additional disclosures in the notes to consolidated financial statements. The adoption of the measurement date
provisions did not have a material impact on our results of operations or financial condition.
In January 2010, the Financial Accounting Standard Board (FASB) issued guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements. The guidance requires additional
disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques
and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3 of
the fair value measurement hierarchy. This guidance became effective for the Company beginning June 1, 2010,
except for disclosures relating to purchases, sales, issuances and settlements of Level 3 assets and liabilities,
which will be effective for the Company beginning June 1, 2011. As this guidance only requires expanded
disclosures, the adoption did not and will not impact the Company’s consolidated financial position or results
of operations.
On January 20, 2009, the Emerging Issues Committee issued Abstract No. 173, Credit Risk and the Fair
Value of Financial Assets and Financial Liabilities (‘‘EIC 173’’). The committee reached a consensus that a
company’s credit risk and the credit risk of its counterparties should be considered when determining the fair
value of its financial assets and financial liabilities, including derivative instruments. The transitional provisions
resulting from the implementation of EIC 173 require the abstract to be applied retrospectively without
restatement of prior periods. Previously, the Company measured it financial assets and financial liabilities under
ASC 820 Fair Value Measurements and therefore a measurement difference did not exist upon the adoption of
EIC 173.
In January 2009, the CICA issued section 1582, Business Combination, which establishes standards for the
accounting for a business combination. This section applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1,
2011. Early application is permitted. As section 1582 is substantially harmonized with U.S GAAP Statement of
Financial Accounting Standards (SFAS) 141(R), Business Combinations, the Company will early adopt the
provisions of this guidance for business combinations occurring on or after June 1, 2010 to reduce the
accounting differences with U.S. GAAP. As a result of early adopting section 1582, the Company is also required
to adopt sections 1601, Consolidated Financial Statements and 1602, Non-Controlling interest.
The CICA issued section 3064, Goodwill and Intangible Assets, which established standards for the
recognition, measurement, presentation and disclosure of intangible assets. Section 3064 came into effect for
annual reporting periods beginning on or after October 1, 2008, replacing section 3062, Goodwill and Other
Intangible Assets and section 3450, Research and Development Costs. Adoption of this new standard
78
commencing June 1, 2009 resulted in the reclassification of computer software costs from property, plant and
equipment to intangible assets.
Recently Issued Accounting Pronouncements
The Canadian Accounting Standards Board has set January 1, 2011 as the date that IFRS will replace
Canadian GAAP for publicly accountable enterprises, which includes Canadian reporting issuers. The Company
will be required to prepare its financial statements in accordance with IFRS commencing June 1, 2011. Financial
reporting under IFRS differs from Canadian GAAP in a number of respects, some of which are significant.
IFRS on the date of adoption is also expected to differ from current IFRS due to new IFRS that are expected to
be issued before the changeover date. During Fiscal 2011, the Company commenced a diagnostic to assess and
scope the significant differences between existing Canadian GAAP and IFRS and the impact on the
consolidated financial statements. The detailed analysis of the accounting policies impacted by the IFRS
convergence is expected to be completed throughout Fiscal 2011. At this time, management cannot reasonably
estimate the impact of adopting IFRS on the consolidated financial statements, information systems, internal
controls over financial reporting, disclosure controls and procedures or business activities.
Conversion to International Financial Reporting Standards
International Financial Reporting Standards (‘‘IFRS’’) will replace GAAP for Canadian publicly
accountable enterprises for interim and annual financial statements effective for fiscal years beginning on or
after January 1, 2011. Accordingly, the Company is required to prepare its financial statements according to
IFRS for the three-month period ending on August 31, 2011, for which current and comparative information will
be prepared under IFRS. References to GAAP in this section are to Canadian GAAP and U.S. GAAP.
The Company commenced its IFRS conversion project in fiscal 2011. Project progress reports are to be
provided to the Company’s Audit Committee on a quarterly basis or on a more frequent basis as determined by
the Audit Committee during our IFRS conversion project.
The IFRS conversion project consists of three phases: Diagnostic, Solution Development and
Implementation and Execution. The IFRS transition plan includes a timetable for assessing the impact on
financial reporting, internal controls over financial reporting and disclosure controls and procedures,
information systems, business activities and financial reporting expertise.
The Diagnostic phase is in progress. The Company has engaged an external advisor to provide a preliminary
diagnostic assessment. The Diagnostic phase involves an assessment of the differences between GAAP and
IFRS and the choices that exist. This assessment will provide insight into the impact of the various accounting
differences and choices on financial reporting and external disclosures. The assessment will also highlight the
most significant areas of difference between GAAP and IFRS applicable to us and the required effort involved
in implementing the required changes.
The Solution Development phase will occur throughout the remainder of fiscal 2011. It involves a detailed
analysis and evaluation of the financial reporting, internal control, information system and business impact of
the IFRS accounting policies and various alternatives under IFRS. The evaluations involve identifying and
recommending implementation solutions for the mandatory changes under IFRS and recommending IFRS
policies where choices exist. All recommended implementation solutions and policies will be approved by senior
management and presented to the Audit Committee.
The Implementation and Execution phase will occur throughout the remainder of fiscal 2011 and into fiscal
2012 as necessary to support the reporting requirements. It involves the detailed design, implementation and
testing of the changes to financial reporting policies, internal controls, information systems and business
processes. This phase also involves the collection of the information required for the preparation of IFRS
comparative financial statements.
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The following table contains certain elements of our IFRS transition plan, the key milestones set to ensure
completion of these elements and an assessment of our progress towards achieving these milestones.
Key Activities
Key Milestones
Status
Financial Reporting Preparation
Identify differences in GAAP/IFRS
accounting policies (Diagnostic Phase).
Complete the Diagnostic Phase in the
third quarter of fiscal 2011.
Select IFRS 1 First-time Adoption of
International Financial Reporting
Standards (IFRS 1) choices.
Senior management approval of all key
IFRS accounting policy choices to occur
within the third and fourth quarter of
fiscal 2011.
Develop on-going IFRS policies.
Develop financial statement format.
Quantify effects of the transition in initial
IFRS disclosure and fiscal 2011
comparative statements.
Preliminary diagnostic assessment is
completed. Financial reporting
preparation is expected to occur as
planned.
Development of draft financial statement
format to occur within the fourth quarter
of fiscal 2011.
Quantification of the effects of transition
in initial IFRS disclosure and fiscal 2011
comparative financial statements will
occur within the third and fourth quarters
of fiscal 2011.
Control Environment
For all accounting policy changes
identified, assess implications and
implement changes if required to ensure
the design and effectiveness of the
following:
•
Internal Controls over Financial
Reporting (ICFR);
•
Disclosure Controls and Procedures
(DC&P).
Analysis of control issues will be
completed in conjunction with review of
accounting issues and policies within the
third and fourth quarters of fiscal 2011.
Control environment assessment and
implementation is expected to occur as
planned.
Implementation and testing of controls
over the new procedures will occur within
the fourth quarter of Fiscal 2011 and the
first quarter of fiscal 2012.
Information Systems
Assessment, development and testing of
system solutions for the transition and
post-transition reporting.
Determination of systems implications
and solutions for the transition and
ongoing reporting within the third and
fourth quarters of fiscal 2011.
Information systems assessment and
implementation is expected to occur as
planned.
System solutions will be addressed to
enable reporting under IFRS for the first
quarter of fiscal 2012.
Business Activities
Determine the impact of IFRS on
business activities and implement changes
if required in the following areas:
•
Financial covenants
•
Compensation arrangements
•
Contractual terms
•
Treasury practices
Identification of impacts of IFRS on
financial covenants, business practices and
compensation arrangements within the
third and fourth quarters of fiscal 2011.
The implementation of any required
solutions and renegotiations are planned
to be completed in the first quarter of
Fiscal 2012.
Business activity assessment and
implementation is expected to occur as
planned.
Financial Reporting Expertise
Define and introduce appropriate level of
expertise for finance and accounting
personnel.
Training to occur within the third and
fourth quarter of fiscal 2011.
Training is expected to occur as planned
and supplemented as needed.
Given the progress of the project the Company could change its intentions between the time of
communicating these key milestones above and the changeover date. Further, changes in regulation or economic
80
conditions at the date of the changeover or throughout the project could result in changes to the transition plan
as described in this prospectus.
The Company has completed the preliminary diagnostic assessment. The areas of accounting difference
having the most significant potential impact on our consolidated financial statements were identified to include
initial adoption of IFRS under the provisions of IFRS 1, First Time Adoption of International Financial
Reporting Standards (‘‘IFRS 1’’); property, plant and equipment; employee benefits; stock-based compensation;
impairment of assets; business combinations and income taxes. The list is subject to change based on completion
of the Diagnostic phase, and based on developments in the Solution Development and Implementation and
Execution phases and new information and circumstances. As the Company is in the early stages of its IFRS
transition, we cannot quantify the effects of any of the potential adjustments on our consolidated financial
statements and will continue to report our progress on conversion in our Management Discussion and Analysis
for our third quarter fiscal 2011 ending February 28, 2011 and the fiscal year ending May 31, 2011.
IFRS 1
IFRS 1 provides the framework for the first time adoption of IFRS and specifies that, in general an entity
shall apply the principles under IFRS retrospectively. IFRS 1 also specifies that the adjustments that arise on
retrospective conversion to IFRS from other GAAP should be directly recognized in retained earnings, with
certain exceptions. The Company is required to apply retrospectively all IFRS that are effective at the end of our
first IFRS annual reporting period, the fiscal year ended May 31, 2012. Certain optional exemptions and
mandatory exceptions to retrospective application are provided under IFRS 1. The Company has completed a
preliminary analysis of the IFRS 1 optional and mandatory exemptions.
• Cumulative translation differences — IFRS requires an entity to determine the translation differences in
accordance with IFRS from the date on which a subsidiary was formed or acquired. IFRS 1 allows
cumulative translation differences for all foreign operations to be deemed zero at the date of transition to
IFRS, with future gains or losses on subsequent disposal of any foreign operations to exclude translation
differences arising from periods prior to the date of transition to IFRS. The Company expects to deem all
cumulative translation differences to be zero on transition to IFRS.
• Business combinations — the Company is required to retroactively apply IFRS to all business
combinations, but may elect to apply the standard prospectively only to those business combinations that
occur after the date of transition to IFRS. The Company expects to choose the elective exemption under
IFRS 1 which removes the requirement to retrospectively restate all business combinations prior to the
date of transition to IFRS. Some adjustments may be required under IFRS 1 for un-restated business
combinations.
• Employee benefits — the Company intends to recognize actuarial gains and losses in other comprehensive
income in the period in which they occur, thus the optional exemption under IFRS 1 would not apply.
• Property plant and equipment — the Company is permitted to use fair value of property, plant and
equipment as the new cost basis on the transition date. This optional exemption is available on an
asset-by-asset basis. The Company does not expect to utilize the deemed cost exemption.
The Company is in the process of assessing early application of IFRS 9, Financial Instruments.
Property, plant and equipment
IFRS and GAAP contain the same basic principles for property, plant and equipment; however, differences
in application do exist. Separate accounting for components of property, plant and equipment is applied more
explicitly under IFRS. Costs are allocated to significant parts of an asset if the useful lives differ, and each part is
then separately depreciated. In addition, IFRS allows either the cost model or the revaluation model to measure
property, plant and equipment subsequent to transition.
Employee benefits
Under IFRS, actuarial gains and losses can be recognized using either (i) the corridor method, (ii) any
systematic method that results in faster recognition, or (iii) in other comprehensive income in the period in
which they occur. Under Canadian GAAP, actuarial gains and losses are recognized on the balance sheet
81
applying a corridor approach. Under U.S. GAAP, actuarial gains and losses are recognized directly in other
comprehensive income.
Stock-based compensation
Under IFRS, each tranche of an award is considered a separate grant with a different vesting date and fair
value, and each is accounted for separately. Under GAAP, the fair value of a stock-based award with graded
vesting is recognized on a straight-line basis over the vesting period. IFRS also does not prescribe the use of a
specific method on how the expected life of stock options is to be determined, but requires consideration of the
following factors (i) the length of the vesting period, (ii) the average length of time similar options have
remained outstanding in the past, (iii) the price of the underlying shares, (iv) the employee’s level within the
organization, and (v) expected volatility of the underlying shares.
Impairment of assets
IFRS uses a one-step approach for testing and measuring asset impairments, with asset carrying values
being compared to the higher of value in use and fair value less costs to sell. Value in use is defined as being
equal to the present value of future cash flows expected to be derived from the asset. In the absence of an active
market, fair value less costs to sell may also be determined using discounted cash flows. IFRS requires that
goodwill be allocated and tested for impairment at the level of cash generating unit (CGU) or group of CGUs.
CGUs represent the lowest level of assets or groups of assets that generate largely independent cash inflows.
Under IFRS, each CGU or group of CGUs to which goodwill is allocated should represent the lowest level
within the entity for which information about goodwill is available and monitored for internal management
purposes. This level of grouping is potentially more granular when compared to the GAAP reporting unit. With
the exception of goodwill, IFRS also requires the reversal of any impairment losses where circumstances
requiring the impairment charge have been changed.
Under GAAP, undiscounted future cash flows are used to compare against the asset’s carrying value to
determine if impairment exists for property, plant and equipment and intangible assets with definite lives This
may result in more frequent write-downs in the carrying value of assets under IFRS since asset carrying values
that were previously supported under GAAP based on undiscounted cash flows may not be supported on a
discounted cash flow basis under IFRS. Under GAAP, impairment of intangible assets with indefinite lives and
goodwill is determined by comparing the carrying value of the asset to the estimate of fair value.
Business combinations
Under IFRS 3, Business Combinations (‘‘IFRS 3’’), business combinations must be accounted for by
applying the acquisition method. One of the parties to a business combination can always be identified as the
acquirer, being the entity that obtains control of the other business. Control is defined as the power to govern
the financial and operating policies of an entity so as to obtain benefits from its activities. The Company, as an
acquirer, shall identify the date on which it obtains control of an acquiree. This date is usually the closing date of
the acquisition, which would generally be the date on which the Company legally transfers the consideration or
acquires the assets and assumes the liabilities of the acquiree. As of the date on which it obtains control, the
Company shall recognize, separately from goodwill, the identifiable assets acquired and the liabilities assumed.
Acquisition-related costs incurred to effect a business combination shall be expensed in the period the costs
are incurred.
For business combinations after the date of transition to IFRS, the business combination is required to be
restated in accordance with IFRS 3.
Income Taxes
The Company will assess the impact of income taxes throughout the project.
The changeover from current Canadian GAAP to IFRS is a major undertaking that may materially affect
the reported financial position and results of operations. The International Accounting Standards Board will
continue to issue new accounting standards during the period of conversion. The Company continues to monitor
standards development as issued by the International Accounting Standards Board and the Accounting
Standards Board (AcSB), as well as regulatory developments as issued by the Canadian Securities
Administrators (CSA), which may affect the timing, nature or disclosure of our adoption of IFRS. The full
impact on the future financial position and results of operations of the Company is not reasonably determinable
or estimable at this time.
82
DESCRIPTION OF SHARE CAPITAL
The following description of our share capital summarizes certain provisions of our Articles. These summaries do
not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of
our Articles.
General
The Company’s authorized share capital will consist of an unlimited number of Common Shares and an
unlimited number of Proportionate Voting Shares. Immediately after the completion of the Offering, assuming
no exercise of the Over-Allotment Option, an equivalent of Common Shares (assuming the conversion of
all Proportionate Voting Shares to Common Shares on the basis of 1,000 Common Shares for one Proportionate
Voting Share) will be issued and outstanding on a non-diluted basis, and, if the Over-Allotment Option is
exercised, the same number of Common Shares (assuming the conversion of all Proportionate Voting Shares to
Common Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share) will be issued and
outstanding on a non-diluted basis. See ‘‘Conversion Rights’’ and ‘‘The Acquisition’’ below.
All of the Equity Shares issued prior to or pursuant to the completion of the Offering will be fully paid and
non-assessable.
Equity Shares
Except as described herein, the Common Shares and Proportionate Voting Shares have the same rights, are
equal in all respects and are treated by us as if they were shares of one class only.
Conversion Rights
Common Shares may at any time, at the option of the holder, be converted into Proportionate Voting
Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share. Each issued and outstanding
Proportionate Voting Share may at any time, at the option of the holder, be converted into 1,000 Common
Shares. Except as provided for below, no fractional Equity Share will be issued on any conversion of another
Equity Share. See ‘‘Take-Over Bid Protection’’ below.
Immediately at the time on or after July 1, 2011 that none of the initial holders of Proportionate Voting
Shares and their affiliates beneficially owns, controls or directs, directly or indirectly, any Proportionate Voting
Shares: all issued and outstanding Proportionate Voting Shares will automatically convert into Common Shares
on a one to 1,000 basis; the right of holders of Common Shares to convert their Common Shares into shares of
Proportionate Voting Shares under the Articles will be terminated; and all authorized and unissued
Proportionate Voting Shares shall automatically convert into authorized and unissued Common Shares on a one
to 1,000 basis; and the Board of Directors shall not be entitled under the Articles to thereafter issue any
Proportionate Voting Shares.
Liquidation Entitlement
In the event of the liquidation, dissolution or winding-up of the Company or any other distribution of its
assets among its shareholders for the purpose of winding-up its affairs, whether voluntarily or involuntarily, the
holders of Equity Shares are entitled to participate in the remaining property and assets of the Company
available for distribution to the holders of Equity Shares on the following basis, and otherwise without
preference or distinction among or between such shares: each Proportionate Voting Share will be entitled to
1,000 times the amount distributed per Common Share. See ‘‘Conversion Rights’’ above.
Dividend Rights
Each Equity Share is entitled to dividends if, as and when dividends are declared by the Board of Directors,
on the following basis, and otherwise without preference or distinction among or between such shares: each
Proportionate Voting Share will be entitled to 1,000 times the amount paid or distributed per Common Share.
See ‘‘Conversion Rights’’ above.
83
Voting Rights
The Common Shares carry one vote per share for all matters coming before shareholders and the
Proportionate Voting Shares carry 1,000 votes per share for all matters coming before shareholders.
Unless a different majority is required by law or our Articles, resolutions to be approved by holders of
Equity Shares require approval by a simple majority of the total number of votes of all Equity Shares cast at a
meeting of shareholders at which a quorum is present with holders of Common Shares entitled to one vote per
share and holders of Proportionate Voting Shares entitled to 1,000 votes per share.
The holders of Common Shares and Proportionate Voting Shares are entitled to receive notice of any
meeting of shareholders of the Company, and to attend and vote at those meetings, except those meetings at
which holders of a specific class of shares are entitled to vote separately as a class under the BCBCA.
Variation of Rights
The rights, privileges, conditions and restrictions attaching to any Equity Shares may be modified if the
amendment is authorized by not less than 662⁄3% of the total number of votes cast at a meeting of holders of
Equity Shares duly held for that purpose. However, if the holders of Proportionate Voting Shares, as a class, or
the holders of Common Shares, as a class, are to be affected in a manner materially different from such other
class of Equity Shares, the amendment must, in addition, be authorized by not less than 662⁄3% of the total
number of votes cast at a meeting of the holders of the class of shares which is affected differently.
Subdivision or Consolidation
No subdivision or consolidation of the Common Shares or Proportionate Voting Shares may be carried out
unless, at the same time, the Common Shares or Proportionate Voting Shares, as the case may be, are
subdivided or consolidated in the same manner and on the same basis, so as to preserve the relative rights of the
holders of each class of Equity Shares.
Take-Over Bid Protection
In addition to the conversion rights described above, if an offer (the ‘‘Offer’’) is being made for
Proportionate Voting Shares where:
(a) by reason of applicable securities legislation or stock exchange requirements, the offer must be made to
all holders of the class of Proportionate Voting Shares; and
(b) no equivalent offer is made for the Common Shares,
the holders of Common Shares have the right, at their option, to convert their Common Shares into
Proportionate Voting Shares for the purpose of allowing the holders of the Common Shares to tender to
that offer.
In the event that holders of Common Shares are entitled to convert their Common Shares into
Proportionate Voting Shares in connection with an Offer pursuant to (b) above, holders of an aggregate of
Common Shares of less than 1,000 (an ‘‘Odd Lot’’) will be entitled to convert all but not less than all of such
Odd Lot of Common Shares into a fraction of one Proportionate Voting Share, at a conversion ratio equivalent
to 1,000 to one, provided that such conversion into a fractional Proportionate Voting Share will be solely for the
purpose of tendering the fractional Proportionate Voting Share to the offer in question and that any fraction of a
Proportionate Voting Share that is tendered to the Offer but that is not, for any reason, taken up and paid for by
the offeror will automatically be reconverted into the Common Shares that existed prior to such conversion.
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THE ACQUISITION
The Company, KSGI and the Existing Holders will enter into a share acquisition agreement
(the ‘‘Acquisition Agreement’’) pursuant to which, concurrently with the Closing, the Company will acquire
100% of KSGI from the Existing Holders in exchange for (i) a combination of Common Shares and
Proportionate Voting Shares representing a % equity and voting interest in the Company ( % on a
fully diluted basis), plus Cdn$ in cash being the net proceeds of the Offering received by the Company
(exclusive of expenses of the Offering) assuming no exercise of the Over-Allotment Option, or (ii) a combination
of Common Shares and Proportionate Voting Shares representing a % equity and voting interest in the
Company ( % on a fully diluted basis), plus Cdn$ in cash being the net proceeds of the Offering and
the Over-Allotment Option received by the Company (exclusive of expenses of the Offering and the OverAllotment Option) if the Over-Allotment Option is exercised in full.
Upon the Closing of the Offering and the completion of other transactions described in this prospectus, in
exchange for their current equity interests in KSGI (other than predecessor options which will be exchanged as
described below under ‘‘Treatment of Predecessor Options’’), all of the securityholders of KSGI listed below
(the ‘‘Existing Holders’’) will receive a combination of share consideration and cash consideration as set out in
the table below.
No Exercise of Over-Allotment Option
Cash (Cdn$)(2)
Common Shares(1)
Existing Holder
Kohlberg Investors VI, L.P.(4) . . . .
Kohlberg TE Investors VI, L.P.(4) . .
Partners Group Access 72, L.P.(5) . .
AEA Mezzanine Fund L.P.(5) . . . . .
GE Capital Equity Holdings, Inc.(5)
Kohlberg Partners VI, L.P.(4) . . . . .
AEA Mezzanine (Unleveraged)
Fund L.P.(5) . . . . . . . . . . . . . . . .
KOCO Investors VI, L.P.(4) . . . . . .
Current Management(6) . . . . . . . . .
Over-Allotment Option
Exercised in Full
Common Shares(1)
Cash (Cdn$)(3)
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(1)
Number of Common Shares included in this column represents the Existing Holder’s pro rata share of the share consideration and
assumes the conversion of all Proportionate Voting Shares to Common Shares on the basis of 1,000 Common Shares for one
Proportionate Voting Share. The Existing Holder may receive all or part of the share consideration in the form of Common Shares
and/or Proportionate Voting Shares.
(2)
Cash consideration included in this column represents the Existing Holder’s pro rata share of the net proceeds of the Offering received
by the Company (exclusive of expenses of the Offering) assuming no exercise of the Over-Allotment Option.
(3)
Cash consideration included in this column represents the Existing Holder’s pro rata share of the net proceeds of the Over-Allotment
Option received by the Company (exclusive of expenses of the Over-Allotment Option) assuming the exercise of the Over-Allotment
Option in full.
(4)
Each such Existing Holder will receive substantially all of its pro rata share consideration in the form of Proportionate Voting Shares.
(5)
Each such Existing Holder will receive all of its pro rata share consideration in the form of Common Shares.
(6)
Current Management include six senior managers of the Company and/or its operating subsidiaries. Each such Existing Holder will
receive all of its pro rata share consideration in the form of Common Shares.
For an illustration of the Company’s ownership structure after giving effect to the Offering and the
Acquisition, see ‘‘Corporate Structure’’.
Closing Mechanics and Settlement
Upon the Closing of the Offering, the Existing Holders will receive, on a pro rata basis, (i) the share
consideration that they are entitled to receive (as set out in the table above under ‘‘No Exercise of
Over-Allotment’’), less an aggregate of share consideration equivalent to Common Shares (the ‘‘Holdback
85
Shares’’), being equal to the maximum number of Common Shares that may be issued pursuant to the exercise
of the Over-Allotment Option, and (ii) the net proceeds of the Offering (exclusive of expenses of the Offering).
In the event that the Over-Allotment is exercised, on the date of the closing of the Over-Allotment Option, the
Existing Holders will receive, on a pro rata basis, (i) up to the number of Holdback Shares as is inversely
proportional to the number of Common Shares issued upon exercise of the Over-Allotment Option, and (ii) the
net proceeds of the Over-Allotment Option (exclusive of expenses of the Over-Allotment Option). For example,
if the Over-Allotment Option is exercised in full within the prescribed period, on the date of the closing of the
Over-Allotment Option, no further share consideration will be issued to the Existing Holders, and the net
proceeds of the Over-Allotment Option will be distributed to the Existing Holders. If the Over-Allotment
Option is not exercised within the prescribed period, on the date that is 30 days from the Closing of the Offering,
all of the Holdback Shares will be issued to the Existing Holders.
Treatment of Predecessor Options
KSGI has previously granted to employees, managers and directors options to purchase ordinary shares of
KSGI (‘‘predecessor options’’) under KSGI’s equity incentive plan dated April 16, 2008 (the ‘‘Predecessor
Plan’’). The board of directors of KSGI intends to accelerate the vesting of all predecessor options outstanding
under the Predecessor Plan to be effective as of immediately prior to and contingent upon the closing of the
Acquisition.
In connection with the Acquisition, the Company will assume the Predecessor Plan (as modified, the
‘‘Rollover Plan’’) and all predecessor options outstanding will be exchanged for fully vested and exercisable
options (the ‘‘rollover options’’) to purchase Common Shares of the Company such that the fair market value of
the rollover options (determined as the ‘‘spread’’ or excess of the fair market value of a Common Share over the
exercise price of the rollover option) is no greater than the fair market value of the predecessor options so
exchanged (determined as the spread between the fair market value of an ordinary share of KSGI over the
predecessor option exercise price). See ‘‘Executive Compensation — Rollover Plan’’.
Covenants, Representations, Warranties and Conditions
The following is a summary of certain provisions of the Acquisition Agreement, which summary is not
intended to be complete. Reference is made to the Acquisition Agreement for a complete description and the
full text of its provisions. See ‘‘Material Contracts’’.
The Acquisition Agreement will contain customary representations and warranties, which will survive for a
period of eighteen months following the Closing Date (other than certain representations and warranties
identified in the Acquisition Agreement which will continue in full force and effect beyond the period specified
above), and related indemnities from KSGI and the Existing Holders in favour of the Company as to various
matters, including but not limited to, organization and status, power and due authorization, capital structure,
approvals, non-contravention, financial statements, environmental issues, conduct of business, litigation, tax
status, and, material contracts. The Acquisition Agreement will also contain representations and warranties from
the Existing Holders in favour of the Company that each owns all of their respective interests in KSGI.
The Acquisition Agreement will also contain a representation and warranty (the ‘‘Prospectus
Representation’’) from the Existing Holders, on a several basis, in favour of the Company, that this prospectus
contains full, true and plain disclosure of all material facts relating to KSGI and does not contain an untrue
statement of material fact or omit any material fact that is required to be stated or that is necessary to make a
statement not misleading in light of the circumstances in which it was made. KSGI will also make the Prospectus
Representation to the Company. The Prospectus Representation will survive for a period of three years and
30 days from the later of the Closing or from the date of closing of the Over-Allotment Option, if any. The
several obligations of the Existing Holders in respect of breaches of the Prospectus Representation will be
limited to 100% of the total cash proceeds of the Offering received by the Existing Holders. Pursuant to the
terms of the Underwriting Agreement, the Company has agreed to subordinate its indemnity right under the
Acquisition Agreement against certain Existing Holders to any indemnity and contribution rights the
Underwriters may have against the such Existing Holders, see ‘‘Plan of Distribution’’. As a result, any successful
claim by the Underwriters against the Existing Holders under the Underwriting Agreement will reduce the
86
indemnification amount available to the Company against the Existing Holders under the Acquisition
Agreement. There can be no assurance of recovery by the Company from the Existing Holders for any breach of
the representations and warranties provided by the Existing Holders in the Acquisition Agreement, as there can
be no assurance that the assets of the Existing Holders will be sufficient to satisfy such obligations. The Existing
Holders are not required to maintain any assets for this purpose. Only the Company will be entitled to bring an
action for misrepresentation or breach of contract under the Acquisition Agreement and purchasers of Common
Shares under this Prospectus will not have any contractual rights under the Acquisition Agreement.
All representations, warranties and indemnities of the Existing Holders, collectively, will be subject to an
initial deductible of $1,000,000 and claims thereafter must aggregate at least $500,000 subject to the limitations
discussed above.
As a condition to the closing of the Acquisition, the Existing Holders are required to enter into a
reimbursement agreement with the Company pursuant to which each such Existing Holders will agree to
reimburse the Company, on a pro rato basis, in the event that KSGI may be obligated to make a payment to
Nike. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Contingencies’’.
The completion of the Acquisition will be conditioned upon the completion of this Offering, the receipt of
certain consents and approvals (including the listing of the Common Shares on the TSX) and the New Credit
Facility being available to the Company’s operating subsidiaries.
DESCRIPTION OF REFINANCING AND MATERIAL INDEBTEDNESS
Overview
As of May 31, 2010, KSGI had a $142.0 million credit facility (the ‘‘Old Facility’’) with General Electric
Capital Corporation, GE Canada Finance Holding Company and certain other financial institutions
(collectively, the ‘‘Old Lenders’’). The Old Facility is comprised of a $52.0 million variable interest rate term
loan and $90.0 million revolving credit line. Approximately $50.7 million of the borrowings were used as of
December 31, 2010.
KSGI’s operating subsidiaries have issued senior subordinated promissory notes (the ‘‘Old Notes’’) in the
aggregate principal amount of $52.0 million to AEA Mezzanine Funding LLC, AEA Mezzanine (Unleveraged)
Fund LP and Partners Group Access 71, L.P. (collectively, the ‘‘Old Noteholders’’).
Upon the Closing of the Offering, we currently anticipate that we will enter into the New Credit Facility
(as defined below), which will be used to, among other things, repay the borrowings outstanding under the Old
Facility and to redeem and cancel the Old Notes, including any prepayment penalties in connection therewith.
Description of New Credit Facility
The following is a summary of certain provisions of the New Credit Facility, which summary is not intended
to be complete. Reference is made to the New Credit Facility for a complete description and the full text of its
provisions see ‘‘Material Contracts’’ for instructions on how to obtain a full text of the New Credit Facility.
General
In connection with the Closing of the Offering, the material operating subsidiaries of the Company, being
Bauer Hockey Corp. (the ‘‘Canadian Borrower’’) and Bauer Hockey, Inc. (the ‘‘U.S. Borrower’’, and together
with the Canadian Borrower, the ‘‘Borrowers’’), will enter into a senior secured credit facility with a syndicate of
financial institutions (the ‘‘New Credit Facility’’). The New Credit Facility will be comprised of a
(i) $100.0 million term loan facility, denominated in both Canadian dollars and U.S. dollars (the ‘‘Term Loan’’)
and (ii) $100.0 million Revolving Loan (the ‘‘Revolving Loan’’), denominated in both Canadian dollars and
U.S. dollars, the availability of which will be subject to meeting certain borrowing base requirements. The
Revolving Loan will include a $10.0 million letter of credit subfacility and a $5.0 million swing line loan
subfacility. In addition, the Borrowers may, under certain circumstances and subject to receipt of additional
87
commitments from existing lenders and/or new lenders, increase the size of the New Credit Facility in an
aggregate amount of up to $30.0 million.
The Term Loan and the Revolving Loan will each mature five years following the closing of the
Refinancing, which is currently anticipated to be concurrent with the Closing of the Offering. The Borrowers will
pay customary closing fees to the lenders in connection with the New Credit Facility.
Interest Rate and Fees
The interest rates per annum applicable to the loans under the New Credit Facility, will equal an applicable
margin percentage, as further described below, plus, at the Borrowers’ option, (1) the U.S. base rate or
(2) LIBOR (each as determined in accordance with the terms of the New Credit Facility).
Any portion of the outstanding principal balance under the Revolving Loan in Canadian dollars and any
portion of the Term Loan in Canadian dollars will bear interest equal to the applicable margin percentage, as
further described below, plus, at the Borrowers’ option, (1) the Canadian base rate or (2) the Bankers’
Acceptance rate (each as determined in accordance with the terms of the New Credit Facility).
The applicable margin percentages will be subject to adjustment based upon the ratio of the total debt to
EBITDA (as defined under the New Credit Facility) as follows:
Total Debt to Adjusted EBITDA
equal to or greater than 2.5x . . . . . . . . . . . . . . . . . . . . . . . . . . .
equal to or greater than 2.0x but less than 2.5x . . . . . . . . . . . . . .
less than 2.0x . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base Rate/Canadian Base Rate
LIBOR/BA Rate
2.25%
2.00%
1.75%
3.50%
3.25%
3.00%
On the last day of each calendar quarter, the Borrowers will pay a commitment fee to GE Canada Finance
Holding Company (the ‘‘Administrative Agent’’) on account of each of the lenders in respect of any unused
commitments under the Revolving Loan, in an amount equal to 0.5% per annum on the average unused daily
balance (less any outstanding letters of credit). Upon the occurrence and during the continuation of a payment
or bankruptcy event of default, and at the election of the Administrative Agent or a majority of the lenders, the
oustanding amounts under the New Credit Facility shall be subject to an additional 2% per annum of default
interest.
Amortization
Beginning with a first installment on May 31, 2011, the New Credit Facility will require scheduled quarterly
payments in the amount of 7.5% of the Term Loan per annum for each of years one to four. In year five,
payments shall consist of three quarterly payments of 1.875% of the original principal amount and a fourth and
final payment of the entire remaining unpaid balance then outstanding due on maturity, being 64.375% of
the loan.
Prepayments
In addition to regularly scheduled payments of principal of the Term Loan, the New Credit Facility will
require mandatory prepayments of the Term Loan as follows, subject to certain exceptions, baskets and
reinvestment rights:
• promptly upon receipt thereof in the amount of 100% of the net proceeds of (i) any sale or other
disposition of any assets of the Borrowers or their respective subsidiaries; (ii) any issuance of debt
securities of any holding company of the Borrowers, the Borrowers or any of their subsidiaries and/or any
other indebtedness incurred by the Borrowers or their subsidiaries after the Closing Date; and
(iii) insurance proceeds and condemnation awards to the extent not reinvested in the business; and
• 50% of Excess Cash Flow (as defined in the New Credit Facility), annually commencing on the first full
fiscal year of the Borrowers after the closing date (less voluntary prepayments), which may be reduced to
88
25% if the total debt to EBITDA (as defined under the New Credit Facility) ratio as of the end of the
applicable fiscal year is less that 2:1.
Mandatory prepayments will be applied without penalty or premium in forward order for the next eight
quarterly installments after such prepayment and thereafter pro-rata to the remaining amortization payments.
For a period of 30 consecutive days between February 1 and March 31 of each year, the Borrowers will be
required to pay down outstanding advances under the Revolving Loan to a certain maximum amount
outstanding.
Voluntary prepayments of the New Credit Facility will be allowed to be made without premium or penalty,
subject to concurrent payments of any applicable LIBOR breakage costs.
Covenants
The New Credit Facility will contain restrictive financial covenants with respect to a minimum fixed charge
coverage ratio, maximum net funded debt to EBITDA (as defined under the New Credit Facility) and maximum
capital expenditures. The New Credit Facility will also contain other affirmative covenants, negative covenants,
representations, warranties and events of default customary for credit facilities of this nature.
Permitted Acquisitions
The Borrowers will be permitted to make acquisitions with an aggregate consideration not in excess of
$25 million for any one acquisition and not in excess of $75 million for all acquisitions during the term of the
New Credit Facility, provided that all of the conditions specified in the New Credit Facility documentation for
the consummation of any such acquisition have been fully satisfied.
Guarantees and Security
The Administrative Agent, for the benefit of itself and the lenders, will have a first priority perfected
security interest in all existing and after-acquired real and personal property of the Borrowers and their
respective subsidiaries, subject to certain exceptions and materiality thresholds, and any holding company
formed to own the capital stock or equity securities of the Borrowers. The Administrative Agent will also receive
a first priority perfected pledge, for the benefit of itself and the lenders, of all the outstanding capital stock or
other equity securities of the Borrowers and each of their respective subsidiaries. Subsidiaries of the Canadian
Borrower shall guarantee the obligations of the Canadian Borrower only. The Canadian Borrower shall not
guarantee the obligations of the U.S. Borrower. Holdings and the subsidiaries of the U.S. Borrower shall
guarantee the obligations of both Borrowers, and the U.S. Borrower shall guarantee the obligations of the
Canadian Borrower.
CONSOLIDATED CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company as at November 30, 2010, both
before and after giving effect to the Offering, the Acquisition and the Refinancing. See ‘‘The Acquisition’’ and
‘‘Description of Refinancing and Material Indebtedness’’.
This table is presented and should be read in conjunction with our consolidated financial statements and
the related notes included elsewhere in this prospectus and with the information under ‘‘Selected Consolidated
89
Financial Information’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results
of Operations’’.
Outstanding as of
November 30, 2010(1)
Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Loan (new) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving Loan (new) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1
—
—
1
Outstanding after
giving effect to the Offering,
the Acquisition and
the Refinancing
(dollars in millions)
$ (2)
$100.0
$ $ (1)
Assumes that the Company was incorporated on November 30, 2010.
(2)
Assumes the conversion of all Proportionate Voting Shares to Common Shares on the basis of 1,000 Common Shares for one
Proportionate Voting Share.
OPTIONS TO PURCHASE SECURITIES
KSGI has previously granted to employees, senior officers and directors predecessor options under the
Predecessor Plan. In connection with the Acquisition, the Company will assume the Predecessor Plan
(as modified, the Rollover Plan) and outstanding predecessor options. Predecessor options will be exchanged for
an aggregate of fully vested and exercisable rollover options, subject to the terms of the Rollover Plan,
such that spread value of the rollover options is no greater than the spread value of the predecessor options. See
‘‘Executive Compensation — The Rollover Plan’’.
Upon the Closing of the Offering, the Company will grant an aggregate of options to purchase
Common Shares (‘‘new options’’) under a new stock option plan (the ‘‘2011 Plan’’) to certain employees, senior
officers and directors. See ‘‘Executive Compensation — The 2011 Plan’’.
The following table shows, as at , 2011, the aggregate number of rollover options and new options that
are anticipated to be outstanding as at the Closing of the Offering:
Category
All executive officers and past
executive officers, as a group
(9 in total) . . . . . . . . . . . . . .
All directors and past directors
who are not also executive
officers, as a group
(2 in total) . . . . . . . . . . . . . .
All other employees or past
employees, as a group
(25 in total)(3) . . . . . . . . . . . .
Number of
rollover options
Number of
new options(1)
Exercise
Price(Cdn$)(2)
—
—
$
$
April 2018 to November 2020
—
—
$
$
April 2018 to November 2020
—
—
$
$
April 2018 to November 2020
Expiration Date
(1)
Options to be granted on the date that the Board of Directors approves the final prospectus that qualifies the Offering. Such new
options will have an exercise price equal to the Offering Price.
(2)
Represents the weighted average exercise price of all outstanding options to purchase Common Shares, whether vested or unvested.
(3)
The Company currently anticipates that the group of holders of rollover options and/or new options will be approximately 25 upon the
Closing of the Offering.
90
PRIOR SALES
The only issuance of securities by the Company prior to the date of this prospectus was the issuance of one
Common Share for $1. This Common Share will be cancelled upon the Closing of the Offering for no
consideration.
KSGI has not issued any ordinary shares, or any securities convertible into or exchangeable for ordinary
shares, in the 12 months preceding the date of this prospectus, other than:
• on June 4, 2010, such number of predecessor options under the Predecessor Plan that is equivalent to
rollover options at an exercise price of Cdn$ ; and
• on November 5, 2010, such number of predecessor options under the Predecessor Plan that is equivalent
to rollover options at an exercise price of Cdn$ .
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial ownership of securities of the Company
as anticipated immediately after the completion of the Offering and the Acquisition (assuming the issuance of
all share consideration on the date of Closing and assuming no exercise of the Over-Allotment Option) by each
person or entity that will own beneficially, directly or indirectly, more than 10% of any class or series of our
voting securities.
Number
Name
Type of Ownership
Kohlberg Funds(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct
Common
Shares
(2)
Percentage of
Equity and Voting
Interest after the
Offering and the
Acquisition
%(3)(4)
(1)
The Kohlberg Funds include Kohlberg TE Investors VI, LP, Kohlberg Investors VI, LP, Kohlberg Partners VI, LP, and KOCO
Investors VI, LP, each of which is advised or managed by Kohlberg. Investment and voting decisions at Kohlberg are made jointly by
individuals who are partners of Kohlberg, and therefore no individual member of Kohlberg is the beneficial owner of the securities,
except with respect to the shares in which such member holds a pecuniary interest. Each of Mr. Anderson, Mr. Frieder,
Mr. Mardirossian and Mr. Woodward is a partner of Kohlberg entitled to participate in investment and voting decisions and therefore
may be deemed to share voting and dispositive power with respect to the shares held by Kohlberg. Mr. Anderson, Mr. Frieder,
Mr. Mardirossian and Mr. Woodward each disclaim any beneficial ownership of any such shares, except to the extent of his pecuniary
interest therein.
(2)
Number of Common Shares included in this table assumes the conversion of all Proportionate Voting Shares to Common Shares on
the basis of 1,000 Common Shares for one Proportionate Voting Share. It is anticipated that substantially all of the Equity Shares held
by such funds will be held in the form of Proportionate Voting Shares.
(3)
(4)
% on a fully-diluted basis.
If the Over-Allotment Option is exercised in full, such funds will own an aggregate of an equivalent number of Common Shares
(assuming the conversion of all Proportionate Voting Shares to Common Shares on the basis of 1,000 Common Shares for one
Proportionate Voting Share), representing a % equity and voting interest in the Company ( % on a fully-diluted basis).
CERTAIN SECURITYHOLDERS AGREEMENTS
In connection with the acquisition of the Bauer Business from Nike, the Existing Holders entered into a
securityholders agreement (the ‘‘KSGI Securityholders Agreement’’) and a registration rights agreement
(the ‘‘KSGI Registration Rights Agreement’’) in respect of KSGI.
In connection with the Offering, each of the KSGI Securityholders Agreement and the KSGI Registration
Rights Agreement will be terminated. Concurrently with the Offering, the Existing Holders (including
management) and the Company will enter into various agreements governing and dealing with their shares and
providing rights to certain holders.
The following are summaries of certain provisions of agreements referred to below, which summaries are
not intended to be complete. Reference is made to the Nomination Rights Agreement, the Registration Rights
91
Agreement and the Voting Agreement for a complete description and the full text of its provisions. See
‘‘Material Contracts’’.
Nomination Rights Agreement
The Kohlberg Funds and the Company will enter into a nomination rights agreement (the ‘‘Nomination
Rights Agreement’’) in connection with the Closing of the Offering, pursuant to which the Company will
covenant to take all permissible corporate action such that the Board of Directors will consist of a total of nine
directors, with five directors initially nominated by the Kohlberg Funds. For so long as the Kohlberg Funds
beneficially own a specified percentage of the combined voting power of all Equity Shares, the Kohlberg Funds
will be entitled to nominate for election or appointment to the Board of Directors a specified number of the
Company’s directors, as set out in the table below.
Percentage of the voting and equity power of all of the Equity Shares
Greater than or equal to 50% . . . . . .
Less than 50% but not less than 40%
Less than 40% but not less than 30%
Less than 30% but not less than 20%
Less than 20% but not less than 10%
Less than 10% . . . . . . . . . . . . . . . . .
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Number of Directors
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5/9
4/9
3/9
2/9
1/9
None
Voting Agreement
In connection with the Closing of the Offering, AEA Mezzanine Fund LP, AEA Mezzanine (Unleveraged)
Fund LP, Partners Group Access 72, L.P., GE Capital Equity Holdings, Inc. and the Company will enter into a
voting agreement (the ‘‘Voting Agreement’’) pursuant to which the parties will agree, for so long as they or any
of their affiliates own Equity Shares, to vote in favour of the Company’s slate of directors nominated for election
or appointment to the Board of Directors.
Registration Rights Agreement
The Existing Holders and the Company will enter into a registration rights agreement (the ‘‘Registration
Rights Agreement’’) in connection with the Closing of the Offering, pursuant to which the Company will provide
for demand registration rights in favour of the Kohlberg Investors (or their permitted assignees) that enable
them to require the Company to qualify by prospectus all or a portion of its Common Shares, including Common
Shares issuable upon conversion of its Proportionate Voting Shares, held by them for a distribution to the public
in Canada, provided such demand will result in a minimum offering size of $10 million. In accordance with the
terms of the Registration Rights Agreement, the Kohlberg Investors will be limited to participate on an
aggregate basis in three demand registrations in any 12-month period, commencing 180 days after Closing. The
Company is entitled to defer, for valid business reasons, any such demand for a period of up to 90 days in certain
circumstances.
The Registration Rights Agreement will also provide the Existing Holders with incidental, or piggy-back,
registration rights. Where the Company proposes to file a preliminary prospectus with respect to a distribution
of Common Shares in Canada, the Existing Holders will have the right to request that all or a portion of their
Common Shares, including Common Shares issuable upon conversion of its Proportionate Voting Shares, be
included as a part of such distribution, subject to certain limitations. In addition, where the Kohlberg Investors
have made a demand registration, the other Existing Holders will have a piggy-back registration right, subject to
certain limitations.
Subject to the minimum offering size and the restrictions described above, the Kohlberg Investors may
make an unlimited number of demand registrations for so long as the Kohlberg Investors, in the aggregate,
beneficially own more than 10% of the outstanding Equity Shares representing more than 10% of the combined
voting power of all Equity Shares. The Existing Holders (other than the Kohlberg Investors) will continue to
have piggy-back registration rights for so long as the Kohlberg Investors have demand registration rights under
the Registration Rights Agreement.
92
The Company will pay all distribution expenses in connection with all demand registrations and piggy-back
registrations, and all expenses incurred by the Existing Holders in connection therewith, other than underwriting
fees, discounts and commissions in respect of the Existing Holders’ Common Shares sold pursuant to any
registration, which will be for the account of the Existing Holders.
Management Lock-up
In connection with the Closing of the Offering, Management Shareholders will enter into lock-up
agreements with the Company (‘‘Management Lock-up Agreements’’). Under the terms of the Management
Lock-up Agreements, subject to certain exemptions, Common Shares, including any Common Shares issuable
pursuant to the exercise of rollover options, beneficially owned by Management Shareholders, other than
Common Shares purchased on or following the Closing or Common Shares issued pursuant to options granted
under the 2011 Plan, (‘‘Locked-up Securities’’) will be subject to a restriction on transfer for a period of
24 months following the Closing.
During the 24 months following the Closing, Management Shareholders will only be permitted to transfer
Locked-up Securities beneficially held by each Management Shareholder as follows:
(a) no transfers of Locked-up Securities within the first 180 days following Closing (the ‘‘Blackout
Period’’);
(b) up to 15% of Locked-up Securities (calculated on a fully-diluted basis) (the ‘‘Initial Limit’’) in the first
six month period following the Blackout Period; and
(c) up to an additional 15% of the Locked-up Securities (calculated on a fully-diluted basis) in the
subsequent 12 month period, plus any unused Initial Limit,
provided, that no more than 15% of the Locked-up Securities held by a Management Shareholder may be
transferred in any one fiscal quarter, and, subject to the exercise of a piggy-back registration right. See ‘‘Certain
Securityholders Agreements — Registration Rights Agreement’’.
In addition, the Management Lock-up Agreements will provide that, if the employment of a Management
Shareholder is terminated at any time for cause or if a Management Shareholder has violated the terms of any
confidentiality, non-competition or non-solicitation covenant or other agreement for the benefit of the Company
or its affiliates, within the 24 months following Closing, the Company will have an assignable right to purchase
all or any portion of the Locked-up Securities beneficially held by such Management Shareholder at the lower of
the cost or the market value of the Locked-up Securities held by such Management Shareholder.
93
MANAGEMENT
The following table sets out, for each of our directors and executive officers, the person’s name, province or
state and country of residence, positions with us or our operating subsidiaries, as applicable, principal
occupation during the five preceding years and, if a director, the date on which the person became a director.
Our directors are expected to hold office until our next meeting of shareholders. Our directors are elected
annually and, unless re-elected, retire from office at the end of the next annual general meeting of shareholders.
As a group, the directors and executive officers will beneficially own, or control or direct, directly or indirectly,
an equivalent number of Common Shares (assuming the conversion of all Proportionate Voting Shares to
Common Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share), representing a
% equity and voting interest in the Company ( % on a fully diluted basis), assuming no exercise of
the Over-Allotment Option.
Directors and Executive Officers
Name and Province or
State and Country of Residence
Position(s)/Title
Since(1)
Principal Occupation
for Past Five Years
CHRIS ANDERSON(2)(3) . . . . . . .
New York, USA
Director
2008
Partner, Kohlberg.
KEVIN DAVIS . . . . . . . . . . . . .
New Hampshire, USA
Director, President and
Chief Executive Officer
2008
CEO, Bauer; Chief Operating Officer,
Bauer; Chief Financial Officer, Bauer.
RICHARD W. FRANK . . . . . . . .
Wisconsin, USA
Director
2008
Operating Partner, Kohlberg; CEO,
Invisible Technologies Inc.
SAMUEL P. FRIEDER(2) . . . . . .
New York, USA
Director
2008
Managing Partner, Kohlberg.
SHANT MARDIROSSIAN(4) . . . . .
New York, USA
Director
2008
Partner and CFO, Kohlberg.
BOB NICHOLSON(2)(4) . . . . . . . .
British Columbia, Canada
Director
—
W. GRAEME ROUSTAN . . . . . .
Florida, USA
Director (Chairman)
GORDON H. WOODWARD(3) . . .
New York, USA
Director
PAUL DACHSTEINER . . . . . . . .
New Hampshire, USA
Vice President,
Information Systems
N/A
VP, Bauer; Chief Information Officer,
Cole Haan; Chief Information Officer,
Nike Bauer.
JOHN GAGLIARDI . . . . . . . . . .
New York, USA
President and Chief
Executive Officer,
Maverik Lacrosse
N/A
President and Founder, Maverik Lacrosse.
PAUL GIBSON . . . . . . . . . . . .
New Hampshire, USA
Executive Vice President,
Product Creation and
Supply Chain
N/A
EVP, Bauer; SVP, Product Creation,
Bauer; SVP, Global Manufacturing and
Sourcing, Nike Bauer.
EDWARD KINNALY . . . . . . . . .
New Hampshire, USA
Executive Vice President,
Global Commerce
N/A
EVP, Bauer; SVP, General Manager,
Bauer; General Manager, Ice Hockey,
Bauer.
TROY MOHNS . . . . . . . . . . . .
New Hampshire, USA
Vice President, Category
Management
N/A
VP, Bauer; VP of Business Development,
Bauer; VP of Business Development and
Strategic Planning, Nike Bauer.
2008
—
94
President and CEO of Hockey Canada.
Chairman and Owner, Roustan Inc.,
Chairman and CEO, York Live Inc.
Partner and CIO, Kohlberg.
Name and Province or
State and Country of Residence
Position(s)/Title
MARY PICARD . . . . . . . . . . . .
New Hampshire, USA
Vice President, Global
Human Resources
N/A
VP, Bauer; Senior Business Partner, High
Liner Foods; Director, Enterasys
Networks; Director, Lindt & Sprungli
(USA).
AMIR ROSENTHAL . . . . . . . . .
New Hampshire, USA
Chief Financial Officer
N/A
CFO, Bauer; VP, CFO, General Counsel
and Secretary, Katy Industries, Inc.
MATT SMITH . . . . . . . . . . . . .
New Hampshire, USA
Vice President, Global
Marketing
N/A
VP, Bauer; Marketing Director, NA
Female Shaving, Gillette/Procter &
Gamble; Brand Development Manager,
Unilever Home and Personal Care.
MICHAEL J. WALL . . . . . . . . .
Massachusetts, USA
Vice President and
General Counsel
N/A
VP and GC, Bauer; Chief Legal Officer,
TD Garden and Boston Bruins.
Since(1)
Principal Occupation
for Past Five Years
(1)
This column reflects the date of appointment of such individual as a director of KSGI, and as of the date of this prospectus, only
Mr. Anderson, Mr. Mardirossian and Mr. Davis have been appointed as directors of the Company. The other individuals designated as
directors are not currently members of the Board of Directors of the Company. Each such individual has agreed to become a member
of the Board of Directors and it is expected that such individuals will be appointed to the Board of Directors on or prior to the Closing
of the Offering. As such individuals are not members of the Board of Directors at the time of this prospectus, the Company does not
believe any of such individuals has any liability for the contents of this prospectus in such capacity under the applicable securities laws
of the provinces of Canada.
(2)
Member of the Compensation Committee.
(3)
Member of the Corporate Governance and Nominating Committee.
(4)
Member of the Audit Committee.
On or promptly following the Closing of the Offering, an additional director who is independent will be
appointed to the Board of Directors and become a member of the Audit Committee and the Corporate
Governance and Nominating Committee. See ‘‘Corporate Governance’’.
Biographies
The following are brief profiles of the executive officers and directors of the Company, including a
description of each individual’s principal occupation within the past five years.
Non-Executive Directors
Christopher W. Anderson, Director
Christopher Anderson has been a member of KSGI’s board of directors since April 2008. Mr. Anderson is a
Partner of Kohlberg, which he joined in 1998. He is a member of the board of directors for Chronos Life Group,
Katy Industries, Inc., Phillips Plastics Corporation, Niagara Corporation and Thomas Nelson, Inc. Mr. Anderson
received a Bachelor of Arts from Princeton University.
Richard W. Frank, Director
Richard Frank has been a member of KSGI’s board of directors since April 2008. Mr. Frank is an Operating
Partner of Kohlberg, which he has been affiliated with since 2003. Prior to joining Kohlberg, he served as an
operating executive with Allied Capital, and was formerly the Chairman and CEO of Evenflo, a baby products
company. Earlier, he was President of Bayer AG’s $800 million U.S. Consumer Health Care business and held
marketing roles at Helene Curtis and Procter & Gamble. Mr. Frank previously served as the Chief Executive
Officer of Invisible Technologies, a Kohlberg portfolio company manufacturing dog training products under the
Innotek and Invisible Fence brand names. He is currently the Chairman of SVP Holdings Ltd. Mr. Frank
received a Bachelor of Science from Yale University and a Master of Business Administration from the
University of Chicago. He served as a captain in the U.S. Air Force and is a decorated Vietnam veteran.
95
Samuel P. Frieder, Director
Samuel Frieder has been a member of KSGI’s board of directors since April 2008. Mr. Frieder is the
Managing Partner of Kohlberg, which he joined in 1989. He is a member of the board of directors of AGY
Holdings Corporation, BioScrip, Inc., Centerplate, Inc., Central Parking Corporation, Chronos Life Group,
Concrete Technologies Worldwide, Inc., The Hoffmaster Group, Inc., Katy Industries, Inc., Kellermeyer
Building Services L.L.C., Kohlberg Capital Corporation, Niagara Corporation, Nielsen & Bainbridge, Inc.,
Packaging Dynamics Corporation, Phillips Plastics Corporation, Pittsburgh Glass Works L.L.C., Stanadyne
Corporation, SVP Holdings, Ltd., Thomas Nelson, Inc. and Trico Products, Inc. Mr. Frieder received a Bachelor
of Arts from Harvard College.
Shant Mardirossian, Director
Shant Mardirossian has been a member of KSGI’s board of directors since April 2008. Mr. Mardirossian is
a Partner and the Chief Financial Officer of Kohlberg, which he joined in 1996. He is a member of the board of
directors for Katy Industries, Inc. and Nielsen & Bainbridge, Inc. Mr. Mardirossian received a Bachelor of
Business Administration and a Master of Business Administration from Pace University. He is a Certified Public
Accountant.
Bob Nicholson, Director
Bob Nicholson will join the Company’s Board of Directors upon the Closing of the Offering. Mr. Nicholson
has been President and Chief Executive Officer of Hockey Canada since 1998. As part of his responsibilities,
Mr. Nicholson oversees corporate sales and marketing, licensing, insurance and regulations, hockey
development programs both nationally and internationally, high performance programs and communications.
He also manages and oversees all operations for competitions that Canada participates in internationally. In
2004, Mr. Nicholson was inducted into the B.C. Hockey Hall of Fame. From 1992 to 1998, Mr. Nicholson was a
senior vice-president of the Canadian Hockey Association.
W. Graeme Roustan, Director
W. Graeme Roustan has been a member of KSGI’s board of directors since April 2008 and during this time
has served as its Chairman. Since 2003, Mr. Roustan has been the Chairman and owner of Roustan Inc., a
U.S.-based corporation which holds numerous equity investments primarily in the arena industry with existing
business dealings in Canada, the United States, the Middle East, Europe and the CIS. Mr. Roustan is also the
Chairman and CEO of York Live Inc., a Canadian arena development company based in Toronto. Mr. Roustan
attended Concordia University in Montreal, Quebec.
Gordon H. Woodward, Director
Gordon Woodward will join the Company’s Board of Directors upon the Closing of the Offering.
Mr. Woodward is a Partner and the Chief Investment Officer of Kohlberg, which he joined in 1996. He is a
member of the board of directors of BioScrip, Inc., Centerplate, Inc., Central Parking Corporation, Chronos
Life Group, The Hoffmaster Group, Nielsen & Bainbridge, Inc., Packaging Dynamics Corporation, Phillips
Plastics Corporation, Stanadyne Corporation and Thomas Nelson, Inc. Mr. Woodward received a Bachelor of
Arts from Harvard College.
Executive Officers Who Also Serve as Directors
Kevin Davis, President, Chief Executive Officer and Director
Kevin Davis is the President and Chief Executive Officer of the Company and has acted in this capacity
since 2008. Mr. Davis joined the Company in 2002 and has held positions of increasing responsibility over that
time, most recently as the Chief Operating Officer from 2006-2008 and Chief Financial Officer from 2004-2006.
Prior to joining the Company, Mr. Davis held senior finance positions in the medical device industry for Pathway
Medical Technologies and Boston Scientific Corporation and in consumer products with The Gillette Company.
Mr. Davis has Bachelor of Science degrees from the University of Massachusetts and earned Certified
Public Accountant (CPA) and Certified Management Accountant (CMA) designations while employed at
Ernst & Young.
96
Executive Officers Who Do Not Serve as Directors
Paul Dachsteiner, Vice President of Information Services
Paul Dachsteiner is the Vice President of Information Services of the Company. Mr. Dachsteiner began in
this role in 2001 with Nike Bauer. Between 2001 and 2006, Mr. Dachsteiner worked closely with Nike to leverage
shared services and deliver best-in-class services while reducing operating costs. In 2006, Mr. Dachsteiner left
the organization for two years and took on the role as Chief Information Officer at the Nike affiliate Cole Haan.
During that time, Mr. Dachsteiner built shared services models between Nike and Cole Haan. In addition, he
supported their global retail stores while leading the transition of their point of sale systems and new store
openings. In 2008, Mr. Dachsteiner returned to Bauer as the Vice President of Information Services where he
helped transition the company from an operating subsidiary of Nike to a stand-alone company. In 2010, Bauer
introduced the first automatic replenishment program to the hockey industry.
Mr. Dachsteiner has a Bachelor of Science degree in Management Information Systems from
New Hampshire College.
John Gagliardi, President and Chief Executive Officer of Maverik Lacrosse
John Gagliardi is President, Chief Executive Officer and Founder of Maverik. Mr. Gagliardi founded
Maverik in 2005. Prior to starting Maverik he held roles at Salomon Smith Barney in New York City and was one
of the founders of Blue Buffalo Dog Food Company in Wilton, CT. Mr. Gagliardi focuses on marketing, sales
and strategic planning at Maverik.
Mr. Gagliardi received a Bachelor of Arts from Johns Hopkins University. Mr. Gagliardi was a two time
All-American lacrosse player at Johns Hopkins and All-World defenseman for Team USA. He also played
professional indoor and outdoor lacrosse for 9 years.
Paul Gibson, Executive Vice President of Product Creation and Supply Chain
Paul Gibson is the Executive Vice President, Product Creation and Supply Chain. Mr. Gibson has held this
position since 2008. Mr. Gibson is responsible for leading the Company’s Research, Design and Development,
Supply Chain and Mergers and Acquisitions organizations. From 2006 to 2010, Mr. Gibson was also responsible
for Category Management. From 2001 to 2006, he held the position of Vice President Global Manufacturing and
Sourcing which included at various times responsibility for Research, Design and Development, Logistics and
Distribution, Supply Planning, Quality and Nike Bauer’s Taiwan Production and Development Operations. From
2006 to 2008, Mr. Gibson was the Senior Vice President of Product Creation. During his prior roles with Nike
Bauer spanning over 10 years, he held positions in manufacturing, sourcing and supply chain. Paul has extensive
relationships with suppliers throughout Asia and led the transition from internal manufacturing at Bauer to
outsourcing products in Asia including setting up Bauer’s Asia Production and Development Operations located
in Taichung, Taiwan.
Edward Kinnaly, Executive Vice President of Global Commerce
Edward Kinnaly is the Executive Vice President of Global Commerce. Mr. Kinnaly has held this position
since 2008. From 2000 to 2003, he held the role of General Manager — Europe for Bauer Hockey. From 2003 to
2006, Mr. Kinnaly was VP of Global Sales. From 2006 to 2008, Mr. Kinnaly was the Senior Vice President and
General Manager of ice hockey. Mr. Kinnaly spent the majority of his career at Nike with positions in product
management, sales, brand management and general management. His 20 years of experience at Nike includes
international assignments in the Netherlands and Germany. Mr. Kinnaly began his career at PepsiCo in 1987.
Mr. Kinnaly has a Bachelor of Science in Marketing from Babson College.
Troy Mohns, Vice President of Category Management
Troy Mohns has held the position of Vice President, Category Management since January 2010. In his
previous role as Vice President, Business Development, Mr. Mohns led the acquisition and integration of the
Company’s fourth largest competitor and managed the separation from Nike including the creation of the
current Bauer brand image and positioning. During his prior role with Nike Bauer spanning a period of 12 years,
97
Mr. Mohns held roles in regional management, brand marketing, product marketing and strategic planning. He
continues in an advisory role on mergers and acquisitions and other strategic opportunities.
Mr. Mohns has a Bachelor of Arts in Economics from Colgate University. Mr. Mohns was also a varsity
hockey player for four years and was drafted by the Los Angeles Kings after his freshman year.
Mary Picard, Vice President of Global Human Resources
Mary Picard is the Vice President of Global Human Resources and has held this position since 2008. Prior
to joining Bauer, Ms. Picard held various Human Resource leadership roles in the consumer packaged goods
industry, including for High Liner Foods and Lindt and Sprungli (USA) where she led U.S. human resources
operational functions for both companies. Previously, Ms. Picard worked for Enterasys Networks, a start-up
enterprise based networks systems company, where she supported global marketing and engineering
organizations. Ms. Picard began her career in the United Technologies Corporation HR Leadership
Development Program and provided human resources leadership support in the unionized manufacturing
headquarters of Pratt and Whitney, Power Division.
Ms. Picard has a Bachelor of Arts degree from the University of Massachusetts and a Master of Arts degree
in Psychology and Organizational Behavior from Boston College.
Amir Rosenthal, Chief Financial Officer
Amir Rosenthal is the Chief Financial Officer of the Company. Mr. Rosenthal has acted in this capacity
since 2008. From 2001 to 2008, Mr. Rosenthal was the Vice President, Chief Financial Officer, General Counsel
and Secretary of Katy Industries, Inc. From 1989 to 2001, Mr. Rosenthal held various positions at Timex Group
Limited, including Treasurer, Senior Counsel, and Counsel. Mr. Rosenthal was also Chairman of Timex Watches
Limited (New Delhi, India). Mr. Rosenthal began his career with LeBoeuf, Lamb, Leiby and MacRae as an
associate attorney in 1986. Mr. Rosenthal is a Director of Sturm, Ruger & Co., Inc., a NYSE-listed company that
manufactures high-quality firearms for the commercial sporting market.
Mr. Rosenthal has a Bachelor of Arts from Dartmouth College, a Doctorate of Jurisprudence from
New York University School of Law, and a Master of Science in Finance from Rensselaer Polytechnic Institute.
Matt Smith, Vice President of Global Marketing
Matt Smith is the Vice President of Global Marketing. Prior to joining Bauer in 2008, Mr. Smith spent
12 years building brand and creating marketing plans at E&J Gallo Winery, Unilever Home and Personal Care,
and Gillette/Procter & Gamble. In his most recent role at Procter & Gamble, Mr. Smith was responsible for
running the North American Female Shaving business and growing the Venus brand. Mr. Smith has also worked
in a marketing role for the National Football League (1996-1997) and Uno Restaurants.
Mr. Smith has a Bachelor of Arts degree in Business from the University of New Hampshire and a Masters
in Business Administration from Vanderbilt University.
Michael J. Wall, Vice President and General Counsel
Michael J. Wall is Vice President and General Counsel of the Company. Mr. Wall has held this position
since 2008. Prior to joining Bauer, he held the position of Chief Legal Officer of the TD Garden and the Boston
Bruins. During his 13 years with the Garden and the Boston Bruins organizations, he was the sole in-house
attorney, providing legal support, advice and counsel to the executive management of the TD Garden, the
Boston Bruins, Massachusetts Sportservice (the concessionaire for the TD Garden), New England Sportservice
(the concessionaire for the Comcast Center) and H.A. Sportservice (the concessionaire for the Agganis Arena at
Boston University). He served as a member of the board of directors of the NHL Pension Society during this
time and continues to serve on the board of directors of The Boston Bruins Charitable Foundation. Before
joining the TD Garden and Boston Bruins executive teams in 1995, he was an attorney with two law firms in
Boston at Hinckley, Allen & Snyder and at Goodwin Procter.
Mr. Wall has a Bachelor of Arts degree from The College of the Holy Cross and a Doctorate of
Jurisprudence from Boston College Law School.
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Cease Trade Orders or Bankruptcies
Other than as described below, none of our directors or executive officers:
(a) is, as at the date of this prospectus, or has been, within 10 years before the date of this prospectus, a
director, CEO or CFO of any company (including us) that,
(i) was subject to an order that was issued while the director or executive officer was acting in the
capacity as director, CEO or CFO; or
(ii) was subject to an order that was issued after the director or executive officer ceased to be a
director, CEO or CFO and which resulted from an event that occurred while that person was
acting in the capacity as a director, CEO or CFO;
(b) and no shareholder holding a sufficient number of securities to affect materially the control of our
Company is, as at the date of this prospectus, or has been within 10 years before the date of this
prospectus, a director or executive officer of any company (including us) that, while that person was
acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt,
made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or
instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver
manager or trustee appointed to hold its assets; or
(c) and no shareholder holding a sufficient number of securities to affect materially the control of our
Company has, within the 10 years before the date of this prospectus, become bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted
any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or
trustee appointed to hold the assets of the director, executive officer or shareholder.
For the purposes of the paragraphs above, ‘‘order’’ means: (i) a cease trade order; (ii) an order similar to a
cease trade order; or (iii) an order that denied the relevant company access to any exemption under securities
legislation that was in effect for a period of more than 30 consecutive days.
Mr. Samuel Frieder was a director of: (i) Printing Arts America (‘‘PAA’’) when it filed for bankruptcy under
Chapter 7 of the United States Bankruptcy Code (‘‘US Code’’) in the US Bankruptcy Court for the District of
Delaware in November 2001 (PAA was subsequently turned over to lenders in December 2001), (ii) Southwest
Supermarkets, LLC when it, and Southwest Holdings, LLC filed for bankruptcy protection under Chapter 11 of
the US Code in the US Bankruptcy Court for the District of Arizona in November 2001 (the bankruptcy was
converted into a Chapter 7 proceeding in September 2004), (iii) Color Spot Nurseries, Inc. when it completed a
substantial restructuring of its debt through an arrangement with its creditors in 2001 and 2002 (after which
Mr. Frieder resigned from the board), (iv) Camber Companies, LLC, when it completed an orderly liquidation
of its assets during 2004, and (v) Holley Performance Products, Inc. when the board of directors approved a plan
to file a voluntary petition under Chapter 11 of the US Code in December 2007 in the US Bankruptcy Court for
the District of Delaware (the plan was subsequently approved in March 2008).
Mr. Shant Mardirossian and Mr. Frieder were both directors of (i) Lab Ventures, Inc., and (ii) International
Cancer Screening Labs (‘‘International Labs’’), a subsidiary of Lab Ventures, Inc. In December 2001, Lab
Ventures, Inc., in conjunction with its subsidiary, filed a petition for bankruptcy under Chapter 7 of the US Code
in the US Bankruptcy Court for the Western District of Texas, San Antonio Division. The final liquidation of
Lab Ventures, Inc. was completed in March 2003 and International Labs’ final liquidation was subsequently
completed in February 2005.
Penalties or Sanctions
No director or executive officer of the Company or shareholder holding sufficient securities of the
Company to affect materially the control of the Company has:
(a) been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a
securities regulatory authority or has entered into a settlement agreement with a securities regulatory
authority; or
(b) been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely
be considered important to a reasonable investor making an investment decision.
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Conflicts of Interest
To the best of our knowledge there are no known existing or potential conflicts of interest among us and our
directors, officers or other members of management as a result of their outside business interests except that
certain of our directors and officers serve as directors and officers of other companies, and therefore it is
possible that a conflict may arise between their duties to us and their duties as a director or officer of such other
companies. See ‘‘Interest of Management and Others in Material Transactions’’ and ‘‘Management — Directors
and Executive Officers’’.
Indemnification and Insurance
The Company will implement a $ million director and officer insurance program to be effective on
Closing. In addition, following the completion of the Offering, the Company will enter into indemnification
agreements with each of its directors and officers. The indemnification agreements will generally require that
the Company indemnify and hold the indemnitees harmless to the greatest extent permitted by law for liabilities
arising out of the indemnitees’ service to the Company as directors and officers, provided that the indemnitees
acted honestly and in good faith and in a manner the indemnitees reasonably believed to be in or not opposed to
the Company’s best interests and, with respect to criminal and administrative actions or proceedings that are
enforced by monetary penalty, the indemnitees had no reasonable grounds to believe that his or her conduct was
unlawful. The indemnification agreements also provide for the advancement of defence expenses to the
indemnitees by the Company.
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EXECUTIVE COMPENSATION
Introduction
The following discussion describes the significant elements of our executive compensation program, with
particular emphasis on the process for determining compensation payable to the CEO, the CFO, and, other than
the CEO and the CFO, each of the three most highly compensated executive officers, or the three most highly
compensated individuals acting in a similar capacity (collectively, the ‘‘Named Executive Officers’’ or ‘‘NEOs’’).
The NEOs are:
• Kevin Davis, President and Chief Executive Officer;
• Amir Rosenthal, Chief Financial Officer;
• Paul Gibson, Executive Vice President of Product Creation and Supply Chain;
• Edward Kinnaly, Executive Vice President of Global Commerce; and
• Michael J. Wall, Vice President and General Counsel.
Overview
Based on recommendations made by the Compensation Committee, our Board of Directors makes
decisions regarding salaries, annual bonuses and equity incentive compensation for our executive officers, and
approves corporate goals and objectives relevant to the compensation of the CEO and our other executive
officers. Our Board of Directors solicits input from our CEO and the Compensation Committee regarding the
performance of the Company’s other executive officers. Finally, the Board of Directors also administers our
incentive compensation and benefit plans with the assistance of the Compensation Committee.
Our Compensation Objectives
Our compensation practices are designed to retain, motivate and reward our executive officers for their
performance and contribution to our long-term success. Our Board of Directors seeks to compensate our
executive officers by combining short- and long-term cash and equity incentives. It also seeks to reward the
achievement of corporate and individual performance objectives, and to align executive officers’ incentives with
shareholder value creation. The Board of Directors seeks to set company performance goals that reach across all
business areas.
Compensation Components
Our compensation consists primarily of three elements: base salary, annual bonus and long-term equity
incentives. We describe each element of compensation in more detail below.
Base Salary
Base salaries for our executive officers are established based on the scope of their responsibilities and their
prior relevant experience, taking into account competitive market compensation paid by other companies in our
industry for similar positions and the overall market demand for such executives at the time of hire. An
executive officer’s base salary is also determined by reviewing the executive officer’s other compensation to
ensure that the executive officer’s total compensation is in line with our overall compensation philosophy.
Base salaries are reviewed annually and increased for merit reasons, based on the executive officers’ success
in meeting or exceeding individual objectives. Additionally, we adjust base salaries as warranted throughout the
year for promotions or other changes in the scope or breadth of an executive officer’s role or responsibilities.
Annual Bonus
Our compensation program includes eligibility for an annual incentive cash bonus. The Board of Directors
assesses the level of the executive officer’s achievement of meeting company goals, as well as that executive
officer’s contribution towards our company-wide goals. The amount of the cash bonus depends primarily on the
level of achievement of the company-wide performance goals, with a target bonus generally set as a percentage
of base salary and based on profitability measures.
Starting with Fiscal 2009, the Board of Directors adopted a bonus plan, the purpose of which is to provide
eligible employees (including the NEOs) a bonus payment based on both personal and corporate performance,
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and determined upon the Company reaching a certain level of performance as measured by profitability.
Personal performance is evaluated by the Board of Directors or anyone to which such powers are delegated by
the Board of Directors.
The Company does not publicly disclose the specific corporate objectives set under the current bonus plan
because disclosure of such information, which reflects our confidential business plans, could result in
competitive harm. Our corporate objectives are designed to be stretch objectives in order to drive sustainable
growth and performance, and there is a risk that payments will not be made at all or will be made at less than
100% of the bonus target. The targets are set such that they are attainable only with significant effort while at
the same time still making them achievable.
Long-Term Equity Incentives
We believe that equity-based awards allow us to reward executive officers for their sustained contributions
to the Company. We also believe that equity awards reward continued employment by an executive officer, with
an associated benefit to us of employee continuity and retention. The Board of Directors believes that stock
options provide management with a strong link to long-term corporate performance and the creation of
shareholder value. The 2011 Plan allows us the opportunity to grant options to purchase Common Shares. The
Board of Directors does not award options according to a prescribed formula or target. Instead, we take into
account the individual’s position, scope of responsibility, ability to affect profits and the individual’s historic and
recent performance and the value of the awards in relation to other elements of the executive’s total
compensation. The Board of Directors will take previous grants of options (including, without limitation, under
the Rollover Plan) into consideration when considering new grants of options under the 2011 Plan.
Termination Based Compensation
For payments due to our executive officers upon a change of control, and the acceleration of vesting of
equity-based awards in the event of a change of control under our stock option plan, see ‘‘the 2011 Plan’’,
‘‘— Rollover Plan’’ and ‘‘— Employment Agreements, Termination Benefits and Change of Control Benefits’’.
Comparator Group
Following the Closing, the Compensation Committee, in conjunction with the Board of Directors, will
establish an appropriate comparator group for purposes of setting the future compensation of the NEOs.
Compensation of Named Executive Officers
Summary Compensation Table expected for Fiscal 2011
To the extent determinable on the date hereof, the following table sets out information concerning the
expected Fiscal 2011 compensation to be paid by the Company to the NEOs effective as of Closing:
Name and
Principal Position
(1)
Sharebased
Award
Optionbased
Award(2)
Non-equity
Incentive Plan
Compensation(3)
Pension
Value
All Other(4)
Compensation
Total
Compensation(3)
Year
Salary
Kevin Davis, . . . . . . .
President and CEO
2011
$420,000
N/A
ND
N/A
N/A
ND
Amir Rosenthal, . . . . .
CFO
2011
$325,000
N/A
ND
N/A
N/A
ND
Paul Gibson, . . . . . . .
Executive Vice
President, Product
Creation & Supply
Chain
2011
$309,000
N/A
ND
N/A
N/A
ND
Edward Kinnaly, . . . .
Executive Vice
President, Global
Commerce
2011
$294,175
N/A
ND
N/A
N/A
ND
Michael J. Wall, . . . . .
Vice President &
General Counsel
2011
$249,100
N/A
ND
N/A
N/A
ND
(1)
Represents the annualized base salary to be in effect as of the Closing. Actual salary paid for Fiscal 2011 will be less than this amount
and will vary based on the date of the Closing.
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(2)
Granted pursuant to the 2011 Plan. Each of Kevin Davis, Amir Rosenthal, Paul Gibson, Edward Kinnaly and Michael J. Wall is to be
granted
,
,
,
, and
new options, respectively. These Shares have been granted to the NEOs in
consideration for past service and the value per share has been determined to be $ (which is equal to the Offering Price). Each
NEO will be eligible to receive additional options under the 2011 Plan, but neither the Board of Directors nor the Compensation
Committee has, at the date hereof, approved or considered any such elements of executive compensation.
(3)
‘‘ND’’ means ‘‘non-determinable’’. These amounts are ‘‘non-determinable’’ as neither the Board of Directors nor the Compensation
Committee has, at the date hereof, approved or considered any such elements of executive compensation.
(4)
None of the NEOs are entitled to perquisites or other benefits which, in the aggregate, are worth over $50,000 or over 10% of their
base salary.
The 2011 Plan
Under the 2011 Plan, options may be granted to the Company’s employees, officers and directors. The 2011
Plan will be administered by the Board of Directors, which may delegate this responsibility to a committee of the
Board of Directors. The following discussion is qualified in its entirety by the text of the 2011 Plan.
The maximum aggregate number of Common Shares which may be subject to options under the 2011 Plan
and any other proposed or established share compensation arrangement of the Company (other than the
Rollover Plan) is 12% of the Company’s Common Shares outstanding from time to time (assuming the
conversion of all Proportionate Voting Shares to Common Shares on the basis of 1,000 Common Shares for one
Proportionate Voting Share). As a result, any increase in the issued and outstanding Equity Shares will result in
an increase in the available number of the Common Shares issuable under the 2011 Plan, and any exercises or
termination, cancellation or expiry of options will make new grants available under the 2011 Plan, effectively
resulting in a re-loading of the number of options available to grant under the 2011 Plan.
Unless otherwise determined by the Board of Directors, options will vest at a percentage rate of 25% of the
initial grant per year over four years at each anniversary of the date of the grant. All options granted have an
exercise price determined and approved by the Board of Directors at the time of grant, which shall not be less
than the market value of the Common Shares at such time.
Subject to any accelerated termination, options expire no later than 10 years after the date of granting,
unless the expiry date falls within a black-out period or within nine business days after the end of such black-out
period, in which case such expiration date will be automatically extended without any further act or formality to
that date which is the tenth business day after the end of such black-out period.
Unless otherwise determined by the Board of Directors in its discretion at any time prior to or after the
following events and in any option agreement, the right to exercise vested options granted pursuant to the 2011
Plan will expire on the earliest to occur of the following: (a) 10 years from the date of grant, (b) 365 days from
the date of the optionee’s death, (c) 90 days from the date of the optionee’s disability or retirement or from the
termination of the optionee’s employment or term in office without cause or voluntary resignation, and
(d) immediately, in the case of termination of the optionee’s employment or term in office for cause. For greater
certainty, any options that were not exercisable at the time of occurrence of events contemplated above
immediately expire and are cancelled on such date.
The Board of Directors may advance the date on which any option may be exercised notwithstanding the
vesting schedule set forth in such option, regardless of any adverse or potentially adverse tax consequences
resulting from such acceleration or, subject to applicable regulatory provisions and shareholder approval, extend
the expiration date of any option, provided that the period during which an option is exercisable does not exceed
10 years from the date such option is granted.
Except as otherwise set forth in any option agreement, in the event of any change of control transaction in
which there is an acquiring or surviving entity, the Board of Directors may provide for substitute or replacement
options of similar value from, or the assumption of outstanding options by, the acquiring or surviving entity or
one or more of its subsidiaries; provided, however, that in the event of a change of control transaction the Board
of Directors may also take, as to any outstanding option, any one or more of the following actions:
• provide that any or all options shall thereupon terminate; provided that any such outstanding options that
have vested shall remain exercisable until consummation of such change of control; or
• make any outstanding option exercisable in full.
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For purposes of the 2011 Plan, a change of control means the occurrence of (a) any transaction or series of
related transactions, whether or not the Company is a party thereto, after giving effect to which in excess of 50%
of the Company’s voting power is owned directly, or indirectly through one or more entities, by any person and
its affiliates or associates, or (b) a sale, lease or other disposition of all or substantially all of the assets of
the Company.
Notwithstanding anything contained to the contrary in the 2011 Plan, in the event of a change of control, a
reorganization of the Company, an amalgamation of the Company, an arrangement involving the Company, a
take-over bid (as that term is defined in the Securities Act (Ontario)) for all of the Common Shares or the sale or
disposition of all or substantially all of the property and assets of the Company, the Board of Directors may
make such provision for the protection of the rights of the optionees as the Board of Directors in its discretion
considers appropriate in the circumstances, including, without limitation, changing the vesting for the options
and/or the date on which any option expires.
The 2011 Plan also provides that appropriate adjustments, if any, will be made by the Board of Directors in
connection with a reclassification, reorganization or other change of shares, consolidation, distribution, merger
or amalgamation (in each case, a ‘‘Change in Capitalization’’), in order to maintain the optionees’ economic
rights in respect of their options in connection with such Change in Capitalization, including adjustments to the
exercise price or the number of Common Shares to which an optionee is entitled upon exercise of options, or
permitting the immediate exercise of any outstanding options that are not otherwise exercisable.
Subject to compliance with the applicable rules of the TSX, the Board of Directors may amend the 2011
Plan or any option at any time without obtaining the approval of shareholders of the Company, provided that
such amendment shall (i) not adversely alter or impair any option previously granted and (ii) be subject to any
regulatory approvals including, where required, the approval of the TSX.
In addition, the Board of Directors may, subject to regulatory approval, discontinue the 2011 Plan at any
time without the consent of the optionees provided that such discontinuance shall not materially and adversely
affect any options previously granted under the Plan.
Except as specifically provided in an option agreement approved by the Board of Directors, options granted
under the 2011 Plan may only be exercised during the lifetime of the optionee by such optionee personally
(except that an optionee may transfer options to a corporation in respect of which the optionee is the sole
shareholder).
The Rollover Plan
In connection with the Acquisition, all of the predecessor options previously granted under the Predecessor
Plan will be exchanged for fully vested and exercisable rollover options issued under the Rollover Plan, such that
immediately following Closing, an aggregate of rollover options will be outstanding, representing %
of the issued and outstanding Common Shares of the Company (assuming the conversion of all Proportionate
Voting Shares to Common Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share and
assuming no exercise of the Over-Allotment Option). See ‘‘The Acquisition — Treatment of Predecessor
Options’’.
The terms of the Rollover Plan are substantially similar to the terms of the 2011 Plan, except that all
rollover options are fully vested and no further options may be granted under the Rollover Plan.
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The following table summarizes for each NEO the number of options granted under the 2011 Plan and the
Rollover Plan, outstanding as at the date of the Offering:
Option-Based Award
Share-Based Awards
Market or
Number of
Payout Value
Shares or Units of Share-Based
of Shares that
Awards that
have not
have not
Vested
Vested
(#)
($)
Number of
Securities
Underlying
Unexercised
Options
(#)
Option
Exercise
Price
($)
Option
Expiration
Date
Value of
Unexercised
In-The-Money
Options
($)
Kevin Davis, . . . . . . . . . . . . . . . . . .
President and CEO
N/A
N/A
Amir Rosenthal, . . . . . . . . . . . . . . .
CFO
N/A
N/A
Paul Gibson, . . . . . . . . . . . . . . . . . .
Executive Vice President,
Product Creation & Supply Chain
N/A
N/A
Edward Kinnaly, . . . . . . . . . . . . . . .
Executive Vice President,
Global Commerce
N/A
N/A
Michael J. Wall, . . . . . . . . . . . . . . .
Vice President & General Counsel
N/A
N/A
Name
Employment Agreements, Termination Benefits and Change of Control Benefits
Each of the NEOs will enter into an executive employment agreement with the Company on or prior to
the Closing.
The executive employment agreements for the NEOs will provide for an indeterminate term, and that
subject to any employee contributions, the NEO shall be entitled to participate in any and all employee benefit
plans from time to time in effect for employees of the Company generally, except to the extent such plans are in
a category of benefit otherwise provided to the NEO.
Each executive employment agreement will provide that the Company may terminate a NEO’s employment
at any time, without cause, by providing the NEO with notice by the Board, effective as of the date specified in
such notice. In the event of such termination or the NEO’s resignation with good reason, the Company is
obligated to (i) pay the NEO any earned, but unpaid base salary through the end of the month in which
termination occurred, any unreimbursed business expenses and any accrued and unused paid time-off, as
applicable (the ‘‘Accrued Obligations’’); (ii) continue to pay the NEO his/her base salary at the rate in effect on
the date of termination for a period of twelve to twenty-four months, as applicable, following such termination
(the ‘‘Continuation Period’’) in accordance with the Company’s normal payroll practices for its NEOs;
(iii) continue to provide medical and dental benefits during the Continuation Period (subject to any employee
contribution applicable to active employees generally and the NEO’s timely election of continuation coverage
under COBRA); (iv) pay the NEO the annual bonus, if any, that would otherwise have been payable to him/her
under the executive employment agreement with respect to the fiscal year of termination of employment,
without regard to the NEO’s termination of employment; (v) pay the NEO the prior year bonus; and
(vi) continue to provide the NEO the annual bonus for the portion of the Continuation Period beginning after
the fiscal year of termination of employment, based on actual performance for the full fiscal year, pro-rated as
though the NEO remained employed through the last day of the Continuation Period. The Accrued Obligations
shall be payable in a lump sum within thirty days following the date of the termination of employment. Each of
the prior year bonus and the annual bonus, if any, shall be payable when annual bonuses for the applicable fiscal
year are paid to other senior executives of the Company.
If the NEO’s employment is terminated by the Company without cause or the NEO terminates his/her
employment for good reason, in each case, nine months prior to, or within twelve months following the
consummation of a ‘‘Change of Control’’ (as defined in the 2011 Plan), the NEO shall be entitled to the same
105
payments and benefits provided to those NEOs terminated without cause as stated above, provided that the
Continuation Period shall be twenty-four months.
The U.S. Internal Revenue Code imposes an excise tax on certain ‘‘parachute payments’’ treated as payable
in connection with or contingent upon certain ‘‘change in control’’ transactions where the total amount of
payments to an affected individual exceeds a prescribed threshold based on the executive’s historical
compensation. Our NEOs who are subject to U.S. income taxes could be subject to this excise tax for
compensation (such as severance and the value of accelerated vesting on equity awards) that becomes payable to
them in connection with a future change in control of the Company and we could be denied a compensation
deduction for U.S. federal income tax purposes for the amount of such ‘‘parachute payments.’’ The employment
agreements with our NEOs who are U.S. taxpayers contain provisions intended to mitigate the adverse impact to
the NEOs from these potential excise taxes.
Each executive employment agreement will provide for customary contractual covenants in favour of the
Company, including a non-solicitation covenant in respect of employees, customers and vendors and a
non-competition covenant throughout the United States, Canada or Europe, both of which will apply for a
period of twelve months following termination, and confidentiality and non disparagement covenants in favour
of the Company.
Director Compensation
The directors’ compensation program is designed to attract and retain qualified individuals to serve on the
Board of Directors. As of Closing, in consideration for serving on the Board of Directors, each independent
director, as well as W. Graeme Roustan, will be paid an annual retainer fee of $35,000. Each such director, if he
or she serves on any committee, will also receive an additional fee of $2,000 per annum, or if he or she serves as
a Chair of any committee, an additional fee $5,000 per annum. Additionally, the Company will pay each such
director a fee of $1,000 for each meeting of the Board of Directors attended in person and $500 for each
meeting of the Board of Directors attended telephonically.
In addition, Richard W. Frank will receive an annual retainer fee of $35,000 for serving as a director.
Mr. Frank will also receive $65,000 per year for providing certain consulting services to the Company pursuant to
a consulting agreement with the Company. None of the directors nominated by Kohlberg (other than
Mr. Frank), nor Kevin Davis, our President and Chief Executive Officer, will receive any compensation for
serving as directors of our Company.
All directors are entitled to be reimbursed for expenses incurred by them in their capacity as directors.
Pension Benefits
The NEOs do not participate in any defined benefit pension plan of the Company.
INDEBTEDNESS OF DIRECTORS AND OFFICERS
None of the directors, executive officers, employees, former directors, former executive officers or former
employees of the Company, and none of their associates, is or has within 30 days before the date of this
prospectus or at any time since the beginning of the most recently completed financial year been indebted to the
Company or another entity whose indebtedness is the subject of a guarantee, support agreement, letter of credit
or other similar agreement or understanding provided by the Company, except for routine indebtedness.
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CORPORATE GOVERNANCE
Board of Directors
Independence
The Board of Directors will be comprised of nine directors, of whom Bob Nicholson is considered
independent as of the date of this prospectus. On or promptly following the Closing of the Offering, an
additional director who is independent will be appointed to the Board of Directors. Pursuant to National
Instrument 52-110 — Audit Committees, as amended from time to time (‘‘NI 52-110’’), an independent director
is one who is free from any direct or indirect relationship which could, in the view of the Board of Directors, be
reasonably expected to interfere with a director’s independent judgment. Kevin Davis is not independent
because he is an executive of officer of the Company and Mr. Roustan is not independent because he previously
received compensation in excess of applicable thresholds. Messrs. Anderson, Frank, Frieder, Mardirossian and
Woodward will not be considered independent if following the completion of the Offering, we are directly or
indirectly controlled by funds advised by Kohlberg. Pursuant to the Nomination Rights Agreement, the funds
advised or managed by Kohlberg have certain rights to nominate directors for election. See ‘‘Certain
Securityholders Agreements — Nomination Rights Agreement’’.
The Company has taken steps to ensure that adequate structures and processes will be in place following
Closing to permit the Board of Directors to function independently of management of the Company. It is
contemplated that the independent directors will hold in camera sessions without management present at
meetings of the Board of Directors, if considered necessary.
Members of our Board of Directors are also members of the board of other public companies. See
‘‘Management — Biographies’’.
Mandate of the Board of Directors
The Company’s Articles state that its Board of Directors must have a minimum of three and a maximum of
10 directors. The Board of Directors is responsible for supervising the management of our business and affairs.
The Board of Directors’ key responsibilities relate to the stewardship of management, generally through the
CEO to pursue the best interests of the Company, and will include the following: review and approval of the
strategic plan and in relation thereto approval of annual business and capital plans and policies and processes
generated by management relating to the authorization of major investments and significant allocations of
capital, supervision of senior management and succession planning including the appointment of the CEO and
the chair of the Board of Directors and ensuring that other executives are in place to ensure sound management
of us, ensuring that we have a communications policy in accordance with the guidance set out in National
Policy 51-201 — Disclosure Standards in place, assessment by the Board of Directors of its own effectiveness and
that of its committees, ensuring that we have risk management systems in place and also ensuring that we have
appropriate internal controls and corporate governance policies in place, and ensuring a business ethics,
compliance and corporate governance mindset and creation of a culture of integrity throughout the
organization. Under the mandate, the Board of Directors is entitled to engage outside advisers, at our expense,
where, in the view of the Board of Directors, additional expertise or advice is required.
Position Descriptions
The Chair of the Board of Directors and Committee Chairs
The Board of Directors will develop and implement written position descriptions for the Chairman, the
Chief Executive Officer and the chair of each committee of the Board of Directors upon completion of
the Offering.
The CEO
The primary functions of the CEO are to lead the management of our business and affairs and to lead the
implementation of the resolutions and the policies of the Board of Directors. The Board of Directors will
develop a written position description and mandate for the CEO which will set out the CEO’s key
responsibilities, including duties relating to strategic planning, our operational direction, Board of Directors
107
interaction, succession reporting and communication with shareholders. The CEO mandate will be considered
by the Board of Directors for approval annually.
Orientation and Continuing Education
Following Closing, we will put in place an orientation program for new directors under which a new director
will meet separately with the chair of the Board of Directors and members of the senior executive team. A new
director will be presented with a director manual that reviews Board of Directors policies and procedures, our
current strategic plan, financial plan and capital plan, the most recent annual and quarterly reports and materials
relating to key business issues. Directors will also receive training and preparation sessions in respect of
International Financial Reporting Standards (IFRS) transition.
The chair of each committee will be responsible for coordinating orientation and continuing director
development programs relating to the committee’s mandate. Each of the committee chairs will also be
responsible for instituting a learning program that focuses on topics relevant to each committee’s mandate.
Code of Conduct
We have a written code of conduct (the ‘‘Code of Conduct’’) that applies to all directors, officers, head
office management and employees. The objective of the Code of Conduct is to provide guidelines for
maintaining the integrity, reputation, honesty, objectivity and impartiality of the Company, its subsidiaries and
business units. The Code of Conduct addresses conflicts of interest, protecting our assets, confidentiality, fair
dealing with our security holders, customers, suppliers, competitors and employees, insider trading, compliance
with laws and reporting any illegal or unethical behaviour.
As part of our Code of Conduct, any person subject to the Code of Conduct is required to avoid or fully
disclose interests or relationships that are harmful or detrimental to the Company’s best interests or that may
give rise to real, potential or the appearance of conflicts of interest. The Board of Directors or the persons or
committee appointed have the ultimate responsibility for the stewardship of the Code of Conduct. The Code of
Conduct will also be filed with the Canadian securities regulatory authorities on the SEDAR website at
www.sedar.com.
Board of Directors Committees
Our Board of Directors ensures that the composition of its committees shall meet applicable statutory
independence requirements within the prescribed delays as well as any other applicable legal and regulatory
requirements.
Audit Committee
The audit committee of the Company (the ‘‘Audit Committee’’) is composed of a minimum of three
directors, each of whom is and must at all times be financially literate and, each of whom must be independent
within the meaning of NI 52-110 or an exemption from the requirement that every Audit Committee member be
‘‘independent’’ must be available for the Company to rely upon. As of Closing, the Audit Committee will be
composed of three directors, two of which will be independent, including Bob Nicholson. As Shant Mardirossian
is not independent for the purposes of NI 52-110, which requires that all three members of the Audit Committee
be independent, upon Closing of the Offering, the Company will rely on section 3.3(2) of NI 52-110 (Controlled
Companies) in respect of his membership on the Audit Committee. The relevant education and experience of
each member of the Audit Committee is described as part of his or her respective biography. See
‘‘Management — Biographies’’.
The Board of Directors has adopted a written charter for the Audit Committee (the ‘‘Charter of the Audit
Committee’’) which sets out the Audit Committee’s responsibility in reviewing the financial statements of the
Company and public disclosure documents containing financial information and reporting on such review to the
Board of Directors, ensuring that adequate procedures are in place for the review of the Company’s public
disclosure documents that contain financial information, overseeing the work and review the independence of
the external auditors and reviewing, evaluating and approving the internal control procedures that are
implemented and maintained by management. A copy of the Charter of the Audit Committee is attached to this
prospectus as Appendix A.
108
Corporate Governance and Nominating
The Board of Directors will establish a corporate governance and nominating committee (the ‘‘Corporate
Governance and Nominating Committee’’) which will be responsible for identifying new candidates for board
nomination and for recommending to the Board of Directors qualifications for directors including, among other
things, the competencies, skills, business and financial experience, leadership roles and level of commitment
required to fulfill Board of Director responsibilities.
After considering the qualifications that existing directors possess and that each new nominee will bring to
the Board of Directors, the Corporate Governance and Nominating Committee will be responsible for
identifying candidates qualified for board membership, and recommending to the Board of Directors nominees
to be placed before the shareholders at each annual meeting. The Corporate Governance and Nominating
Committee will be responsible for annually reviewing the performance of the Board of Directors and its
committees against the objectives of their respective charters and mandates. In addition, it shall annually
evaluate the contribution of the individual directors.
The Corporate Governance and Nominating Committee will ensure the Company develops and implements
an effective and efficient approach to corporate governance that enables the business and affairs of the
Company to be carried out, directed and managed with the objective of enhancing shareholder value. Its
mandate will include the development of the Company’s code of business conduct and ethics (the ‘‘Code of
Business Conduct and Ethics’’) and monitoring compliance with the Code of Business Conduct and Ethics.
The Corporate Governance and Nominating Committee of the Company will be composed of three
directors, initially Chris Anderson, Gordon H. Woodward and one director who is independent. Mr. Woodward
will act as chair of the Corporate Governance and Nominating Committee. Following the Closing, the Corporate
Governance and Nominating Committee will adopt a written charter describing the mandate of such committee.
Compensation Committee
The compensation committee of the Company (the ‘‘Compensation Committee’’) has a variety of
responsibilities relating to compensation, including establishing and administering policies with respect to
compensation of executive officers of the Company, establishing compensation levels annually for the executive
officers of the Company, reviewing and overseeing the administration by management of the Company’s general
compensation and benefit programs and reviewing annually the long-term goals and objectives of the Chief
Executive Officer.
The Compensation Committee of the Company will be composed of three directors, initially Chris
Anderson, Samuel P. Frieder and Bob Nicholson who is independent. Mr. Anderson will act as chair of the
Compensation Committee. Following the Closing, the Committee will adopt a written charter describing the
mandate of such committee.
109
External Auditor Service Fee
The Company has been billed the following fees for services rendered in respect of the audits by
KPMG LLP for the two fiscal years ended May 31, 2010 and May 31, 2009.
Fiscal year
ended
May 31, 2010(5)
Fiscal year
ended
May 31, 2009(5)
.
.
.
.
$403
—
—
—
$344
—
—
—
Total Fees Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$403
$344
(in thousands)
Audit Fees(1) . . . . . . .
Audit-Related Fees(2)
Tax Fees(3) . . . . . . . .
All Other Fees(4) . . . .
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(1)
‘‘Audit Fees’’ include fees necessary to perform the annual audit of the consolidated financial statements.
(2)
‘‘Audit-Related Fees’’ include fees for assurance and related services by the external auditor that are reasonably related to the
performance of the audit or review of the Company’s financial statements other than those included in ‘‘Audit Fees’’.
(3)
‘‘Tax Fees’’ include fees for all tax services other than those included in ‘‘Audit Fees’’ and ‘‘Audit-Related Fees’’. This category includes
fees for tax compliance, tax advice and tax planning.
(4)
‘‘Other Fees’’ include fees for products and services provided by the auditor other than those included above.
(5)
In connection with this Offering, the Company incurred all the fees represented in this table in fiscal 2011. In addition, an aggregate of
$552,000 was incurred in fiscal 2011 in connection with the audit by KPMG LLP for Fiscal 2008.
PLAN OF DISTRIBUTION
General
Pursuant to the Underwriting Agreement dated , 2011 between the Company and the Underwriters,
the Company has agreed to sell and the Underwriters have agreed severally to purchase on , 2011, or such
later date as the Company and the Underwriters agree, but in any event no later than , 2011, Common Shares at a price of Cdn$ per Common Share, for aggregate gross consideration of Cdn$ payable in cash to the Company against delivery of the Common Shares. The Offering Price of the Common
Shares has been determined by negotiation between the Company and the Underwriters. RBC Dominion
Securities Inc. and CIBC World Markets Inc. are co-lead managers and joint bookrunners of the Offering.
Pursuant to the Underwriting Agreement, the Company has granted the Underwriters an Over-Allotment
Option to cover over-allotments, if any, and for market stabilization purposes. The Over-Allotment Option may
be exercised by the Underwriters, in whole or in part, for a 30-day period following the Closing and entitles the
Underwriters to purchase from the Company up to Common Shares at the Offering Price (representing
approximately 15% of the aggregate number of Common Shares offered hereunder). If the Over-Allotment
Option is exercised in full, the total price to the public will be Cdn$ , the Underwriters’ Commission will be
Cdn$ and the net proceeds to the Company will be Cdn$ .
The Offering is being made in each of the provinces and territories of Canada and in the United States in
an offering to qualified institutional buyers and other purchasers exempt from the registration requirements of
the U.S. Securities Act, pursuant to Rule 144A and other applicable exemptions thereunder. The Common
Shares will be offered in each of the provinces and territories of Canada through those Underwriters or their
affiliates who are registered to offer the Common Shares for sale in such provinces and territories and such
other registered dealers as may be designated by the Underwriters. Subject to applicable law, the Underwriters
may offer the Common Shares outside of Canada.
The Common Shares offered hereby have not been and will not be registered under the U.S. Securities Act
or any U.S. state securities laws and may not be offered or sold in the United States or to, or for the account or
benefit of, U.S. persons except in transactions exempt from the registration requirements of the U.S. Securities
Act and applicable state securities laws. Accordingly, except to the extent permitted by the Underwriting
Agreement, the Common Shares may not be offered or sold within the United States or to, or for the account or
110
benefit of, U.S. persons. The Underwriting Agreement provides that the Underwriters may re-offer and resell
the Common Shares that they have acquired pursuant to the Underwriting Agreement to qualified institutional
buyers in the United States in accordance with Rule 144A under the U.S. Securities Act. The Underwriting
Agreement also provides that the Underwriters will offer and sell the Common Shares outside the United States
only in accordance with Regulation S under the U.S. Securities Act. In addition, until 40 days after the
commencement of the Offering, an offer or sale of the Common Shares within the United States by any dealer
(whether or not participating in the Offering) may violate the registration requirements of the U.S. Securities
Act if such offer or sale is made otherwise than in reliance on an exemption from the registration requirements
of the U.S. Securities Act. The Common Shares are also offered to other purchasers in the Untied States under
applicable exemptions from the registration requirements of the U.S. Securities Act.
The Company has applied to list its Common Shares on the TSX. Listing of the Common Shares is subject
to approval by the TSX of the Company’s listing application and fulfillment by the Company of all of the TSX’s
original listing requirements. The TSX has not conditionally approved the listing of the Common Shares and
there is no assurance that the TSX will approve the Company’s listing application. The Company does not
intend to list the Proportionate Voting Shares on any exchange.
In connection with the Offering, certain of the Underwriters or securities dealers may distribute
prospectuses electronically.
Upon completion of the Offering, assuming no exercise of the Over-Allotment Option, the Company
expects to have an equivalent of Common Shares (assuming the conversion of all Proportionate Voting
Shares to Common Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share) issued
and outstanding on a non-diluted basis, and, if the Over-Allotment Option is exercised in full, an equivalent of
Common Shares (assuming the conversion of all Proportionate Voting Shares to Common Shares on the
basis of 1,000 Common Shares for one Proportionate Voting Share) issued and outstanding on a non-diluted
basis.
The obligations of the Underwriters under the Underwriting Agreement are several (and not joint or joint
and several), are subject to certain closing conditions and may be terminated at their discretion on the basis of
their assessment of the state of the financial markets and upon the occurrence of certain stated events. The
Underwriters are, however, obligated to take up and pay for all of the Common Shares if any Common Shares
are purchased under the Underwriting Agreement. In consideration for their services in connection with the
Offering, the Company has agreed to pay the Underwriters a fee equal to Cdn$ per Common Share sold in
the Offering. The purchase price paid by the Company to acquire KSGI from the Existing Holder will be net of
the Existing Holders’ proportionate share of the Underwriters’ Commission. The Underwriters are entitled
under the Underwriting Agreement to indemnification by the Company and the Kohlberg Funds against certain
liabilities and expenses. Pursuant to the terms of the Underwriting Agreement, the Company has agreed to
subordinate its indemnity right under the Acquisition Agreement against certain Existing Holders to any
indemnity and contribution rights the Underwriters may have against such Existing Holders under the
Underwriting Agreement.
Lock-Up Agreements
In connection with completion of the Offering, the Existing Holders, the Company and the Company’s
directors, officers and senior management have agreed not to, directly or indirectly, without the prior written
consent of the Underwriters, issue, sell, grant any option, right or warrant for the sale of, lend, secure, pledge or
otherwise dispose or monetize, or make any short sale, engage in any hedging transaction, or enter into any form
of arrangement the consequence of which is to directly or indirectly transfer to someone else, in whole or in part,
any of the economic consequences of ownership of, or offer or announce any intention to do so, in a public
offering or by way of private placement or otherwise, any Common Shares, Proportionate Voting Shares or any
securities convertible or exchangeable into Common Shares, for a period of 180 days following Closing. The
holders of an equivalent number of Common Shares (assuming the conversion of all Proportionate Voting
Shares to Common Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share),
representing a % equity and voting interest in the Company ( % on a fully diluted basis), have
entered into such agreements.
111
Directed Share Program
At our request, the Underwriters have reserved up to five percent of the Common Shares to be offered by
this prospectus for sale, at the public Offering Price, to certain eligible officers and employees of the Company at
the time of this Offering through a directed share program. The number of Common Shares available for sale to
the general public will be reduced by the number of reserved Common Shares sold to these individuals. Any
reserved Common Shares not purchased by these individuals will be offered by the Underwriters to the general
public on the same basis as the other Common Shares offered by this prospectus.
Pricing of the Offering
Prior to the Offering, there was no public market for the Common Shares. The Offering Price has been
negotiated between the Company and the Underwriters.
Price Stabilization, Short Positions and Passive Market Making
In connection with the Offering, the Underwriters may over-allocate or effect transactions which stabilize or
maintain the market price of the Common Shares at levels other than those which otherwise might prevail on
the open market, including:
• stabilizing transactions;
• short sales;
• purchases to cover positions created by short sales;
• imposition of penalty bids; and
• syndicate covering transaction.
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the Common Shares while the Offering is in progress. These transactions may also
include making short sales of the Common Shares, which involve the sale by the Underwriters of a greater
number of Common Shares than they are required to purchase in the Offering. Short sales may be ‘‘covered
short sales’’, which are short positions in an amount not greater than the Over-Allotment Option, or may be
‘‘naked short sales’’, which are short positions in excess of that amount.
The Underwriters may close out any covered short position either by exercising the Over-Allotment Option,
in whole or in part, or by purchasing Common Shares in the open market. In making this determination, the
Underwriters will consider, among other things, the price of Common Shares available for purchase in the open
market compared with the price at which they may purchase Common Shares through the Over-Allotment
Option.
The Underwriters must close out any naked short position by purchasing Common Shares in the open
market. A naked short position is more likely to be created if the Underwriters are concerned that there may be
downward pressure on the price of the Common Shares in the open market that could adversely affect investors
who purchase in the Offering. Any related short sales will form part of the Underwriters’ over-allotment
position.
In addition, in accordance with rules and policy statements of certain Canadian securities regulators, the
Underwriters may not, at any time during the period of distribution, bid for or purchase Common Shares. The
foregoing restriction is, however, subject to exceptions where the bid or purchase is not made for the purpose of
creating actual or apparent active trading in, or raising the price of, the Common Shares. These exceptions
include a bid or purchase permitted under the by-laws and rules of applicable regulatory authorities and the
applicable stock exchange, including the Universal Market Integrity Rules for Canadian Marketplaces, relating
to market stabilization and passive market making activities and a bid or purchase made for and on behalf of a
customer where the order was not solicited during the period of distribution.
As a result of these activities, the price of the Common Shares may be higher than the price that otherwise
might exist in the open market. If these activities are commenced, they may be discontinued by the Underwriters
at any time. The Underwriters may carry out these transactions on any stock exchange on which the Common
Shares are listed, in the over-the-counter market, or otherwise.
112
Over-Allotment Option
The Company has granted to the Underwriters an Over-Allotment Option, exercisable, in whole or in part,
at the sole discretion of the Underwriters, for a period of 30 days from the date of the Closing, to purchase up to
an aggregate of additional Common Shares (representing approximately 15% of the Common Shares
offered hereunder) at the Offering Price, payable in cash against delivery of such additional shares. The
Over-Allotment Option is exercisable in whole or in part only for the purpose of covering over-allotments, if any,
made by the Underwriters in connection with the Offering and for market stabilization purposes. If the
Over-Allotment Option is exercised in full, the total price to the public, Underwriters’ Commission and net
proceeds to the Company before deducting other expenses of the Offering, will be Cdn$ , Cdn$ and
Cdn$ , respectively. This prospectus qualifies the grant of the Over-Allotment Option and up to Common Shares upon exercise of the Over-Allotment Option. A purchaser who acquires Common Shares
forming part of the Over-Allotment Option acquires those shares under this prospectus, regardless of whether
the position is ultimately filled through the exercise of the Over-Allotment Option or secondary market
purchases.
Commissions and Expenses
The following table shows the per Common Share and total Underwriters’ Commission the Company will
pay to the Underwriters, assuming both no exercise and full exercise of the Underwriters’ Over-Allotment
Option:
Over-Allotment Not
Exercised
Over-Allotment Fully
Exercised
Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Underwriters propose to offer the Common Shares initially at the public Offering Price stated on the
cover page of this prospectus. After the Underwriters have made a reasonable effort to sell all of the Common
Shares offered by this prospectus at that price, the initially stated Offering Price may be decreased, and further
changed from time to time, by the Underwriters to an amount not greater than the initially stated Offering Price
and, in such case, the compensation realized by the Underwriters will be decreased by the amount that the
aggregate price paid by the purchasers for the Common Shares is less than the gross proceeds paid by the
Underwriters to the Company and the Selling Shareholders.
It is estimated that the total expenses of the Offering, not including the Underwriters’ Commission, will be
approximately Cdn$ .
Book Entry System
Subscriptions for the Common Shares will be received subject to rejection or allotment in whole or in part
and the right is reserved to close the subscription books at any time without notice. Certificates representing the
Common Shares sold under the Offering in Canada will be issued in registered form to CDS or its nominee on
the closing date of the Offering. Transfers of ownership of Common Shares in Canada will be effected through
records maintained by participants in the CDS depository service (‘‘CDS Participants’’), which include securities
brokers and dealers, banks and trust companies. Indirect access to the CDS book entry system is also available to
other institutions that maintain custodial relationships with a CDS Participant, either directly or indirectly. Each
purchaser of Common Shares in Canada will receive a customer confirmation of purchase from the CDS
Participant from or through which such Common Shares are purchased in accordance with the practices and
procedures of such CDS Participant.
113
RELATIONSHIP BETWEEN THE COMPANY AND CERTAIN UNDERWRITERS
RBC Dominion Securities Inc., CIBC World Markets Inc. and Scotia Capital Inc. are affiliates of Canadian
chartered banks that are members of a syndicate of lenders (collectively, the ‘‘Banks’’) that will, concurrent with
Closing, make the New Credit Facility available to us. Accordingly, pursuant to applicable securities legislation,
we may be considered a ‘‘connected issuer’’ of RBC Dominion Securities Inc., CIBC World Markets Inc. and
Scotia Capital Inc. for the purposes of securities regulations in certain provinces and territories of Canada. A
summary of certain provisions of the New Credit Facility is set out under ‘‘Description of Refinancing and
Material Indebtedness’’.
None of the Banks were involved in the decision to distribute the Common Shares hereunder or were
involved in the determination of the terms of the Offering, including structure and pricing. The decision to
distribute the Common Shares hereunder and the determination of the terms of the Offering were made
through negotiation between the Company and the Underwriters. Neither RBC Dominion Securities Inc.,
CIBC World Markets Inc. nor Scotia Capital Inc. will receive any direct benefit under the Offering other than
their respective portion of the Underwriters Commission payable pursuant to the Underwriters Agreement.
Certain of the Underwriters and their respective affiliates are full service financial institutions engaged in
various activities, which may include securities trading, commercial and investment banking, financial advisory,
investment management, investment research, principal investment, hedging, financing and brokerage activities.
Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the
future perform, various financial advisory and investment banking services for the Company, for which they
received or will receive customary fees. Certain of the Underwriters and their respective affiliates may also make
investment recommendations and/or publish or express independent research views in respect of such securities
or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions
in such securities and instruments.
LEGAL PROCEEDINGS
We are from time to time involved in legal proceedings of a nature considered normal to our business. We
believe that none of the litigation in which we are currently involved, or have been involved since the beginning
of the most recently completed financial year, individually or in the aggregate, is material to our consolidated
financial condition or results of operations.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Other than as set out below or as described elsewhere in this prospectus, none of (i) the directors or
executive officers of the Company, (ii) the shareholders who beneficially own or control or direct, directly or
indirectly, more than 10% of the voting shares of the Company, or (iii) any associate or affiliate of the persons
referred to in (i) and (ii), has or has had any material interest, direct or indirect, in any transaction within the
three years before the date of this prospectus or in any proposed transaction that has materially affected or is
reasonably expected to materially affect the Company or any of its subsidiaries.
In connection with the sale of the Bauer Business by Nike to the Existing Holders, KSGI paid a transaction
fee to, and entered into a management services agreement with Kohlberg, all as more particularly described in
note 5 to KSGI’s annual consolidated financial statements included in this prospectus. Pursuant to an agreement
between Kohlberg and KSGI, KSGI has agreed to pay Kohlberg an aggregate fee equal to $4 million upon
completion of the Offering in connection with the termination of the management services agreement.
In connection with the Offering, the Existing Holders will enter into certain securityholders’ agreements
with the Company as more particular described under ‘‘Certain Securityholders Agreements’’.
114
AUDITORS, TRANSFER AGENT AND REGISTRAR
Our auditor is KPMG LLP and its address is Two Financial Center, 60 South Street, Boston, Massachusetts,
02111.
The transfer agent and registrar for the Common Shares and Proportionate Voting Shares is Equity
Financial Trust Company at its principal offices in Toronto, Ontario.
MATERIAL CONTRACTS
The following are the only material contracts, other than those contracts entered into in the ordinary course
of business, which the Company has entered into since the beginning of the last financial year before the date of
this prospectus, entered into prior to such date but which contract is still in effect, or to which the Company is or
will become a party on or prior to the Closing:
• the Underwriting Agreement;
• the Acquisition Agreement;
• the Nomination Rights Agreement;
• the Voting Agreement;
• the Registration Rights Agreement;
• the New Credit Facility; and
• the Vapor License Agreement,
(collectively, the ‘‘Material Contracts’’).
Copies of the above material agreements, if not already entered into then once executed, may be inspected
during ordinary business hours at the Company’s principal executive offices located at 150 Ocean Road,
Greenland, New Hampshire, 03840, during the period of distribution of the Common Shares or may be viewed
at the website maintained by the Canadian Securities Administrators at http://www.sedar.com.
EXEMPTION FROM NATIONAL INSTRUMENTS
In connection with the filing of this preliminary prospectus, the Company has applied to the Canadian
provincial securities regulatory authorities for an exemption from the provisions of National Instrument 41-101 General Prospectus Requirements relating to restricted securities. In accordance with Part 19 of NI 41-101, the
receipt for the final prospectus will constitute evidence of receipt of such relief.
EXPERTS
No person or company whose profession or business who is named as having prepared or certified a report,
valuation, statement or opinion described or included in the prospectus, or whose profession or business gives
authority to a report, valuation, statement or opinion described or included in the prospectus, holds any
registered or beneficial interest, direct or indirect, in any of our securities or other property of our Company or
one of our associates or affiliates and no such person or company, or a director, officer or employee of such
person or company, is expected to be elected, appointed or employed as one of our directors, officers or
employees or as a director, officer or employee of any of our associates or affiliates and no such person is one of
our promoters or the promoter of one of our associates or affiliates.
KPMG LLP have advised the Company and KSGI that they are independent under the American Institute
of Certified Public Accountant’s Code of Professional Conduct and its interpretations and rulings.
Certain Canadian legal matters relating to the Offering will be passed upon on our behalf by Stikeman
Elliott LLP and on behalf of the Underwriters by Ogilvy Renault LLP. As of the Closing of the Offering, the
partners and associates of Stikeman Elliott LLP, collectively, will beneficially own, directly and indirectly, less
than (i) 1% of the issued and outstanding Equity Shares; and (ii) 1% of the issued and outstanding common
shares of any of our affiliates or associates, and the partners and associates of Ogilvy Renault LLP, collectively,
will beneficially own, directly and indirectly, (i) 1% of the issued and outstanding Equity Shares; and (ii) 1% of
the issued and outstanding common shares of any of our affiliates or associates.
115
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Stikeman Elliott LLP, counsel to the Company, and Ogilvy Renault LLP, counsel to the
Underwriters, the following is a general summary, as of the date hereof, of the principal Canadian federal
income tax considerations under the Tax Act generally applicable to a holder who acquires Common Shares
pursuant to this Offering and who, for the purposes of the Tax Act and at all relevant times, beneficially owns
Common Share or Proportionate Voting Shares, as applicable, as capital property, and deals at arm’s length
with, and is not affiliated with, the Company (a ‘‘Holder’’). An Equity Share will generally be considered to be
capital property for this purpose unless the Holder holds (or will hold) such Equity Share in the course of
carrying on a business, or the Holder has acquired (or will acquire) such Equity Share in a transaction or
transactions considered to be an adventure or concern in the nature of trade.
This summary is not applicable to a Holder: (a) that is a ‘‘financial institution’’, as defined in the Tax Act for
purposes of the ‘‘mark-to-market rules’’ contained in the Tax Act; (b) an interest in which would be a ‘‘tax shelter
investment’’ as defined in the Tax Act; (c) that is a ‘‘specified financial institution’’ as defined in the Tax Act; or
(d) that has elected to report its ‘‘Canadian tax results’’, as defined in the Tax Act, in a currency other than the
Canadian currency. Any such Holder to which this summary does not apply should consult its own tax advisor.
This summary is based upon the current provisions of the Tax Act and counsel’s understanding of the
current published administrative and assessing policies and practices of the CRA. The summary also takes into
account all specific proposals to amend the Tax Act that have been publicly announced by or on behalf of the
Minister of Finance (Canada) prior to the date hereof (the ‘‘Tax Proposals’’), and assumes that all such Tax
Proposals will be enacted in the form proposed. No assurance can be given that the Tax Proposals will be enacted
in the form proposed or at all. This summary does not otherwise take into account or anticipate any changes in
law, whether by way of legislative, judicial or administrative action or interpretation, nor does it address any
provincial, territorial or foreign tax considerations.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or
tax advice to any particular Holder. Accordingly, Holders are urged to consult their own tax advisors about the
specific tax consequences to them of acquiring, holding and disposing of Equity Shares.
Residents of Canada
The following discussion applies to a Holder who, for the purposes of the Tax Act, and at all relevant times,
is, or is deemed to be, resident in Canada (‘‘Resident Holder’’). Certain Resident Holders whose Equity Shares
might not otherwise qualify as capital property may, in certain circumstances, make the irrevocable election
pursuant to subsection 39(4) of the Tax Act to have its Equity Shares, and every other ‘‘Canadian Security’’, as
defined in the Tax Act, owned by such Resident Holder in the taxation year of the election and in all subsequent
taxation years, deemed to be capital property. Resident Holders should consult their own tax advisors for advice
as to whether an election under subsection 39(4) of the Tax Act is available and advisable in their own
circumstances.
Dividends on Equity Shares
Dividends received or deemed to be received on an Equity Share by a Resident Holder who is an individual
(other than certain trusts) will be included in computing such Resident Holder’s income and will be subject to
the gross-up and dividend tax credit rules normally applicable under the Tax Act to taxable dividends received
from taxable Canadian corporations, including the enhanced gross-up and dividend tax credit in respect of
dividends designated by the Company as ‘‘eligible dividends’’. There may be limitations on the ability of the
Company to designate dividends as ‘‘eligible dividends’’. Dividends received by an individual or a trust (other
than certain specified trusts) may be subject to alternative minimum tax.
Dividends received or deemed to be received on an Equity Share by a Resident Holder that is a corporation
will be included in computing such Resident Holder’s income for the taxation year and will generally also be
deductible in computing its taxable income for that taxation year. A Resident Holder that is a ‘‘private
corporation’’ or a ‘‘subject corporation’’, each as defined in the Tax Act, may be liable under Part IV of the
Tax Act to pay a refundable tax at a rate of 331⁄3% on dividends received or deemed to be received on an Equity
Share to the extent such dividends are deductible in computing the Resident Holder’s taxable income. This tax
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will generally be refunded to the corporation at a rate of $1.00 for every $3.00 of taxable dividends paid while it
is a ‘‘private corporation’’ or a ‘‘subject corporation’’.
Conversion of Equity Shares
A conversion of an Equity Share of one class into an Equity Share of another class will be deemed not to be
a disposition thereof and, accordingly, will not give rise to a capital gain or capital loss. The cost to a Resident
Holder of an Equity Share received on a conversion will be deemed to be an amount equal to the adjusted cost
base to the Resident Holder, determined immediately before the conversion, of the shares (or fractions of
shares) which have been converted into such Equity Share. The cost of any particular Equity Share so obtained
by a Resident Holder will be averaged with the adjusted cost base of all other Equity Shares of the same class
held by the Resident Holder as capital property immediately before such time for purposes of determining
thereafter the adjusted cost base of each such share.
Dispositions of Equity Shares
A disposition, or a deemed disposition, of an Equity Share (other than upon a conversion thereof or to the
Company unless purchased by the Company in the open market in the manner in which shares are normally
purchased by any member of the public in the open market) by a Resident Holder will generally give rise to a
capital gain (or a capital loss) equal to the amount by which the proceeds of disposition of the Equity Share, net
of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base of the Equity Share to the
Resident Holder. For this purpose, the adjusted cost base to a Resident Holder of a Common Share or
Proportionate Voting Share, as the case may be, will be determined at any particular time by averaging the cost
of such share with the adjusted cost base of any other Common Shares or Proportionate Voting Shares, as
applicable, owned by the Resident Holder as capital property at that time. Such capital gain (or capital loss) will
be subject to the treatment described below under ‘‘— Taxation of Capital Gains and Capital Losses’’.
Taxation of Capital Gains and Capital Losses
Generally, one-half of any capital gain (a ‘‘taxable capital gain’’) realized by a Resident Holder for a
taxation year must be included in computing the Resident Holder’s income for the year. Subject to and in
accordance with the provisions of the Tax Act, a Resident Holder will generally be required to deduct one-half of
any capital loss (an ‘‘allowable capital loss’’) realized in a taxation year from taxable capital gains realized in that
taxation year. Allowable capital losses in excess of taxable capital gains for the taxation year of disposition may
generally be carried back and deducted in any of the three preceding taxation years, or in any subsequent year
against net taxable capital gains realized in such years, to the extent and under the circumstances specified in the
Tax Act. If the Resident Holder is a corporation, any such capital loss realized on the sale of an Equity Share
may in certain circumstances be reduced by the amount of any dividends which have been received or which are
deemed to have been received on such Equity Share. Similar rules may apply where a corporation is a member
of a partnership or a beneficiary of a trust that owns Equity Shares, directly or indirectly through a partnership
or a trust. Taxable capital gains realized by a Resident Holder who is an individual may give rise to alternative
minimum tax depending on the Resident Holder’s circumstances.
A Resident Holder that is throughout the year a ‘‘Canadian-controlled private corporation’’ (as defined in
the Tax Act) may be liable to pay a refundable tax at a rate of 62⁄3% on certain investment income, including
taxable capital gains (but excluding dividends or deemed dividends deductible in computing taxable income).
Non-Resident Holders
The following discussion applies to a Holder who, for the purposes of the Tax Act and at all relevant times,
is not (and is not deemed to be) resident in Canada and will not use or hold (and will not be deemed to use or
hold) the Equity Shares in, or in the course of, carrying on a business or part of a business in Canada
(a ‘‘Non-Resident Holder’’). This summary does not apply to a Non-Resident Holder that carries on an
insurance business in Canada and elsewhere and such holders should consult their own tax advisors.
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Dividends on Equity Shares
Dividends paid or credited, or deemed to be paid or credited, on an Equity Share to a Non-Resident Holder
will generally be subject to Canadian withholding tax at the rate of 25%, subject to any reduction in the rate of
withholding to which that Non-Resident Holder may be entitled under an applicable income tax treaty or
convention. For example, the rate of withholding tax applicable to a dividend paid on an Equity Share to a
Non-Resident Holder who is a resident of the United States for purposes of the Canada-U.S. Income Tax
Convention (the ‘‘Convention’’), beneficially owns the dividend and is fully entitled to the benefits of the
Convention will generally be reduced to 15%.
Dispositions and Conversion of Equity Shares
A Non-Resident Holder will not be subject to tax under the Tax Act in respect of any capital gain realized by
such Non-Resident Holder on a disposition of an Equity Share (other than upon a conversion thereof, the
consequences of which are described below) unless the Equity Share constitutes ‘‘taxable Canadian property’’
(as defined in the Tax Act) of the Non-Resident Holder at the time of disposition and the Non-Resident Holder
is not entitled to relief under an applicable income tax treaty or convention. Generally, an Equity Share will not
constitute taxable Canadian property of a Non-Resident Holder at any particular time provided that: (i) the
Equity Share is listed on a ‘‘designated stock exchange’’ for the purposes of the Tax Act (which currently includes
the TSX) at that time; (ii) at no time during the 60-month period immediately preceding such time: (a) were
25% or more of the issued shares of any class or series of the capital stock of the Company owned by or
belonged to any combination of the Non-Resident Holder and persons with whom the Non-Resident Holder did
not deal at arm’s length (for the purposes of the Tax Act), and (b) was more than 50% of the fair market value of
the Equity Share derived directly or indirectly from one, or any combination of, real or immovable property
situated in Canada, Canadian resource property (as defined in the Tax Act), timber resource property
(as defined in the Tax Act) or options in respect of, interests in or for civil law rights in any such property
(whether or not such property exists). An Equity Share that is not listed on a ‘‘designated stock exchange’’ will
not generally constitute taxable Canadian property of a Non-Resident Holder at any particular time provided
that at no time during the 60-month period immediately preceding such time was more than 50% of the fair
market value of the Equity Share derived directly or indirectly from one, or any combination of, real or
immovable property situated in Canada, Canadian resource property (as defined in the Tax Act), timber
resource property (as defined in the Tax Act) or options in respect of, interests in or for civil law rights in any
such property (whether or not such property exists). Non-Resident Holders for whom an Equity Share is, or may
be, taxable Canadian property should consult their own tax advisors.
If the Equity Shares are considered taxable Canadian property to a Non-Resident Holder, an applicable
income tax treaty or convention may exempt that Non-Resident Holder from tax under the Tax Act in respect of
the disposition thereof, provided the value of such Equity Shares is not derived principally from real property
situated in Canada (as may be defined in the applicable income tax treaty or convention). If the Equity Shares
constitute taxable Canadian property to a Non-Resident Holder and any capital gain realized by the
Non-Resident Holder on the disposition of such shares is not exempt from tax under the Tax Act by virtue of an
applicable income tax treaty, then tax consequences described above under the heading ‘‘Residents of Canada —
Dispositions of Equity Shares’’ will generally apply.
A conversion of an Equity Share of one class into an Equity Share of another class will be deemed not to be
a disposition thereof and, accordingly, will not give rise to a capital gain or capital loss. The cost to a
Non-Resident Holder of an Equity Share received on a conversion will be deemed to be an amount equal to the
adjusted cost base to the Non-Resident Holder, determined immediately before the conversion, of the shares
(or fractions of shares) which have been converted into such Equity Share. The cost of any particular Equity
Share so obtained by a Non-Resident Holder will be averaged with the adjusted cost base of all other Equity
Shares of the same class held by the Non-Resident Holder as capital property immediately before such time for
purposes of determining thereafter the adjusted cost base of each such share.
As long as a particular class of Equity Share is listed at the time of its disposition (including a conversion
thereof) on the TSX or another ‘‘recognized stock exchange’’, as defined in the Tax Act, a Non-Resident Holder
who disposes (including a conversion thereof) of an Equity Share of that particular class that is taxable Canadian
property will not be required to satisfy certain withholding and reporting obligations imposed under section 116
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of the Tax Act in connection with the disposition thereof. An exemption from such requirements may also be
available in respect of such disposition if the Equity Share is ‘‘treaty-protected property’’ of the Non-Resident
Holder, as defined in the Tax Act. Non-Resident Holder’s are urged to consult their own tax advisors in this
regard and, in particular, should they dispose of an Equity Share that is taxable Canadian property that is not
listed on a recognized stock exchange.
ELIGIBILITY FOR INVESTMENT
In the opinion of Stikeman Elliott LLP, counsel to the Company, and Ogilvy Renault LLP, counsel to the
Underwriters, on the Closing, provided that the Common Shares are listed on a ‘‘designated stock exchange’’
(which currently includes the TSX), the Common Shares will on that date be qualified investments under the
Tax Act and the Regulations for trusts governed by registered retirement savings plans, registered retirement
income funds, registered disability savings plans, deferred profit sharing plans, registered education savings plans
and tax-free savings accounts each as defined in the Tax Act (collectively, ‘‘Deferred Plans’’). In addition, if on
the Closing the Common Shares are listed on a ‘‘designated stock exchange’’ in Canada (which currently
includes the TSX), the Proportionate Voting Shares will on that date be qualified investments under the Tax Act
and the Regulations for Deferred Plans.
Notwithstanding the foregoing, if the Common Shares or the Proportionate Voting Shares are ‘‘prohibited
investments’’ for purposes of the Tax Act, a holder of a tax-free savings account will be subject to a penalty tax on
Common Shares or Proportionate Voting Shares, as the case may be, held in a tax-free savings account as set out
in the Tax Act. A Common Share and Proportionate Voting Share will not be a prohibited investment for a trust
governed by a tax-free savings account held by a particular holder provided that the holder deals at arm’s length
with the Company for purposes of the Tax Act, and does not have a ‘‘significant interest’’ (as defined in the
Tax Act) in either the Company or a person or partnership that does not deal at arm’s length with the Company
for purposes of the Tax Act.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
IRS Circular 230 Disclosure: To ensure compliance with Internal Revenue Service Circular 230, holders of
Common Shares are hereby notified that: (a) any discussion of U.S. federal tax issues in this prospectus is not
intended or written by us to be relied upon, and cannot be relied upon for the purpose of avoiding penalties that
may be imposed on holders of Common Shares under the Internal Revenue Code; (b) such discussion is written in
connection with the promotion or marketing of the transactions or matters addressed herein; and (c) holders of
Common Shares should seek advice based on their particular circumstances from an independent tax advisor.
The following is a general summary of certain material U.S. federal income tax consequences to a
U.S. Holder, as defined below, of the acquisition, ownership and disposition of Common Shares in the Company
acquired pursuant to this Offering and to the Company of the Acquisition. This discussion is based on the
U.S. Internal Revenue Code of 1986, as amended (the ‘‘Code’’), Treasury regulations promulgated under the
Code (‘‘Treasury Regulations’’), administrative pronouncements or practices, judicial decisions, and the
Convention, all as of the date hereof. Future legislative, judicial, or administrative modifications, revocations, or
interpretations, which may or may not be retroactive, may result in U.S. federal income tax consequences
significantly different from those discussed herein. This discussion is not binding on the U.S. Internal Revenue
Service (the ‘‘IRS’’). No ruling has been or will be sought or obtained from the IRS with respect to any of the
U.S. federal tax consequences discussed herein. There can be no assurance that the IRS will not challenge any of
the conclusions described herein or that a U.S. court will not sustain such a challenge. This summary is for
general informational purposes only and does not address all possible U.S. federal tax issues that could apply
with respect to the acquisition, ownership or disposition of Common Shares by a U.S. Holder.
This summary does not take into account the facts unique to any particular U.S. Holder that could impact
his, her or its U.S. federal income tax consequences with respect to acquiring, owning and disposing of the
Common Shares. This discussion is not, and should not be, construed as legal or tax advice to a U.S. Holder of
Common Shares.
This discussion does not address the U.S. federal income tax consequences to U.S. Holders subject to
special rules, including but not limited to U.S. Holders that (i) are banks, financial institutions, or insurance
companies; (ii) are regulated investment companies or real estate investment trusts; (iii) are brokers, dealers, or
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traders in securities or currencies; (iv) are tax-exempt organizations; (v) hold Common Shares as part of hedges,
straddles, constructive sales, conversion transactions, or other integrated investments; (vi) acquire Common
Shares as compensation for services or through the exercise or cancellation of employee stock options or
warrants; (vii) have a functional currency other than the U.S. dollar; (viii) own or have owned directly, indirectly,
or constructively 10% or more of the voting power of the Company; or (ix) are subject to the alternative
minimum tax. In addition, this discussion does not address any U.S. federal estate, gift, or other non-income tax,
or any state, local, or non-U.S. tax consequences of the ownership and disposition of the Common Shares.
This summary does not address any U.S. federal income tax issues with respect to the Acquisition or related
transactions as those relate to the Existing Holders.
As used herein, ‘‘U.S. Holder’’ means a beneficial owner of Common Shares that is (i) an individual that is
a citizen or resident of the U.S. for U.S. federal income tax purposes; (ii) a corporation (or other entity taxable
as a corporation for U.S. federal income tax purposes) created or organized under the laws of the U.S., any
U.S. state, or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income tax
regardless of its source; or (iv) a trust that (a) is subject to the primary jurisdiction of a court within the U.S. and
for which one or more U.S. persons have authority to control all substantial decisions or (b) has a valid election
in effect under applicable Treasury Regulations to be treated as a U.S. person.
If a pass-through entity, including a partnership or other entity taxable as a partnership for U.S. federal tax
purposes, holds Common Shares, the U.S. federal income tax treatment of an owner or partner generally will
depend on the status of such owner or partner and on the activities of the pass-through entity. This summary
does not address any U.S. federal income tax issues that may be peculiar to a U.S. person that owns Common
Shares through a pass-through entity, and a U.S. person that is an owner or partner of a pass-through entity
holding Common Shares is urged to consult its own tax advisor.
This discussion assumes that Common Shares are held as capital assets (generally, property held for
investment), within the meaning of the Code, in the hands of a U.S. Holder at all relevant times.
A U.S. HOLDER OF COMMON SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR
REGARDING THE APPLICATION OF U.S. FEDERAL TAX LAWS TO ITS PARTICULAR SITUATION
AND ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, NON-U.S.,
OR OTHER TAXING JURISDICTION.
U.S. Federal Income Tax Consequences of the Ownership and Disposition of Common Shares
Distributions on Common Shares
Subject to the discussion under ‘‘Passive Foreign Investment Company (PFIC) Considerations’’ below, the
gross amount of any distribution paid on the Common Shares of the Company will generally be subject to
U.S. federal income tax as dividend income to the extent paid out of the Company’s current or accumulated
earnings and profits, as determined under U.S. federal income tax principles. Such amount will be includable in
gross income by a U.S. Holder as ordinary income on the date such U.S. Holder actually or constructively
receives the distribution. Dividends paid by the Company will not be eligible for the dividends received
deduction generally allowed to corporations.
Under the current law, which is scheduled to expire at the end of 2012, certain dividends paid by foreign
corporations to non-corporate U.S. Holders are eligible for taxation at reduced rates. The Company has not
determined whether any dividends paid by it would be eligible for such reduced rates.
Dividends received by a U.S. Holder with respect to Common Shares will constitute foreign source income,
which may be relevant in calculating the U.S. Holder’s foreign tax credit limitation. The limitation on foreign
taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose,
dividends paid by the Company with respect to the Common Shares will, depending on a U.S. Holder’s
circumstances, be ‘‘passive category’’ or ‘‘general category’’ income.
Subject to certain limitations, any Canadian tax withheld with respect to distributions made on the Common
Shares may be treated as a foreign tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability.
Alternatively, a U.S. Holder may, subject to applicable limitations, elect to deduct the otherwise creditable
Canadian withholding taxes for U.S. federal income tax purposes. The rules governing the foreign tax credit are
complex and their application depends on each taxpayer’s particular circumstances. Accordingly, U.S. Holders
are urged to consult their own tax advisors regarding the availability of the foreign tax credit under their
particular circumstances.
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To the extent that a distribution exceeds the amount of the Company’s current or accumulated earnings and
profits, as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of
capital, causing a reduction in the U.S. Holder’s adjusted basis in the Common Shares held by such U.S. Holder
(thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by such U.S. Holder
upon a subsequent disposition of the Common Shares), with any amount that exceeds the adjusted basis being
taxed as a capital gain recognized on a sale or exchange (as discussed under ‘‘Sale, Exchange, or Other Taxable
Disposition of Common Shares’’ below). However, the Company does not intend to maintain calculations of
earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should
therefore assume that any distribution by the Company with respect to the Common Shares will constitute
ordinary dividend income.
The gross amount of distributions paid in any foreign currency will be included by each U.S. Holder in gross
income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day the distributions
are actually or constructively received, regardless of whether the payment is in fact converted into U.S. dollars. If
the foreign currency is converted into U.S. dollars on the date of receipt, the U.S. Holder should not be required
to recognize any foreign currency gain or loss with respect to the receipt of the foreign currency distributions. If
the foreign currency received is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a
tax basis in the foreign currency equal to the U.S. dollar value on the date of receipt. Any foreign currency gain
or loss realized on a subsequent conversion or other disposition of the foreign currency will be treated as
U.S. source ordinary income or loss. The amount of any distribution of property other than cash will be the fair
market value of such property on the date of distribution.
Sale, Exchange, or Other Taxable Disposition of Common Shares
Subject to the discussion below under ‘‘Passive Foreign Investment Company (PFIC) Considerations,’’ a
U.S. Holder generally will recognize U.S. source capital gain or loss on the sale, exchange or other disposition of
Common Shares in an amount equal to the difference between the amount realized on the disposition and the
U.S. Holder’s adjusted tax basis in the Common Shares. Such gain or loss would be long-term capital gain or loss
if the U.S. Holder held the Common Shares for more than one year as of the date of the sale, exchange or other
disposition. Long-term capital gain recognized by certain non-corporate U.S. Holders, including individuals,
generally is subject to tax at a reduced rate. The deductibility of capital losses is subject to limitations.
With respect to the sale, exchange or other taxable disposition of Common Shares, the amount realized
generally will be the U.S. dollar value of the payment received determined on (1) the date of receipt of payment
in the case of a cash basis U.S. Holder and (2) the date of disposition in the case of an accrual basis U.S. Holder.
If the Common Shares are treated as traded on an ‘‘established securities market,’’ a cash basis taxpayer, or, if it
elects, an accrual basis taxpayer, will determine the U.S. dollar value of the amount realized by translating the
amount received at the spot rate of exchange on the settlement date of the sale. Additionally, if a U.S. Holder
receives any foreign currency on the sale of Common Shares, such U.S. Holder may recognize ordinary income
or loss as a result of currency fluctuations between the date of the sale of Common Shares and the date the sale
proceeds are converted into U.S. dollars.
Conversion of Common Shares
A conversion of Common Shares into Proportionate Voting Shares will not constitute a taxable exchange
for U.S. federal income tax purposes, and therefore, a U.S. Holder will not recognize any gain or loss upon such
exchange. A U.S. Holder’s holding period for the Proportionate Voting Shares received on a conversion will
include the holding period of the Common Shares so exchanged and the U.S. Holder’s initial adjusted tax basis
in the Proportionate Voting Shares received on a conversion will equal the adjusted tax basis of such U.S. Holder
in the Common Shares.
Passive Foreign Investment Company (PFIC) Considerations
Special and generally unfavourable U.S. federal income tax rules may apply to a U.S. Holder if its holding
period in its Common Shares includes any period during a taxable year of the Company in which the Company
or certain non-U.S., corporations related to it (a ‘‘Related Entity’’) is a passive foreign investment company
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(a ‘‘PFIC’’). A non-U.S. corporation is classified as a PFIC for each taxable year in which (a) 75% or more of its
income is passive income (as defined for U.S. federal income tax purposes) or (b) on average for such taxable
year, 50% or more of the average value (or, if elected, the adjusted tax basis) of its assets either produce or are
held for the production of passive income.
The Company believes that neither it nor a Related Entity currently is a PFIC for U.S. federal income tax
purposes, and the Company does not expect itself or a Related Entity to become a PFIC in the future. If the
Company or a Related Entity were classified as a PFIC for any taxable year during which a U.S. Holder holds
Common Shares, such U.S. Holder would be subject to an increased tax liability (such tax generally will be
calculated at the highest U.S. federal income tax rate and will also include an interest charge) upon the sale or
other disposition of the Common Shares or upon the receipt of certain distributions treated as ‘‘excess
distributions,’’ unless the U.S. Holder makes certain elections to mitigate such consequences (although even if
either of such elections were made the U.S. federal income tax consequences of ownership of stock of a PFIC
are still less favourable than ownership of stock of a non-PFIC). In addition, certain annual information
reporting to the IRS would be required of the U.S. Holder if the Company or a Related Entity is a PFIC. If the
Company were to determine that it had become a PFIC, it would provide additional information regarding such
elections and reporting requirements.
Each U.S. Holder is urged to consult its own tax advisor regarding the Company’s PFIC classification, the
consequences to such U.S. Holder of the Company’s PFIC classification, and the availability and the
consequences of making certain election to mitigate such consequences.
U.S. Information Reporting and Backup Withholding Tax
Under U.S. federal income tax law and regulations, certain categories of U.S. Holders must file information
returns with respect to their investment in, or involvement in, a foreign corporation. Penalties for failure to file
certain of these information returns are substantial. In addition, new U.S. return disclosure obligations
(and related penalties for failure to disclose) have also been imposed on U.S. individuals that hold certain
specified foreign financial assets in excess of $50,000. The definition of specified foreign financial assets includes
not only financial accounts maintained in foreign financial institutions, but also may include the Common
Shares. U.S. Holders of Common Shares should consult their own tax advisors regarding the requirements of
filing information returns.
Dividends on Common Shares and proceeds from the sale or other disposition of Common Shares that are
paid in the United States or by a U.S.-related financial intermediary will be subject to U.S. information reporting
rules, unless a U.S. Holder is a corporation or other exempt recipient. In addition, payments that are subject to
information reporting may be subject to backup withholding (currently at a 28% rate) if a U.S. Holder does not
provide its taxpayer identification number and otherwise comply with the backup withholding rules. Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules are available to be
credited against a U.S. Holder’s U.S. federal income tax liability and may be refunded to the extent they exceed
such liability, provided the required information is provided to the IRS in a timely manner.
Additional Tax on Investment Income
For taxable years beginning after December 31, 2012, U.S. Holders that are individuals, estates or trusts and
whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on
unearned income, including, among other things, dividends on, and capital gains from the sale or other taxable
disposition of, the Common Shares, subject to certain limitations and exceptions.
Each U.S. Holder is urged to consult its own tax advisors regarding the possible implications of the
additional tax on investment income described above.
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U.S. Federal Income Tax Consequences of the Acquisition to the Company
The Company believes that the Acquisition will have no material U.S. federal income tax consequences to
the Company.
The Company will use Equity Shares and a portion of the proceeds of the Offering to purchase 100% of
KSGI, which owns (i) 100% of Bauer Hockey Corp., a Canadian corporation and (ii) 100% of Bauer
Hockey, Inc., a Vermont corporation.
In certain circumstances, the direct or indirect acquisition of substantially all of the assets of a
U.S. corporation by a non-U.S. corporation will be subject to adverse U.S. federal income tax consequences
(‘‘inversion transactions’’). If after the acquisition of the U.S. corporation, at least 80% of the stock of the
acquiring corporation (without regard for stock sold in a public offering) is owned by former shareholders of the
U.S. corporation by reason of their ownership of the U.S. corporation, the acquiring corporation is treated as a
U.S. corporation for U.S. federal income tax purposes. If after the acquisition of the U.S. corporation, at least
60% (but less than 80%) of the stock of the acquiring corporation (without regard for stock sold in a public
offering) is held by former shareholders of the U.S. corporation by reason of their ownership of the
U.S. corporation, the U.S. corporation will be subject to U.S. federal income tax on its ‘‘inversion gain,’’ which,
in general, is the gain recognized on asset transfers that occur as part of the transaction or are made to related
foreign parties during the 10-year period beginning on the date of the acquisition. Neither of these rules apply if,
after the acquisition, the acquiring corporation and certain affiliated entities have substantial business activities
in the foreign country in which the acquiring corporation is organized. The determination as to whether a
foreign corporation has substantial business activities in its country of organization is based on all the facts and
circumstances.
The Company believes that the Acquisition is not an inversion transaction, because less than 60% of the
Equity Shares issued in the Acquisition will be held by Existing Holders by reason of their ownership of Bauer
Hockey, Inc. Further, the Company believes, based on the level of business activity in Canada by it and its
subsidiaries, including the value of the assets located in Canada, sales, and payroll, that the Company will
conduct substantial business activities in Canada. Both of these conclusions depend upon the facts and
circumstances of the Company, and there can be no assurance that the IRS will not challenge these conclusions.
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RISK FACTORS
You should carefully consider the risks described below, which are qualified in their entirety by reference to, and
must be read in conjunction with, the detailed information appearing elsewhere in this prospectus, and all other
information contained in this prospectus before purchasing Common Shares, including the consolidated financial
statements and accompanying notes. The risks and uncertainties described below are those we currently believe to be
material, but they are not the only ones we face. If any of the following risks, or any other risks and uncertainties that
we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our
business, prospects, financial condition, results of operations and cash flows and consequently the price of the
Common Shares could be materially and adversely affected. In all these cases the trading price of the Common
Shares could decline and you could lose all or part of your investment.
Risks Related to Our Business
Sales of our products may be adversely affected if we cannot effectively introduce new and innovative products
The sporting equipment industry is subject to constantly and rapidly changing consumer demands based, in
part, on performance benefits. 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 and growth will depend, in part, upon our continued ability to develop and introduce innovative
products. Successful product design, however, can be displaced by other product designs introduced by
competitors which shift market preferences in their favour. 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 revenues and an increase in our inventory levels, and could
adversely affect our business and financial condition.
In addition, 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.
Conversely, our competitors may obtain intellectual property protection for superior products that would
preclude us from offering the same or similar features. If a competitor’s proprietary product feature became the
industry standard, our customers may purchase products from our competitors, which will result in a decrease in
our net revenues and an increase in our inventory levels, and could adversely affect our business and financial
condition.
Our financial results will be affected by market conditions in the sporting equipment and related apparel industry,
which is intensely competitive and has certain segments with low barriers to entry
The sporting equipment industry is highly competitive. Competitive factors that affect our market position
within the sporting equipment industries in which we compete include the style, quality, technical aspects and
pricing of our products and the strength and authenticity of our brands. There are minimal barriers to entry into
certain segments of the sporting equipment and related apparel industry. For example, there are low barriers to
entry in the related apparel market, including certain performance, team and lifestyle segments. The general
availability of offshore manufacturing capacity allows for rapid expansion by competitors and new entrants. Our
competitors may overproduce, or face financial or liquidity difficulties, which may lead them to release their
products at lower prices into the market, resulting in decreased demand for our products. We face competition
from well-known sporting goods companies, such as Reebok and Easton in the ice hockey industry, each of
which has strong brand recognition inside and outside of hockey. In lacrosse, our principal competitors include
STX, Brine and Warrior, each of which has significant market share and stronger brand recognition than
Maverik. We also compete with smaller companies who specialize in marketing to our core customers. Our
inability to effectively compete in the sporting equipment and related apparel market could adversely affect our
business and financial condition.
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We rely on technical innovation and high quality products to compete in the market for our products
Although design and performance of our products is a key factor for consumer acceptance of our products,
technical innovation and quality control in the design and manufacture of sporting equipment and related
apparel is also essential to the commercial success of our products. R&D plays a key role in technical innovation.
We include specialists in the fields of biomechanics, engineering, industrial design and related fields, as well as
research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, and other
experts to develop and test cutting-edge performance products. While we strive to produce quality products that
enhance athletic performance and maximize comfort, if we fail to introduce technical innovation in our products
the consumer demand for our products could decline. If we experience problems with the quality of our
products, we may incur substantial expense to remedy the problems and our reputation and brands may be
harmed which could adversely impact our business and financial condition.
In addition, there can be no assurance that our third party suppliers and manufacturers will continue to
manufacture products that are consistent with our quality 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 revenues resulting from the inability to sell those products and could incur
related increased administrative and shipping costs, and there also could be a negative impact to our brands
which could adversely impact our business and financial condition.
Our success depends in large part on the continued popularity of ice hockey, roller hockey and lacrosse as
recreational sports and the popularity of the NHL and other professional leagues for sports in which our products
are used
We generate a significant portion of our revenue from the sale of ice hockey equipment and related apparel.
The other portion of our revenue flow is generated from the sale of roller hockey and lacrosse equipment and
related apparel. The demand for our ice hockey equipment and related apparel is directly related to the
popularity of the sport of ice hockey, the number of professional and amateur ice hockey participants and the
amount of ice hockey being played by these participants. If ice hockey participation decreases, sales of our ice
hockey equipment and related apparel could be adversely affected.
The popularity of the NHL, as well as other professional ice hockey leagues in North America, Europe and
the rest of the world, also affect the sales of our ice hockey equipment and related apparel. Our brands receive
significant ‘‘on-ice’’ exposure as a result of our endorsements with, or purchases by, NHL players and other
professional athletes. We depend on this ‘‘on-ice’’ exposure of our brands to increase brand recognition and
reinforce the quality and high performance of our products. Any significant reduction in television coverage of
NHL games, any work stoppages in the NHL or any other significant decreases in either attendance at NHL
games or viewership of NHL games will reduce the visibility of our brands and could adversely affect our sales of
hockey equipment and related apparel.
Likewise, our sales of roller hockey and lacrosse equipment and related apparel depends on the popularity
of these sports, professional and amateur participation and brand exposure from league play which if negatively
impacted could adversely affect our business and financial condition.
The value of our brands and sales of our products could be diminished if we, the athletes who use our products or
the sports in which our products are used, 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
revenues, 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
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promotion, which may not prove to be as effective or may result in additional costs. Also, union strikes or
lock-outs affecting professional play could negatively impact the popularity of the sport, which could have a
material adverse effect on our net revenues from 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, recalls or bans on the use of our products and if the popularity of
ice hockey (or other sports for which we design, manufacture and sell equipment and related apparel) among
players and fans were to decrease due to these risks or the associated negative publicity, sales of our products
could decrease and it could have a negative impact on our net revenues, profitability and operating results and
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, which could adversely impact our business and financial condition.
Our business depends on strong brands, and if we are not able to maintain and enhance our brands we may be
unable to sell our products, which would harm our business and cause the results of our operations to suffer
We believe that the brand image we have developed has significantly contributed to the success of our
business. We also believe that maintaining and enhancing the Bauer, Vapor, Supreme, Mission and Maverik
brands is critical to maintaining and expanding our customer base. Maintaining and enhancing our brands may
require us to make substantial investments in areas such as R&D, community relations and employee training,
and these investments may not be successful. A primary component of our strategy involves expanding into other
geographic markets, particularly within Eastern Europe and Russia (for ice hockey) and in Canada
(for lacrosse). As we expand into new geographic markets, consumers in these markets may not accept our
brand image and may not be willing to pay a premium to purchase our sporting equipment as compared to the
locally established branded equipment. We anticipate that as our business expands into new markets,
maintaining and enhancing our brands may become increasingly difficult and expensive. If we are unable to
maintain or enhance our brands’ image, it could adversely affect our business and financial condition.
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 Fiscal 2010, approximately 90% 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. During Fiscal 2010, nine international manufacturers produced
approximately 90% of our purchased finished goods. We do generally maintain long-term agreements with our
third-party suppliers and manufacturers, and we compete with other businesses for raw materials, production
capacity and capacity within applicable import quotas.
If we experience significantly increased demand, or if, for any reason, we need to replace an existing
manufacturer or supplier, 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
new supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In
addition, should we decide to transition existing manufacturing between 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. 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.
We are subject to numerous risks associated with doing business abroad, any one of which, if realized, could
adversely affect our business or financial condition
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,
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including, among others: (i) economic trends in international markets; (ii) legal and regulatory changes and the
burdens and costs of our compliance with a variety of laws, including trade restrictions and tariffs;
(iii) difficulties in enforcing intellectual property rights; (iv) increases in transportation costs or delays; (v) work
stoppages and labour strikes; (vi) increase and volatility in labour input costs; (vii) fluctuations in exchange rates;
(viii) political unrest, terrorism and economic instability; and (ix) 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. Should our current third-party
manufacturers become incapable of meeting our manufacturing or supply requirements in a timely manner or
cease doing business with us for any reason, our business and financial condition could be adversely affected.
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 labour 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, which could
adversely affect our business and financial condition.
Problems with our distribution system could harm our ability to meet customer expectations, manage inventory,
complete sales and achieve objectives for operating efficiencies
We rely on our distribution facilities in Greenland, New Hampshire, and Mississauga, Ontario, and on third
party logistics providers in Boras, Sweden and Aurora, Illinois for substantially all of our product distribution.
We intend to broaden our arrangement with this third-party vendor to encompass the distribution of all U.S. ice
hockey equipment but there can be no assurance that we will be able to enter into an agreement with this third
party on acceptable terms. Our distribution facilities include computer controlled and automated equipment,
which means their operations are complicated and may be subject to a number of risks related to security or
computer viruses, the proper operation of software and hardware, electronic or power interruptions or other
system failures. In addition, because substantially all of our products are distributed from a few locations, our
operations could also be interrupted by labour difficulties, or by floods, fires or other natural disasters near our
distribution centers. We maintain business interruption insurance, but it may not adequately protect us from the
adverse effects that could result from significant disruptions to our distribution system, such as the long-term
loss of customers or an erosion of our brand image. In addition, our distribution capacity is dependent on the
timely performance of services by third parties, including the shipping of our products to and from the Aurora,
Illinois and Boras, Sweden distribution facilities. If we encounter problems with our distribution system, our
ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating
efficiencies could be harmed, which could adversely affect our business and financial condition.
The cost of raw materials could affect our operating results
The materials used by us, our suppliers and our manufacturers involve raw materials, including carbonfiber, aluminum, steel, resin and other petroleum-based products. Significant price fluctuations or shortages in
petroleum or other raw materials, including the costs to transport such materials or finished products, 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.
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 our core geographic markets and
other jurisdictions and on contractual restrictions, such as confidentiality agreements, to protect certain aspects
of our business. We also enter into confidentiality and invention assignment agreements with our employees and
consultants. However, while we have selectively pursued patent and trademark protection in our core geographic
markets, 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
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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 Canada or 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 Canada and the United States, thirdparty 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 revenues 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 and patents, 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 Bauer, Vapor, Supreme, Mission and Maverik. We
believe that these trademarked and licensed brands, as applicable, 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.
Vapor, one of our key brands, is not owned, and Vapor and Supreme are both subject to use by third parties
on products outside of hockey and skating.
Our rights to the Vapor brand are licensed from Nike, and Nike continues to own the mark and the goodwill
associated therewith. We are required to comply with certain conditions regarding our use of the Vapor mark,
and are not permitted to use it on apparel or equipment primarily manufactured for participants in athletic
activities other than hockey or skating. If we materially breach certain provisions of the Vapor License
Agreement and do not or are unable to remedy such breach following notice by Nike, the Vapor License
Agreement could be terminated, which would have an adverse effect on our business and financial condition.
Nike has rights to use the Vapor mark and the Supreme mark on equipment and apparel outside of the
hockey and skating markets. If Nike’s, or its licensees’, use of the Vapor or Supreme marks is associated with
negative publicity, it may have an adverse effect on our business and financial condition.
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
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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.
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, which could adversely affect our business and financial condition.
Our business is affected by seasonality, which could result in fluctuations in our operating results and the trading
price of our Common Shares
We experience substantial fluctuations in aggregate sales volume during the year. Historically, revenues in
the first fiscal quarter have exceeded those in the second and fourth fiscal quarters and revenues in the third
fiscal quarter are lower than the other quarters. However, the mix of product sales may vary considerably from
time to time as a result of changes in seasonal and geographic demand for particular types of equipment and
related apparel. In addition, our customers may cancel orders, change delivery schedules or change the mix of
products ordered with minimal notice. We may also make strategic decisions to deliver and invoice product at
certain dates in order to lower costs or improve supply chain efficiencies. As a result, we may not be able to
accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly
from period to period. This seasonality, along with other factors that are beyond our control, including general
economic conditions, changes in consumer preferences, weather conditions, availability of import quotas and
currency exchange rate fluctuations, could adversely affect our business and financial conditiion. Our operating
margins are also sensitive to a number of factors, including those that are beyond our control, as well as shifts in
product sales mix, geographic sales trends, and currency exchange rate fluctuations, all of which we expect to
continue. Results of operations in any period should not be considered indicative of the results to be expected
for any future period.
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 on a multi-season or
multi-year basis. For Fiscal 2010, our top 10 customers, collectively accounted for approximately 42.4% of our
net revenues. While none of our customers accounted for more than 10% of our net revenues, we nonetheless
face the risk that one or more of our key customers may not increase their business with us as much as we
expect, may suffer from an economic downturn, 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 adversely affect our business and financial condition. In addition, our customers in the
retail industry are experiencing consolidation, contractions and some may face financial difficulties from time to
time. A large portion of our sales are to specialty sporting 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 non-payment. 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, which could adversely affect our business and financial condition.
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 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:
• changes in consumer demand for our products or the products of our competitors;
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• new product introductions by our competitors;
• failure to accurately forecast consumer acceptance of our products;
• adverse weather conditions;
• 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;
• weakening of economic conditions or consumer confidence in future economic conditions, which could
reduce demand for discretionary items, such as our products;
• 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
• 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 revenues, any of which could adversely affect our business and financial
condition.
We may not be successful in our efforts to expand into international market segments
We intend to expand into additional international markets, particularly Eastern Europe and Russia (for ice
hockey) and in Canada (for lacrosse), in order to grow our business. These expansion plans will require
significant management attention and resources and may be unsuccessful. We have limited experience adapting
our products to conform to local cultures, standards and policies, particularly in non-western markets. In
addition, to achieve satisfactory performance for consumers in international locations, it may be necessary to
locate physical facilities, such as regional offices, in the foreign market. We may not be successful in expanding
into any additional international markets or in generating revenues from foreign operations.
In addition to risks described elsewhere in this prospectus, our international sales and operations are
subject to a number of risks, including:
• economic and political conditions, including inflation, fluctuation in interest rates and currency
exchange rates;
• government regulation and restrictive governmental actions (such as trade protection measures, including
export duties and quotas and custom duties and tariffs), nationalization, measures protecting cultural
industries expropriation and restrictions on foreign ownership;
• restrictions on sales or distribution of certain products and uncertainty regarding liability for products,
services and content, local laws, lack of legal precedent, and enforcement of intellectual property rights;
• business licensing or certification requirements;
• lower levels of consumer spending and fewer opportunities for growth compared to our existing
markets; and
• geopolitical events, including unstable governments and legal systems, war, civil unrest, terrorism.
Adverse developments in any of these areas could adversely affect our business and financial condition.
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 or designed 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
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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. 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 portion of the Company’s product liability coverage is written under a policy
expiring on June 1, 2011 with a primary limit of $5,000,000, and with a self-insured retention of $50,000 for all
products, including helmets and soft goods. The Company has umbrella coverage with a limit of $20,000,000
above the primary layer. The umbrella coverage expires on June 1, 2011. We also have excess liability coverage,
expiring on June 1, 2011, with a limit of $25,000,000 above the umbrella layer, providing a total of $50,000,000 of
liability insurance. We cannot assure you that this coverage will be renewed or otherwise 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 uneconomical 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 an adverse effect on
our business and financial condition and could harm the reputation of our brands.
In addition, if any of our products are, or are alleged to be defective or not in compliance with applicable
law, we may be required to or voluntarily participate in a recall of that product. For example, we recently
conducted a recall of approximately 130,000 youth hockey sticks in North America after we found that the paint
on these sticks contained lead in excess of the regulatory limits established in Canada and the United States for
children’s products. The manufacturer of these sticks assumed full responsibility for the costs incurred by the
Company in connection with this recall, but there can be no assurance that the costs of any future recalls will not
be borne, at least in part, by the Company.
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 Canadian Standards Association (CSA) and the Hockey Equipment Certification Council
(HECC), as well as by athletic organizations and governing bodies, including the NHL and NCAA. 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. Any failure to comply with applicable standards could have an adverse effect on our
business and financial condition. In addition, certain regulatory and testing bodies, including the CSA, test and
certify our products pursuant to contractual agreements which may be terminated with or without cause by the
regulatory and testing bodies on short notice. Any such termination may be within or beyond our control, and if
we could no longer sell our products with the relevant certification, it could have an adverse effect on
our business and financial condition.
If we lose the services of our CEO or other member of our team who possess specialized market knowledge and
technical skills, it could reduce our ability to compete, to manage our operations effectively, or to develop new
products and services
Many of our team members have extensive experience in our industry and with our business, products, and
customers. Since we are managed by a small group of senior executive officers, the loss of the technical
knowledge, management expertise and knowledge of our operations of one or more members of our team,
including Kevin Davis, our President and CEO, could result in a diversion of management resources, as the
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remaining members of management would need to cover the duties of any senior executive who leaves us and
would need to spend time usually reserved for managing our business to search for, hire and train new members
of management. The loss of some or all of our team could negatively affect our ability to develop and pursue our
business strategy, which could adversely affect our business and financial condition. In addition, the market for
key personnel in the industry in which we compete is highly competitive, and we may not be able to attract and
retain key personnel with the skills and expertise necessary to manage our business. We do not maintain ‘‘key
executive’’ life insurance.
Litigation may adversely affect our business and financial results
Our business is subject to the risk of litigation by employees, customers, consumers, suppliers, competitors,
shareholders, government agencies, or others through private actions, class actions, administrative proceedings,
regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits, regulatory
actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may
seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these
lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided
adversely to us or settled by us, may result in liability material to our financial statements as a whole or may
negatively affect our operating results if changes to our business operations are required. The cost to defend
future litigation may be significant. There also may be adverse publicity associated with litigation that could
negatively affect customer perception of our business, regardless of whether the allegations are valid or whether
we are ultimately found liable. As a result, litigation may adversely affect our business and financial condition.
Employment related matters, such as unionization, may affect our profitability or reputation
As of November 30, 2010, approximately 83 of our 389 employees were unionized. Although we have good
labour 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 Mississauga, Ontario, covering
approximately 55 employees expires in July 2011. Our collective bargaining agreement with a union in
St. Jerome, Québec covering approximately 28 employees expires in November 2012. labour 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 favourable terms or that we will not experience work
stoppages or other labour problems in the future at our unionized and non-union facilities. We could experience
a disruption of our operations or higher ongoing labour costs, which could adversely affect our business and
financial condition.
In addition, labour 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.
Further, any negative publicity associated with actions by any of our employees, whether during the course
of employment or otherwise, could negatively affect our reputation, which could adversely affect our business
and financial condition.
If we experience significant disruptions in our information technology systems, our business and financial results
may be adversely affected
We depend on our information technology systems for the efficient functioning of our business, including
accounting, data storage, customer order processing, purchasing and inventory management. Our software
solutions are intended to enable management to better and more efficiently conduct our operations and gather,
analyze, and assess information across all business segments and geographic locations. However, difficulties with
the hardware and software platform could disrupt our operations, including our ability to timely ship and track
product orders, project inventory requirements, manage our supply chain, and otherwise adequately service our
customers, which would have an adverse effect on our business and financial results. In the event we experience
significant disruptions with our information technology system, we may not be able to fix our systems in an
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efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire
operation and have a material adverse effect on our business and financial condition. Costs associated with
potential interruptions to our information systems could be significant.
The ability to operate our business will be limited by restrictive covenants contained in our New Credit Facility
Our New Credit Facility will contain restrictive financial and other covenants which affect and, in some
cases, significantly limit or prohibit, among other things, the manner in which we may structure or operate our
business, including by reducing our liquidity, limiting our ability to incur indebtedness, create liens, sell assets,
pay dividends, make capital expenditures, be subject to a change of control, and engage in acquisitions, mergers
or restructurings. Future financings and other major agreements may also be subject to similar covenants which
limit our operating and financial flexibility, which could materially and adversely affect our business and
financial condition.
A failure by us to comply with our contractual obligations (including restrictive, financial and other
covenants), or to pay our indebtedness and fixed costs could result in a variety of material adverse consequences,
including the acceleration of our indebtedness, and the exercise of remedies by our creditors, and such defaults
could trigger additional defaults under other indebtedness or agreements. In such a situation, it is unlikely that
we would be able to repay the accelerated indebtedness or fulfill our obligations under certain contracts, or
otherwise cover our fixed costs. Also, the lenders under the financing arrangements could foreclose upon all or
substantially all of our assets which secure our obligations.
Our anticipated level of indebtedness could adversely affect our ability to raise additional capital to fund our
operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our
debt obligations
$
Upon the Closing of the Offering, our long-term debt excluding financing costs will be approximately
million. Our degree of leverage could have important consequences, including the following:
• a substantial portion of our cash flows from operations will be dedicated to the payment of principal and
interest on our indebtedness and other financial obligations and will not be available for other purposes,
including funding our operations and capital expenditures for projects such as a new warehouse or
distribution center, new store openings, and future business opportunities;
• the debt service requirements of our other indebtedness and lease expense could make it more difficult
for us to make payments on our debt;
• our ability to obtain additional financing for working capital and general corporate or other purposes may
be limited;
• certain of our borrowings under the New Credit Facility, is at variable rates of interest, exposing us to the
risk of increased interest rates;
• our debt level may limit our flexibility in planning for, or reacting to, changes in our business and in our
industry in general, placing us at a competitive disadvantage compared to our competitors that have
less debt;
• our leverage may make us vulnerable to a downturn in general economic conditions and adverse industry
conditions; and
• changes in interest rates could materially and adversely affect our cash flows and results from operations.
Our financing includes long-term debt and a Revolving Loan that bears interest based on floating market
rates. Changes in these rates result in fluctuation in the required cash flow to service this debt and could
adversely affect our business and financial condition.
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Our business could suffer if we are unsuccessful in making, integrating, and maintaining acquisitions
and investments
One of our growth strategies is to pursue strategic acquisitions of new or complementary businesses,
products or technologies, although we have no present commitments with respect to any material acquisitions or
investments. There can be no assurance that we would be able to expand our efforts and operations in a
cost-effective or timely manner or that any such efforts would increase overall market acceptance. Further, given
our current level of market share in the hockey equipment segment, any acquisitions or investments may be
subject to regulatory approval, and there can be no assurance that such approval would be received, whether in a
timely manner or if at all.
Furthermore, any new businesses or products acquired by us that were not favourably received by
consumers could damage our reputation or our existing brands. The lack of market acceptance of such
businesses or products or our inability to generate satisfactory revenues from such businesses or products to
offset their cost could have an adverse effect on our business and financial condition.
We have acquired and invested in a number of companies, and we may acquire or invest in or enter into
joint ventures with additional companies. These transactions create risks such as:
• disruption of our ongoing business, including loss of management focus on existing businesses;
• problems retaining key personnel;
• additional operating losses and expenses of the businesses we acquired or in which we invested;
• the potential impairment of tangible assets, intangible assets and goodwill acquired in the acquisitions;
• the potential impairment of customer and other relationships of a company we acquired or in which we
invested or our own customers as a result of any integration of operations;
• the difficulty of incorporating acquired businesses and unanticipated expenses related to such integration;
• the difficulty of integrating a new company’s accounting, financial reporting, management, information,
human resource and other administrative systems to permit effective management, and the lack of
control if such integration is delayed or not implemented;
• the difficulty of implementing at a company we acquire the controls, procedures and policies appropriate
for a public company;
• potential unknown liabilities associated with a company we acquire or in which we invest; and
• for foreign transactions, additional risks related to the integration of operations across different cultures
and languages, and the economic, political, and regulatory risks associated with specific countries.
As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our
cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which
could reduce our profitability and harm our business. In addition, valuations supporting our acquisitions and
strategic investments could change rapidly given the current global economic climate and the inherent
uncertainty involved in such matters. We could determine that such valuations have experienced impairments or
other-than-temporary declines in fair value which could adversely impact our business and financial condition.
Acquisitions and investment also increase the complexity of our business and places significant strain on our
management, personnel, operations, supply chain, financial resources, and internal financial control and
reporting functions. We may not be able to manage growth effectively, which could damage our reputation, limit
our growth and adversely affect our business and financial condition.
Risks Related to the Offering
Our securities have no prior public market and our share price may decline after the Offering
Before this Offering, there has been no public market for our Common Shares, and an active public market
for our Common Shares may not develop or be sustained after this Offering. If an active public market does not
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develop, the liquidity of your investment may be limited, and our share price may decline below its initial public
Offering Price. The Offering Price has been determined by negotiation between us and the Underwriters and
may bear no relationship to the price that will prevail in the public market.
Volatile market price for Common Shares
The market price for Common Shares may be volatile and subject to wide fluctuations in response to
numerous factors, many of which are beyond the Company’s control, including the following:
• actual or anticipated fluctuations in the Company’s quarterly results of operations;
• changes in estimates of our future results of operations by us or securities research analysts;
• changes in the economic performance or market valuations of other companies that investors deem
comparable to the Company;
• addition or departure of the Company’s executive officers and other key personnel;
• release or other transfer restrictions on outstanding Common Shares;
• sales or perceived sales of additional Common Shares;
• significant acquisitions or business combinations, strategic partnerships, joint ventures or capital
commitments by or involving the Company or its competitors;
• news reports relating to trends, concerns or competitive developments, regulatory changes and other
related issues in the Company’s industry or target markets; and
• conversion or sale of the Proportionate Voting Shares.
Financial markets have recently experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of companies and that have, in many cases, been unrelated to the
operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of
the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects
have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset
values that are deemed to be other than temporary, which may result in impairment losses. As well, certain
institutional investors may base their investment decisions on consideration of the Company’s environmental,
governance and social practices and performance against such institutions’ respective investment guidelines and
criteria, and failure to meet such criteria may result in a limited or no investment in the Common Shares by
those institutions, which could adversely affect the trading price of the Common Shares. There can be no
assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility
and market turmoil continue, the Company’s business and financial condition could be adversely impacted and
the trading price of the Common Shares may be adversely affected.
We do not currently intend to pay dividends on our Equity Shares
We currently intend to retain future earnings, if any, for future operation, expansion and debt repayment.
Any decision to declare and pay dividends on our Equity Shares in the future will be made at the discretion of
our Board of Directors and will depend on, among other things, our financial results, cash requirements,
contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability
to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our
subsidiaries incur, including our New Credit Facility. As a result, you may not receive any return on an
investment in our Common Shares in the foreseeable future unless you sell our Common Shares for a price
greater than that which you paid for it.
We will incur increased costs as a result of complying with the reporting requirements, rules and regulations
affecting public companies
As a public company, we are subject to the reporting requirements and rules and regulations under the
securities laws of all of the provinces of Canada. Additional or new regulatory requirements may be adopted in
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the future. The requirements of existing and potential future rules and regulations will increase our legal,
accounting and financial compliance costs, make some activities more difficult, time-consuming or costly and
may also place undue strain on our personnel, systems and resources, which could adversely affect our business
and financial condition.
We are a holding company
We are a holding company and a substantial portion of our assets are the capital stock of our subsidiaries.
As a result, investors in the Company are subject to the risks attributable to our subsidiaries. As a holding
company, we conduct substantially all of our business through our subsidiaries, which generate substantially all
of our revenues. Consequently, the Company’s cash flows and ability to complete current or desirable future
enhancement opportunities are dependent on the earnings of its subsidiaries and the distribution of those
earnings to the Company. The ability of these entities to pay dividends and other distributions will depend on
their operating results and will be subject to applicable laws and regulations which require that solvency and
capital standards be maintained by such companies and contractual restrictions contained in the instruments
governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of our subsidiaries,
holders of indebtedness and trade creditors will generally be entitled to payment of their claims from the assets
of those subsidiaries before any assets are made available for distribution to the Company. Upon completion of
this Offering, the Common Shares will be effectively junior to indebtedness and other liabilities (including trade
payables) of our subsidiaries. If any dividends are payable, holders of each Proportionate Voting Share will
receive 1,000 times the amount paid to the holder of each Common Share.
The IRS may assert that the Acquisition is an inversion transaction
In certain circumstances, a U.S. corporation that is acquired by a non-U.S. corporation may be required to
recognize certain taxable income, or the new foreign parent corporation may be treated as a U.S. corporation for
U.S. federal income tax purposes (‘‘inversion transactions’’). See ‘‘Certain U.S. Federal Income Tax
Considerations — U.S. Federal Income Tax Consequences of the Acquisition to the Company’’. If the Company
were treated as a U.S. corporation for U.S. federal income tax purposes, the Company and its shareholders that
are not U.S. Holders could be subject to adverse tax consequences. The Company believes, based on the facts
and circumstances of the Acquisition and the Company’s operations, that the Acquisition will not be an
inversion transaction, but there can be no assurance that the IRS will not challenge this conclusion.
Our existing investors will indirectly retain control of Bauer and their interests may conflict with your interests
Immediately after the completion of the Offering, the Kohlberg Funds, collectively, will own an equivalent
of Common Shares (assuming the conversion of all Proportionate Voting Shares to Common Shares on
the basis of 1,000 Common Shares for one Proportionate Voting Share), representing a % equity and
voting interest in the Company ( % on a fully diluted basis), and if the Over-Allotment is exercised in full,
the Kohlberg Funds, collectively, will own an equivalent of Common Shares (assuming the conversion of
all Proportionate Voting Shares to Common Shares on the basis of 1,000 Common Shares for one Proportionate
Voting Share), representing a
% equity and voting interest in the Company ( % on a fully
diluted basis).
Accordingly, and for so long as the Kohlberg Funds continue to have significant voting power among the
Equity Shares, it could exercise a controlling influence over our business and affairs and will have the power to
determine or significantly influence all matters submitted to a vote of our shareholders, including the election of
the majority of our directors and approval of significant corporate transactions such as amendments to our
Articles and By-Laws, mergers, amalgamations and the sale of all or substantially all of our assets. The Kohlberg
Funds could cause corporate actions to be taken even if the interests of the Kohlberg Funds conflict with the
interests of our other shareholders. This concentration of voting power could have the effect of deterring or
preventing a change in control of Bauer that might otherwise be beneficial to our shareholders. See also
‘‘Description of Share Capital’’ and ‘‘Principal Shareholders’’.
The Kohlberg Funds also have certain rights to nominate directors for election, and as such, may exercise
further control on our business, affairs and strategic direction. In addition, certain Existing Investors (other than
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the Kohlberg Funds) will also enter into the Voting Agreement pursuant to which they will agree to vote in
favour of the Company’s slate of directors nominated for election or appointment by the Board of Directors. See
‘‘Certain Securityholders Agreements — Nomination Rights Agreement’’ and ‘‘Certain Securityholders
Agreements — Voting Agreement’’.
Conversions and potential future sales of Equity Shares could adversely affect prevailing market prices for the
Equity Shares
Common Shares may at any time, at the option of the holder, be converted into Proportionate Voting
Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share. Each issued and outstanding
Proportionate Voting Share may at any time, at the option of the holder, be converted into 1,000 Common
Shares. See ‘‘Description of Share Capital — Equity Shares’’ and ‘‘Description of Share Capital — Conversion
Rights’’.
The Existing Holders may sell some or all of their Equity Shares in the future and no prediction can be
made as to the effect, if any, such future sales of Equity Shares could have on the market price of the Common
Shares or other Equity Shares prevailing from time to time.
Future sales of a substantial number of Equity Shares by our shareholders, officers, directors, principal
shareholder and their affiliates, or the perception that such sales could occur, could adversely affect prevailing
market prices for the Equity Shares and could impair our ability to raise capital through any future sales of our
securities. Pursuant to the Registration Rights Agreement, the Existing Holders are granted certain demand and
‘‘piggy-back’’ registration rights. See ‘‘Certain Securityholders Agreements — Registration Rights Agreement’’.
No prediction can be made as to the effect of any conversion of an Equity Share into another class of Equity
Shares. Generally, any conversion between our Equity Shares could have adverse effects on the liquidity and
market prices for the shares of the class from which conversion is made and the shares of the class to which
conversion is made, respectively.
Risks Related to Macroeconomic Environment
Fluctuations in the value of the Canadian dollar and the U.S. dollar in relation to each other and other world
currencies may impact our operating and financial results and may affect the comparability of our results between
financial periods
We are exposed to market risks attributable to fluctuations in foreign currency exchange rates, primarily
changes in the value of the U.S. dollar versus other currencies such as the Canadian dollar, the euro and the
Swedish krona. Exchange rate fluctuations could have an adverse effect on our results of operations. We conduct
business in many geographic markets. For example, most of our supply purchases are in U.S. dollars, and a
majority of our sales and revenues are in Canadian dollars. Therefore, a fluctuation in the exchange rate of
U.S. dollar versus other currencies such as the Canadian dollar, the euro and the Swedish krona, could
materially affect our gross profit margins and operating results. We have entered into various arrangements to
mitigate our foreign currency rate, but there can be no assurances that such arrangements will prove to be
favourable to the Company.
For the purposes of financial reporting, our financial statements are presented in accordance with
U.S. GAAP, and we report, and will report, our results in U.S. dollars. Any change in the value of the Canadian
dollar against the U.S. dollar during a given financial reporting period would result in a foreign currency loss or
gain on the translation of U.S. dollar denominated revenues and costs. Consequently, our reported earnings
could fluctuate materially as a result of foreign exchange translation gains or losses and may not be comparable
from period to period.
In addition, if you are a U.S. shareholder, the value of your investment in us will fluctuate as the U.S. dollar
rises and falls against the Canadian dollar. Also, if we pay dividends in the future, we may pay those dividends in
Canadian dollars. Accordingly, if the U.S. dollar rises in value relative to the Canadian dollar, the U.S. dollar
value of the dividend payments received by U.S. shareholders would be less than they would have been if
exchange rates were stable.
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Global capital and credit market conditions, and resulting declines in consumer confidence and spending, could
have a material adverse effect on our business, operating results, and financial condition
Volatility and disruption in the global capital and credit markets in 2008, 2009 and 2010 have led to a
tightening of business credit and liquidity, a contraction of consumer credit, business failures, higher
unemployment, and declines in consumer confidence and spending in Canada, the United States and
internationally. If global economic and financial market conditions deteriorate or remain weak for an extended
period of time, the following factors could have a material adverse effect on our business, operating results, and
financial condition:
• Slower consumer spending may result in reduced demand for our products, reduced orders from retailers
for our products, order cancellations, lower revenues, increased inventories, and lower gross
profit margins.
• We may be unable to access financing in the credit and capital markets at reasonable rates in the event we
find it desirable to do so.
• The failure of financial institution counterparties to honor their obligations to us under credit and
derivative instruments could jeopardize our ability to rely on and benefit from those instruments. Our
ability to replace those instruments on the same or similar terms may be limited under poor market
conditions.
• We conduct transactions in various currencies, which increases our exposure to fluctuations in foreign
currency exchange rates relative to the U.S. dollar. Continued volatility in the markets and exchange rates
for foreign currencies and contracts in foreign currencies could have a significant impact on our reported
financial results and condition.
• Continued volatility in the markets and prices for commodities and raw materials we use in our products
and in our supply chain (such as petroleum-based products) could have a material adverse effect on our
costs, gross profit margins, and profitability.
• If retailers of our products experience declining revenues, or retailers experience difficulty obtaining
financing in the capital and credit markets to purchase our products, this could result in reduced orders
for our products, order cancellations, inability of retailers to timely meet their payment obligations to us,
extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with
collection efforts, and increased bad debt expense.
• If retailers of our products experience severe financial difficulty, some may become insolvent and cease
business operations, which could reduce the availability of our products to consumers.
• If contract manufacturers of our products or other participants in our supply chain experience difficulty
obtaining financing in the capital and credit markets to purchase raw materials or to finance general
working capital needs, it may result in delays or non-delivery of shipments of our products.
A reduction in discretionary consumer spending could reduce sales of our sporting equipment and related apparel
We sell recreational, non-essential products. The success of our business depends to a significant extent
upon discretionary consumer spending. Discretionary consumer spending is affected by general economic
conditions affecting disposable consumer income, such as rates of employment, business conditions, consumer
confidence, the stock market, interest rates and taxation. Any significant decline in these general economic
conditions or uncertainties regarding future economic prospects that adversely affect discretionary consumer
spending could lead to reduced sales of our sporting equipment and related apparel, which could have an
adverse effect on our business and financial condition.
Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and
profitability
We are subject to income taxes in Canada, the United States, and numerous foreign jurisdictions. Our
effective income tax rate in the future could be adversely affected by a number of factors, including: changes in
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the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets
and liabilities, changes in tax laws, and the outcome of income tax audits in various jurisdictions around the
world. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject
to discretion. If our assessments are incorrect, it could have an adverse effect on our business and financial
condition.
The inability for counterparties and customers to meet their financial obligations to us may result in financial losses
Credit risk is the risk that the counterparty to a financial instrument fails to meet is contractual obligations,
resulting in a financial loss to us.
We sell to a diverse customer base over a global geographic area. We evaluate collectability of specific
customers receivables based on a variety of factors including currency risk, geopolitical risk, payment history,
customer stability and other economic factors. Collectability of receivables is reviewed on an ongoing basis by
management and the allowance for doubtful accounts is adjusted as required. Account balances are charged
against the allowance for doubtful accounts when we determine that it is probable that the receivable will not be
recovered. Although the geographic diversity of the customer base, combined with our established credit
approval practices and ongoing monitoring of customer balances mitigates the counterparty risk, there are no
assurances that our customers will meet their contractual obligations to us.
Natural disasters, unusual weather, pandemic outbreaks, boycotts and geo-political events or acts of terrorism could
adversely affect our operations and financial results
The occurrence of one or more natural disasters, such as hurricanes and earthquakes, unusually adverse
weather, pandemic outbreaks, boycotts and geo-political events, such as civil unrest in countries in which our
suppliers are located and acts of terrorism, or similar disruptions could adversely affect our operations and
financial results. These events could result in physical damage to one or more of our properties, increases in fuel
or other energy prices, the temporary or permanent closure of one or more of our warehouses or distribution
centers, the temporary lack of an adequate workforce in a market, the temporary or long-term disruption in the
supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods
from overseas, delay in the delivery of goods to our warehouses, distribution centers and disruption to our
information systems. These factors could otherwise disrupt our operations and could have an adverse effect on
our business and financial condition.
PURCHASERS’ STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the provinces and territories of Canada provides purchasers with the right
to withdraw from an agreement to purchase securities. This right may be exercised within two business days after
receipt or deemed receipt of a prospectus and any amendment. In several of the provinces and territories of
Canada, the securities legislation further provides a purchaser with remedies for rescission or, in some
jurisdictions, revisions of the price or damages if the prospectus and any amendment contains a
misrepresentation or is not delivered to the purchaser, provided that the remedies for rescission, revisions of the
price or damages are exercised by the purchaser within the time limits prescribed by the securities legislation of
the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities
legislation of the purchaser’s province or territory for the particulars of these rights or consult with a
legal advisor.
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GLOSSARY OF TERMS
‘‘2011 Plan’’ has the meaning set out under the heading ‘‘Options to Purchase Securities’’.
‘‘Accrued Obligations’’ has the meaning ‘‘Executive Compensation — Employment Agreements, Termination
Benefits and Change of Control Benefits’’.
‘‘Acquisition’’ has the meaning set out on the cover page.
‘‘Acquisition Agreement’’ has the meaning set out under the heading ‘‘The Acquisition’’.
‘‘Adjusted EBITDA’’ has the meaning set out under ‘‘Selected Consolidated Financial Information’’.
‘‘Adjusted EBITDA margin’’ means Adjusted EBITDA divided by net revenues.
‘‘Adjusted Gross Profit’’ has the meaning set out under the heading ‘‘Selected Consolidated Financial
Information’’.
‘‘Adjusted Gross Profit margin’’ means Adjusted Gross Profit divided by net revenues.
‘‘Administrative Agent’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — Interest Rate and Fees’’.
‘‘allowable capital loss’’ has the meaning set out under the heading ‘‘Certain Canadian Federal Income Tax
Considerations — Taxation of Capital Gains and Capital Losses’’.
‘‘Articles’’ means the articles of incorporation of the Company.
‘‘Audit Committee’’ has the meaning set out under the heading ‘‘Corporate Governance — Board of Directors
Committees — Audit Committee’’.
‘‘Banks’’ has the meaning set out under the heading ‘‘Relationship Between the Company and Certain
Underwriters’’.
‘‘Blackout Period’’ has the meaning set out under the heading ‘‘Certain Securityholders Agreements —
Management Lock-up Agreements’’.
‘‘Bauer’’ or ‘‘Company’’ means Bauer Performance Sports Ltd.
‘‘Bauer Business’’ means the business as currently carried on by Bauer Hockey Corp., Bauer Hockey, Inc., and
their respective subsidiaries, consisting of, among other things, the design, development, manufacturing and
marketing of performance sports products for ice hockey, roller hockey and lacrosse.
‘‘BCBCA’’ means the British Columbia Business Corporations Act.
‘‘Board of Directors’’ means the board of directors of the Company.
‘‘Borrowers’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — New Credit Facility — General’’.
‘‘Business Purchase’’ has the meaning set out under the heading ‘‘Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Basis of Presentation’’.
‘‘CAGR’’ means compound annual growth rate.
‘‘Canadian Borrower’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — Description of New Credit Facility — General’’.
‘‘Canadian GAAP’’ means generally accepted accounting principles in Canada.
‘‘CDS’’ means CDS Clearing and Depository Services Inc.
‘‘CDS Participants’’ has the meaning set out under the heading ‘‘Plan of Distribution — Book Entry System’’.
‘‘CEO’’ means chief executive officer of the Company.
‘‘CFO’’ means chief financial officer of the Company.
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‘‘Change in Capitalization’’ has the meaning set out under the heading ‘‘Executive Compensation — The
2011 Plan’’.
‘‘Charter of the Audit Committee’’ has the meaning set out under the heading ‘‘Corporate Governance — Board
of Directors Committees — Audit Committee’’.
‘‘CHL’’ means the Canadian Hockey League.
‘‘Closing’’ means the closing of the Offering.
‘‘Code’’ has the meaning set out under the heading ‘‘Certain U.S. Federal Income Tax Considerations’’.
‘‘Code of Business Conduct and Ethics’’ has the meaning set out under the heading ‘‘Corporate Governance —
Board of Directors Committee — Corporate Governance and Nominating’’.
‘‘Code of Conduct’’ has the meaning set out under the heading ‘‘Corporate Governance — Code of Conduct’’.
‘‘Common Shares’’ means the common shares of the Company.
‘‘Compensation Committee’’ has the meaning set out under the heading ‘‘Corporate Governance — Board of
Directors Committees — Compensation Committee’’.
‘‘Continuation Period’’ has the meaning set out under the heading ‘‘Executive Compensation — Employment
Agreements, Termination Benefits and Change of Control Benefits’’.
‘‘Convention’’ has the meaning set out under the heading ‘‘Certain Canadian Federal Income Tax
Considerations — Non-Resident Holders — Dividends on Equity Shares’’.
‘‘Corporate Governance and Nominating Committee’’ has the meaning set out under the heading ‘‘Corporate
Governance — Board of Directors Committees — Corporate Governance and Nominating Committee’’.
‘‘CRA’’ means the Canada Revenue Agency.
‘‘CSA’’ means the Canadian Standards Association.
‘‘Deferred Plans’’ has the meaning set out under the heading ‘‘Eligibility for Investment’’.
‘‘Easton’’ means Easton-Bell Sports, Inc.
‘‘EBITDA’’ means earnings before interest, taxes, depreciation and amortization.
‘‘EIC 173’’ has the meaning set out under the heading ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Recently Adopted Accounting Pronouncements’’.
‘‘Equity Shares’’ means, together, the Common Shares and the Proportionate Voting Shares.
‘‘Existing Holders’’ has the meaning set out under the heading ‘‘The Acquisition’’.
‘‘GDP’’ means gross domestic product.
‘‘Hockey Canada’’ means the Canadian Hockey Association.
‘‘Holdback Shares’’ has the meaning set out under the heading ‘‘The Acquisition — Closing Mechanics and
Settlement’’.
‘‘Holder’’ has the meaning set out under the heading ‘‘Certain Canadian Federal Income Tax Considerations’’.
‘‘IFRS’’ means International Financial Reporting Standards.
‘‘IIHF’’ means the International Ice Hockey Federation.
‘‘ILF’’ means the International Lacrosse Federation.
‘‘Initial Limit’’ has the meaning set out under the heading ‘‘Certain Securityholders Agreements — Management
Lock-up Agreements’’
‘‘IRS’’ has the meaning set out under the heading ‘‘Certain U.S. Federal Income Tax Considerations’’.
141
‘‘Jock Plus Hockey Intellectual Property Acquisition’’ means the acquisition of Intellectual Property Assets from
Jock Plus Hockey in November 2009.
‘‘KHL’’ means the Kontinental Hockey League.
‘‘Kohlberg’’ means Kohlberg & Company L.L.C.
‘‘Kohlberg Funds’’ means, collectively, Kohlberg TE Investors VI, LP, Kohlberg Investors VI, LP, Kohlberg
Partners VI, LP, and KOCO Investors VI, LP, each of which are Existing Holders and funds advised or managed
by Kohlberg.
‘‘KSGI’’ means Kohlberg Sports Group Inc., a Cayman Island corporation.
‘‘KSGI Registration Rights Agreement’’ has the meaning set out under the heading ‘‘Certain Securityholders
Agreements’’.
‘‘KSGI Securityholders Agreement’’ has the meaning set out under the heading ‘‘Certain Securityholders
Agreements’’.
‘‘Locked-up Securities’’ has the meaning set out under the heading ‘‘Certain Securityholders Agreements —
Management Lock-up Agreements’’.
‘‘Management Lock-up Agreements’’ has the meaning set out under the heading ‘‘Certain Securityholders
Agreements — Management Lock-Up Agreements’’.
‘‘Material Contracts’’ has the meaning set out under the heading ‘‘Material Contracts’’.
‘‘Maverik’’ means Maverik Lacrosse LLC.
‘‘Maverik Lacrosse Acquisition’’ means the strategic acquisition of Maverik in June 2010.
‘‘Mission-ITECH’’ means Mission-ITECH Hockey Inc.
‘‘Mission-ITECH Acquisition’’ means the strategic acquisition of Mission-ITECH in September 2008.
‘‘Named Executive Officers’’ or ‘‘NEOs’’ means the Company’s CEO and CFO and each of the three most highly
compensated executive officers, or the three most highly compensated individuals acting in a similar capacity,
other than the CEO and CFO, at the end of the most recently completed financial year whose total
compensation was, individually, more than $150,000.
‘‘NCAA’’ means the National Collegiate Athletic Association.
‘‘New Credit Facility’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — Description of New Credit Facility — General’’.
‘‘New Era’’ means New Era Cap Company.
‘‘New Options’’ has the meaning set out under the heading ‘‘Options to Purchase Securities’’.
‘‘NHL’’ means the National Hockey League.
‘‘NI 52-110’’ has the meaning set out under the heading ‘‘Corporate Governance — Board of Directors’’.
‘‘Nike’’ means NIKE, Inc., including its affiliates, as applicable.
‘‘Nomination Rights Agreement’’ has the meaning set out under the heading ‘‘Certain Shareholders
Agreements — Nomination Rights Agreement’’.
‘‘Non-Resident Holder’’ has the meaning set out under the heading ‘‘Certain Canadian Federal Income Tax
Considerations — Non-Resident Holders’’.
‘‘Offer’’ has the meaning set out under the heading ‘‘Description of Share Capital — Equity Shares —
Take-Over Bid Protection’’.
‘‘Offering’’ means this initial public offering of Common Shares.
‘‘Offering Price’’ means the price of each common share that will be issued pursuant to the Offering.
142
‘‘Old Facility’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — Overview’’.
‘‘Odd Lot’’ has the meaning set out under the heading ‘‘Description of Share Capital — Take-Over Bid
Protection’’.
‘‘Old Lenders’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — Overview’’.
‘‘Old Noteholders’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — Overview’’.
‘‘Old Notes’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — Overview’’.
‘‘Over-Allotment Option’’ means the option granted by the Company to the Underwriters to purchase up to 15%
additional Common Shares at the Offering Price, exercisable for a period of 30 days from the Closing.
‘‘PFIC’’ has the meaning set out under the heading ‘‘Certain U.S. Federal Income Tax Considerations — Passive
Foreign Investment Company (PFIC) Considerations.
‘‘Predecessor’’ has the meaning set out under the heading ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Basis of Presentation’’.
‘‘predecessor options’’ has the meaning set out under the heading ‘‘The Acquisition — Treatment of Predecessor
Options’’.
‘‘Predecessor Period’’ has the meaning set out under the heading of ‘‘Presentation of Financial Information’’.
‘‘Predecessor Plan’’ has the meaning set out under the heading ‘‘The Acquisition — Treatment of Predecessor
Options’’.
‘‘Proportionate Voting Shares’’ means the proportionate voting shares of the Company.
‘‘Prospectus Representation’’ has the meaning set out under the heading ‘‘The Acquisition — Covenants,
Representations, Warranties and Conditions’’.
‘‘Reebok’’ means Reebok International Ltd., a subsidiary of adidas AG.
‘‘Registration Rights Agreement’’ has the meaning set out under the heading ‘‘Certain Shareholders
Agreements — Registration Rights Agreement’’.
‘‘Regulations’’ means the regulations promulgated under the Income Tax Act (Canada).
‘‘Related Entity’’ has the meaning set out under the heading ‘‘Certain U.S. Federal Income Tax Considerations —
U.S. Federal Tax Consequences of the Ownership and Disposition of Common Shares — Passive Foreign
Investment Company (PFIC) Considerations’’.
‘‘Resident Holders’’ has the meaning set out under the heading ‘‘Certain Canadian Federal Income Tax
Considerations — Residents of Canada’’.
‘‘Revolving Loan’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — New Credit Facility — General’’.
‘‘rollover options’’ has the meaning set out under the heading ‘‘The Acquisition — Treatment of Predecessor
Options’’.
‘‘Rollover Plan’’ has the meaning set out under the heading ‘‘The Acquisition — Treatment of Predecessor
Options’’.
‘‘SGMA’’ means The Sporting Goods Manufacturing Association.
‘‘SPM’’ means Straight Path Management.
‘‘Successor Period’’ has the meaning set out under the heading of ‘‘Presentation of Financial Information’’.
143
‘‘Tax Act’’ means the Income Tax Act (Canada) and the regulations thereunder.
‘‘Tax Proposals’’ has the meaning set out under the heading ‘‘Certain Canadian Federal Income Tax
Considerations’’.
‘‘taxable capital gain’’ has the meaning set out under the heading ‘‘Certain Canadian Federal Income Tax
Considerations — Taxation of Capital Gains and Capital Losses’’.
‘‘Term Loan’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — New Credit Facility — General’’.
‘‘Total Reserve’’ has the meaning set out under the heading ‘‘Executive Compensation — The 2011 Plan’’.
‘‘Treasury Regulations’’ has the meaning set out under the heading ‘‘Certain U.S. Federal Income Tax
Considerations’’.
‘‘TSX’’ means the Toronto Stock Exchange.
‘‘Underwriting Agreement’’ means the underwriting agreement dated
Kohlberg Funds and the Underwriters.
, 2011 among the Company, the
‘‘Underwriters’’ means, collectively, RBC Dominion Securities Inc., CIBC World Markets Inc., BMO Nesbitt
Burns Inc., Scotia Capital Inc., TD Securities Inc. and Macquarie Capital Markets Canada Ltd.
‘‘U.S. Borrower’’ has the meaning set out under the heading ‘‘Description of Refinancing and Material
Indebtedness — Description of New Credit Facility — General’’.
‘‘U.S. GAAP’’ means generally accepted accounting principles in the U.S.
‘‘U.S. Holder’’ has the meaning set out under the heading ‘‘Certain U.S. Federal Income Tax Considerations’’.
‘‘U.S. Securities Act’’ means the United States Securities Act of 1933, as amended.
‘‘Vapor License Agreement’’ has the meaning set out under the heading ‘‘Business of the Company — Intellectual
Property’’.
‘‘Voting Agreement’’ has the meaning set out under the heading ‘‘Certain Shareholders Agreements — Voting
Agreement’’.
‘‘YHL’’ means the Youth Hockey League.
144
APPENDIX A
CHARTER OF THE AUDIT COMMITTEE
This charter governs the operations of the audit committee (the ‘‘Committee’’) of Bauer Performance
Sports Ltd. (the ‘‘Corporation’’). This charter describes the principal duties and responsibilities of the
Committee. These are set forth as a guide with the understanding that the Committee may supplement them
as appropriate.
1.
OBJECTIVES
The Committee has three primary objectives:
(a) to assist the board of directors of the Corporation (the ‘‘Board’’) in fulfilling its oversight
responsibilities relating to the Corporation’s financial statements;
(b) to assist the Board in fulfilling its oversight responsibilities relating to the integrity of the Corporation’s
internal control over financial reporting and management information systems; and
(c) to fulfill the responsibilities assigned to the Committee by the Board pursuant to this charter.
2.
CONSTITUTION
2.1 Membership
The Committee must be composed of a minimum of three members. Every Committee member must be a
director of the Corporation (a ‘‘Director’’). Every Committee member must be ‘‘independent’’ as such term is
defined in National Instrument 52-110 — Audit Committees (‘‘NI 52-110’’) or an exemption from the
requirement that every Committee member be ‘‘independent’’ must be available for the Corporation to rely
upon. Every Committee member must be ‘‘financially literate’’ as such term is defined in NI 52-110.
2.2 Chair
The Board shall appoint the Chair of the Committee from the members of the Committee (or if it fails to
do so, the members of the Committee shall appoint the Chair of the Committee from among its members).
2.3 Annual Appointment of Members
The appointment of members of the Committee and the designation of its Chair shall take place annually at
the first meeting of the Board after a meeting of the shareholders at which Directors are elected. The Board may
appoint a member to fill a vacancy which occurs in the Committee between annual elections of Directors.
2.4 Continuance of Existing Mandate
If an appointment of members of the Committee is not made as prescribed, the members shall continue as
such until their successors are appointed.
2.5 Quorum
A quorum of the Committee shall be a majority of its members.
2.6 Secretary
The Chair of the Committee may designate from time to time a person to be the Secretary of the
Committee. The Secretary may, but need not, be a member of the Committee.
2.7 Committee Procedures
The time and place of the meetings of the Committee and the calling of meetings and the procedure in all
things at such meetings shall be determined by the Committee.
A-1
2.8 Attendees at Meetings
The Committee may invite Directors, officers and employees of the Corporation or any other person to
attend meetings of the Committee to assist in the discussion and examination of the matters under consideration
by the Committee.
3.
AUTHORITY
The Committee has the authority:
(a) to engage independent counsel and other advisors as it determines necessary or advisable to carry out
its duties;
(b) to set and pay the compensation for any advisors employed by the Committee; and
(c) to communicate directly with the internal and external auditors.
The Committee also has the authority to delegate certain responsibilities to individual members or
subcommittees of the Committee in accordance with NI 52-110.
In discharging its oversight role, the Committee is empowered to investigate any matter brought to its
attention with full access to all books, records, facilities, and personnel of the Corporation.
4.
RESPONSIBILITIES
4.1 External Auditor
(a) The Corporation’s external auditor is required to report directly to the Committee.
(b) The Committee is responsible for recommending to the Board:
(i) the external auditor to be nominated for the purpose of preparing or issuing an auditor’s report or
performing other audit, review or attest services for the Corporation; and
(ii) the compensation of the external auditor.
(c) The Committee is directly responsible for overseeing the work of the external auditor engaged for the
purpose of preparing or issuing an auditor’s report or performing other audit, review or attest services
for the Corporation, including the resolution of disagreements between management and the external
auditor regarding financial reporting.
(d) The Committee is responsible for reviewing and approving the proposed audit scope, focus areas,
timing and key decisions underlying the audit plan.
(e) The Committee is also responsible for:
(i) monitoring and reporting to the Board with regards to the qualifications, independence and
performance of the external auditor;
(ii) receiving and reviewing reports from the external auditor on the progress against the approved
audit plan, important findings, recommendations for improvements and the auditors’ final
report; and
(iii) reviewing, at least annually, a report from the external auditor on all relationships and
engagements that may reasonably be thought to bear on the independence of the auditor;
(f) The Committee should meet separately at least annually with management and the external auditors to
discuss issues and concerns warranting committee attention. The Committee should provide sufficient
opportunity for the external auditors to meet privately with the members of the Committee. The
Committee should review with the external auditor any audit problems or difficulties and
management’s response.
A-2
4.2 Pre-Approval and Non-Audit Services
The Committee is responsible for pre-approving all ‘‘non-audit services’’ (as such term is defined in
NI 52-110) to be provided to the Corporation or its subsidiary entities by the Corporation’s external auditor.
4.3 Review of Financial Statements and MD&A
The Committee is responsible for reviewing the Corporation’s financial statements, MD&A and annual and
interim earnings press releases before the Corporation publicly discloses this information.
4.4 Review of Public Disclosure of Financial Information
The Committee is responsible for being satisfied that adequate procedures are in place for the review of the
Corporation’s public disclosure of financial information extracted or derived from the Corporation’s financial
statements, other than the public disclosure referred to in section 4.3 above, and periodically assessing the
adequacy of those procedures.
4.5 Submission Systems and Treatment of Complaints
The Committee is responsible for establishing procedures for:
(a) the receipt, retention and treatment of complaints received by the Corporation regarding accounting,
internal accounting controls, or auditing matters; and
(b) the confidential, anonymous submission by employees of the Corporation of concerns regarding
questionable accounting or auditing matters.
4.6 Hiring Policies
The Committee is responsible for reviewing and approving the Corporation’s hiring policies regarding
partners, employees and former partners and employees of the present and former external auditor of the
Corporation.
4.7 Internal Controls and Management Information Systems
The Committee is responsible for reviewing and monitoring the integrity and adequacy of the Corporation’s
internal controls over financial reporting and management information systems, reporting to the Board thereon
and overseeing the implementation by management of any changes to such systems to ensure the integrity of
such systems as required by the Board.
4.8 Other Responsibilities
The Committee is also responsible for:
(a) taking into account the reports of management and such other persons as the Committee may consider
appropriate, identifying the principal risks of the Corporation’s business, satisfying itself as to the
implementation of appropriate systems to manage these risks and reporting and making
recommendations to the Board with respect to these matters;
(b) reviewing and making recommendations to the Board on the Corporation’s Corporate Disclosure
Policy; and
(c) monitoring compliance with the Code of Business Conduct, reviewing the report of management
concerning compliance with the Code of Business Conduct and, if appropriate, reporting and making
recommendations to the Board with respect to these matters.
A-3
4.9 Consultation with the Board
The Committee shall report to the Board at the Board’s next meeting on the proceedings of any meeting of
the Committee, all recommendations to the Board made by the Committee at such meeting and any approvals
given by the Committee at such meeting.
5.
GENERAL
5.1 Subject to by-laws, etc.
The provisions of this charter are subject to the provisions of the by-laws of the Corporation and to the
applicable provisions of the Canada Business Corporations Act and any other applicable legislation.
5.2 Annual Review of Charter
The Committee shall review and reassess this charter at least annually and obtain the approval of the
Board. The Committee should also perform an evaluation of its performance and this charter at least annually to
determine whether it is functioning effectively.
Approved by the Board of Directors
Bauer Performance Sports Ltd.
• , 2011
A-4
INDEX TO FINANCIAL STATEMENTS
Financial Statements of Bauer Performance Sports Ltd.
Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
Balance Sheet as at January 26, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-3
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
Financial Statements of Kohlberg Sports Group Inc.
Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-7
Audited consolidated balance sheets as at May 31, 2010 and May 31, 2009 . . . . . . . . . . . . . . . . . . . .
F-8
Audited statements of operations, stockholders’ equity and comprehensive (loss) income and cash
flows for the three years ending May 31, 2010, May 31, 2009 and May 31, 2008 . . . . . . . . . . . . . . .
F-9
Notes to the audited consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-12
Unaudited consolidated balance sheet as at November 30, 2010 and audited consolidated balance
sheet as at May 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-41
Unaudited statements of operations and cash flows for the three and six months ending
November 30, 2010 and November 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-42
Notes to the unaudited consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-44
U.S. GAAP to Canadian GAAP Reconciliation
Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-55
Reconciliation between accounting principles generally accepted in the United States and Canada for
the two years ended May 31, 2010 and May 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-56
Unaudited reconciliation between accounting principles generally accepted in the United States and
Canada for the three and six months ended November 30, 2010 and November 30, 2009 . . . . . . . . .
F-63
Auditors’ Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-69
F-1
INDEPENDENT AUDITORS’ REPORT
The Board of Directors
Bauer Performance Sports Ltd.
We have audited the accompanying balance sheet of Bauer Performance Sports Ltd. (the ‘‘Company’’),
comprising the balance sheet as at January 26, 2011, and notes, comprising a basis of presentation and nature of
business and other explanatory information.
Management’s Responsibility for the Financial Statement
Management is responsible for the preparation and fair presentation of the financial statement in
accordance with Canadian generally accepted accounting standards, and for such internal control as
management determines is necessary to enable the preparation of the financial statement that is free from
material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the financial statement based on our audit. We conducted our
audit in accordance with Canadian generally accepted auditing standards. Those standards require that we
comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether
the financial statement is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statement. The procedures selected depend on the auditor’s judgment, including the assessment of the
risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of
the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of the financial statement.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the balance sheet presents fairly, in all material respects, the financial position of the
Company as at January 26, 2011 in accordance with Canadian generally accepted accounting principles.
Boston, Massachusetts, USA
January 26, 2011
F-2
BAUER PERFORMANCE SPORTS LTD.
BALANCE SHEET
As at January 26, 2011
(in U.S. dollars)
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1
Stockholders’ Equity (note 2)
Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1
Subsequent event (note 3)
The accompanying notes are an integral part of the financial statement.
F-3
BAUER PERFORMANCE SPORTS LTD.
NOTES TO FINANCIAL STATEMENT
As at January 26, 2011
(in U.S. dollars)
1.
BASIS OF PRESENTATION AND NATURE OF BUSINESS
Bauer Performance Sports Ltd. (the ‘‘Company’’) (formerly 0896936 B.C. Ltd.) was incorporated pursuant to the laws of the Province of
British Columbia on December 2, 2010, for the purpose of completing the public offering of its shares and the concurrent acquisition
(the ‘‘Acquisition’’) of Kohlberg Sports Group Inc. (‘‘KSGI’’). The Company has not commenced operations as at the balance sheet date
and therefore separate statements of operations, cash flows, and changes in stockholders’ equity and comprehensive income have not
been presented.
The balance sheet of the Company has been prepared in accordance with Canadian generally accepted accounting principles.
2.
SHARE CAPITAL
Authorized share capital consists of the following:
• An unlimited number of common shares. Common shares may at any time, at the option of the holder, be converted into
proportionate voting shares on the basis of 1,000 common shares for one proportionate voting share.
• An unlimited number of proportionate voting shares. Proportionate voting shares may at any time, at the option of the holder, be
converted into 1,000 common shares.
Issued and outstanding share capital consists of the following:
• 1 common share at $1 per share for a total of $1.
Under certain circumstances, the proportionate voting class of shares may automatically convert into common shares on a one to
1,000 basis, the right of holders of common shares to convert their common shares into proportionate voting shares will be terminated,
and the Board of Directors will not be entitled to issue any additional proportionate voting shares.
The common shares and proportionate voting shares generally have the same rights as the other class of share (including liquidation
entitlement, dividend rights, voting rights, subdivision or consolidation and take-over bid protection), except that each proportionate
voting share is entitled to 1,000 times more than one common share.
3.
SUBSEQUENT EVENT
The Company intends to file a final prospectus on , 2011 for the sale to the public of common shares at a price of $ per share (the ‘‘Offering’’), payable on closing for aggregate gross proceeds of $ , subject to the terms of an underwriting
agreement. The Company has also granted to the underwriters of the Offering an over-allotment option, exercisable, in whole or in part,
at the sole discretion of the underwriters, for a period of 30 days from the closing of the Offering, to purchase up to an additional Common Shares for aggregate gross proceeds of $ .
The Company intends to establish a stock incentive plan (the ‘‘2011 Plan’’), pursuant to which options to purchase common shares may
be granted to the Company’s employees, officers and directors. The maximum aggregate number of common shares which may be
subject to options under the 2011 Plan and any other proposed or established share compensation arrangement of the Company (other
than the Rollover Plan, as defined further below) is 10% of the Company’s common shares outstanding from time to time (assuming the
conversion of all proportionate voting shares).
Concurrent with the closing of the Offering, the Company will, among other things, complete the Acquisition and acquire all of the
issued shares of KSGI in exchange for: (i) a combination of common shares and proportionate voting shares representing a %
equity and voting interest in the Company ( % on a fully diluted basis), plus Cdn$ in cash being the net proceeds of the
Offering received by the Company (exclusive of expenses of the Offering) assuming no exercise of the over-allotment option, or (ii) a
combination of common shares and proportionate voting shares representing a % equity and voting interest in the Company
( % on a fully diluted basis), plus Cdn$ in cash if the over-allotment option is exercised in full.
KSGI has previously granted to employees, managers and directors options to purchase ordinary shares of KSGI (‘‘predecessor
options’’) under KSGI’s equity incentive plan dated April 16, 2008 (the ‘‘Predecessor Plan’’). The board of directors of KSGI intends to
accelerate the vesting of all predecessor options outstanding under the Predecessor Plan to be effective as of immediately prior to and
contingent upon the closing of the Acquisition. In connection with the Acquisition, the Company will assume the Predecessor Plan
(as modified, the ‘‘Rollover Plan’’) and all predecessor options outstanding will be exchanged for fully vested and exercisable options
(the ‘‘rollover options’’) to purchase common shares of the Company such that the fair market value of the rollover options (determined
as the ‘‘spread’’ or excess of the fair market value of a common share over the exercise price of the rollover option) is no greater than
the fair market value of the predecessor options so exchanged (determined as the spread between the fair market value of an ordinary
share of KSGI over the predecessor option exercise price). The terms of the Rollover Plan are substantially similar to the terms of the
2011 Plan, except that all rollover options are fully vested and no further options may be granted under the Rollover Plan.
F-4
Kohlberg Sports Group Inc. and
Subsidiaries
Consolidated Financial Statements
as of May 31, 2010 and 2009 and for the years ended May 31, 2010
and 2009 and the period April 17, 2008 through May 31, 2008 for
the Successor and for the period June 1, 2007 through April 16,
2008 for the Predecessor
F-5
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
INDEX
Page(s)
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-7
Consolidated balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-8
Consolidated statements of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-9
Consolidated statements of stockholders’ equity and comprehensive (loss) income . . . . . . . . . . . . . .
F-10
Consolidated statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-11
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-12
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Kohlberg Sports Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Kohlberg Sports Group, Inc. and
Subsidiaries as of May 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’
equity and comprehensive (loss) income and cash flows for the years ended May 31, 2010 and 2009, for the
period April 17, 2008 through May 31, 2008 (Successor), and for the period June 1, 2007 through April 16, 2008
(Predecessor), together referred to hereafter as the Company, as described in Note 1. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. 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 consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Kohlberg Sports Group, Inc. as of May 31, 2010 and 2009 and the
results of its operations and its cash flows for the years ended May 31, 2010 and 2009, for the period April 17,
2008 through May 31, 2008 (Successor), and for the period June 1, 2007 through April 16, 2008 (Predecessor), in
conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts, USA
September 17, 2010
F-7
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
CONSOLIDATED BALANCE SHEETS
At May 31, 2010 and 2009 for the Successor
(In thousands, except share and per share amounts)
May 31, 2010
ASSETS
Current assets:
Cash . . . . . . . . . . . . . .
Accounts receivable, net
Inventories, net . . . . . .
Deferred tax asset . . . .
Other current assets . . .
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May 31, 2009
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.
$ 4,157
72,072
52,411
5,667
5,269
Total current assets . . . . . . . . . . . .
Property, plant and equipment, net .
Trademarks and intangible assets . .
Other non-current assets . . . . . . . .
Deferred income taxes . . . . . . . . . .
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.
139,576
8,656
68,946
7,667
18,737
143,510
10,602
65,702
6,973
17,633
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$243,582
$244,420
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . .
Current portion of direct financing and capital lease payable
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion benefit plans . . . . . . . . . . . . . . . . . . . . . . .
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.
$ 19,023
5,666
413
16,548
24,965
306
349
$
Total current liabilities . . . . . . . .
Long-term debt . . . . . . . . . . . . .
Direct financing and capital lease
Benefit plans . . . . . . . . . . . . . . .
Other non-current liabilities . . . .
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.
67,270
86,246
1,652
4,701
1,132
72,833
86,914
1,946
3,881
1,333
...
161,001
166,907
.
.
.
.
11
113,598
(25,096)
(5,932)
11
112,379
(27,324)
(7,553)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,581
77,513
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . .
$243,582
$244,420
......
......
payable
......
......
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TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 21)
Stockholders’ equity
Common stock, par value $0.0001 per share, 500,000,000 shares authorized;
108,069,808 shares issued and outstanding at May 31, 2010 and 2009. . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
.
.
.
.
.
.
.
The accompanying notes are an integral part of the consolidated financial statements.
F-8
$
9,443
62,358
58,844
9,047
3,818
3,000
17,151
349
22,800
29,209
—
324
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
(In thousands)
For the year
ended
May 31,
2010
Successor
For the year
ended
May 31,
2009
April 17, 2008
through
May 31,
2008
Predecessor
June 1, 2007
through
April 16,
2008
$257,385
168,261
—
$242,249
187,174
—
$ 17,274
14,204
—
$202,210
120,977
3,869
..
..
..
5)
89,124
61,007
9,657
—
55,075
66,069
6,789
—
3,070
10,010
1,057
—
77,364
52,490
6,963
(4,690)
............
18,460
(17,783)
(7,997)
22,601
.
.
.
.
12,952
(357)
564
(756)
13,933
(458)
110
5,218
1,850
(95)
1,775
(1,112)
2,447
(1,230)
—
1,452
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . .
12,403
18,803
2,418
2,669
Income (loss) before income tax (expense) benefit . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . .
6,057
3,829
(36,586)
(11,590)
(10,415)
(2,403)
19,932
6,804
Net income (loss) before extraordinary item . . . . . . . . . .
Extraordinary gain (Note 4) . . . . . . . . . . . . . . . . . . . . . .
2,228
—
(24,996)
5,683
(8,012)
—
13,128
—
$ (19,313)
$ (8,012)
$ 13,128
$
$
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademark royalty expense (Note 3 and 5) . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . .
Research and development expenses . . . . . . . . . . . . .
Research and development expense credit (Note 3 and
Operating income (loss) . . . . . . . . . . . .
Other (income) expense:
Interest expense . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . .
Losses on derivative instruments . . . . .
Exchange losses (gains), net and other
.
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.
.
.
.
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,228
Basic and diluted earnings (loss) per common share . . . .
$
0.02
(0.19)
(0.08)
The accompanying notes are an integral part of the consolidated financial statements.
F-9
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE (LOSS) INCOME
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
(In thousands, except share amounts)
Common Stock
Shares
Outstanding Amount
Predecessor
Balance at May 31, 2007 . . . .
Dividends paid in cash . . . . .
Dividends settled with assets .
Intercompany loan forgiveness
Comprehensive income (loss):
Net income . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
Additional
Paid-in
Capital
Accumluated
Deficit
.
.
.
.
Due to
Nike, Inc.
Accumulated
Other
Comprehensive
Income (Loss)
142,847
(120,293)
(1,476)
51,025
. . . .
578
13,128
Successor
Issuance of common stock . . .
Issuance of common stock . . .
Stock-based compensation plan
Comprehensive income (loss):
Net loss . . . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . .
. . . .
. . . .
. . . .
. . . .
1,677
—
$—
97,000,000
799,500
10
—
$ —
$ —
$ 85,231
$ 2,255
96,690
800
2,850
(8,012)
(8,012)
. . . .
795
97,799,500
$10
$100,340
Issuance of common stock . . . . . .
Stock-based compensation plan . . .
Comprehensive income (loss):
Net loss . . . . . . . . . . . . . . . .
Pension liability adjustments, net
of tax of ($154) . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . . .
10,270,308
1
10,229
1,810
.
$ (8,012)
$
795
$ 93,133
10,230
1,810
(19,313)
.
(19,313)
411
.
(8,759)
Total comprehensive income (loss) . .
411
(8,759)
(27,660)
108,069,808
$11
.
$112,379
$(27,324)
$(7,553)
1,219
.
$ 77,513
1,219
2,228
.
2,228
(658)
.
2,279
Total comprehensive income (loss) . .
Balance at May 31, 2010 . . . . . . . .
795
(7,217)
Balance at May 31, 2008 . . . . . . . .
Stock-based compensation plan . . .
Comprehensive income (loss):
Net income . . . . . . . . . . . . . .
Pension liability adjustments, net
of tax of $193 . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . . .
$ 87,486
96,700
800
2,850
Total comprehensive income (loss) . .
Balance at May 31, 2009 . . . . . . . .
1,677
14,805
. . . .
.
.
$ 143,425
(120,293)
(1,476)
51,025
13,128
Total comprehensive income (loss) . .
Balance at April 16, 2008 . . . . . . .
Total
Stockholders’
Equity
(658)
2,279
3,849
108,069,808
$11
$113,598
$(25,096)
$(5,932)
The accompanying notes are an integral part of the consolidated financial statements.
F-10
$ 82,581
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash used
operating activities:
Stock-based compensation . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . .
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . .
Unrealized loss (gain) on derivative instrument . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash from changes in assets and
liabilities (excluding acquisition):
Accounts receivable . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other liabilities . . . . . . . . . . . . . . . . .
. . . .
in
For the year
ended
May 31, 2010
Successor
For the year
ended
May 31, 2009
$ 2,228
$(19,313)
April 17,
2008 through
May 31, 2008
$
Predecessor
June 1, 2007
through
April 16, 2008
(8,012)
$ 13,128
.
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.
.
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.
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.
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.
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.
.
.
.
.
.
.
.
.
.
.
.
1,219
8,470
558
(4,796)
160
2,962
—
1,810
8,770
48
110
495
(11,857)
(5,683)
2,850
1,174
—
1,775
228
(2,725)
—
—
3,008
171
—
2,582
1,958
—
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(3,088)
8,419
(2,664)
(254)
(6,651)
(4,970)
15,055
46,030
(1,147)
(2,555)
1,626
(8,551)
(9,597)
(4,707)
(2,246)
1,327
2,530
7,229
(12,130)
(6,546)
(747)
(222)
497
8,624
1,593
24,838
(10,174)
10,323
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in property, plant and equipment . . . . . . . . . . . . .
(3,400)
—
(1,502)
(22,742)
(2,625)
(913)
(185,733)
(9,625)
(92)
—
—
(2,496)
Net cash flows from investing activities . . . . . . . . . . . . . . . .
(4,902)
(26,280)
(195,450)
(2,496)
.
.
.
.
.
.
.
—
—
(17,507)
—
—
—
(1,679)
10,000
10,230
(17,760)
(1,241)
—
—
—
101,371
97,500
24,065
(6,044)
108,017
(120,293)
—
—
—
—
—
Net cash flows from financing activities . . . . . . . . . . . . . . . .
(1,840)
216,892
(12,276)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . .
(137)
Net cash flows from operating activities . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of intercompany loans . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt . . . . . . . . . . . . . . .
Proceeds from long-term debt . . . . . . . . . . . . . . .
Proceeds from issuance of stock . . . . . . . . . . . . . .
Proceeds from (repayments of) short-term borrowing
Financing fees . . . . . . . . . . . . . . . . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
15,667
(450)
348
(281)
416
(DECREASE) INCREASE IN CASH . . . . . . . . . . . . . . . . . . .
(5,286)
(1,544)
10,987
BEGINNING CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,443
10,987
—
ENDING CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,157
$ 9,443
$ 10,987
$
. . . . . . . . . . .
. . . . . . . . . . .
$ 10,466
866
$ 8,959
396
$
$
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
—
—
1,171
Supplemental disclosures of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . .
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items:
Intercompany loan forgiveness . . . . . . . . . .
Dividends settled with assets . . . . . . . . . . .
Capitalized PIK interest . . . . . . . . . . . . . .
—
—
—
1,206
—
—
—
—
The accompanying notes are an integral part of the consolidated financial statements.
F-11
(4,033)
7,496
3,463
—
309
51,025
1,476
—
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Kohlberg Sports Group Inc. (a Cayman Island Corporation) and Subsidiaries, (the Company or Successor) was established in March 2008
for the purpose of purchasing, through its wholly owned subsidiaries, all of the issued and outstanding shares of the capital stock of Nike
Acquisition Inc. and Nike Bauer Hockey USA, Inc. (both wholly-owned subsidiaries of NIKE, Inc.) as well as certain intangible assets from
NIKE, Inc. (collectively, the Predecessor). The acquisition was completed on April 16, 2008 (the Acquisition).
The Company is engaged in the design, manufacture and distribution of ice hockey products and roller hockey products. The ice hockey
products include skates, skate blades, protective gear, sticks, team apparel and accessories. The roller hockey products include skates,
protective gear and accessories. The Company distributes its product primarily in the United States, Canada and Europe to specialty retail
stores, sporting goods and national retail chains as well as directly to sports teams. The Company is headquartered in Greenland,
New Hampshire. The Company has leased sales offices in the United States, Canada, Sweden, Germany and Finland. The Company has
leased distribution centers located in Greenland, New Hampshire and Toronto, Ontario, and third party distribution centers in Boras,
Sweden and Aurora, Illinois. The Company also has a research and development and limited manufacturing facility in St. Jerome, Canada;
this facility is leased.
The Acquisition was accounted for using the purchase method of accounting which resulted in a new basis for the assets acquired and
liabilities assumed. Accordingly, although the Company continues with the same core operations after the Acquisition, the accompanying
financial statements are presented for two periods: Successor, which relates to the periods subsequent to the Acquisition, and Predecessor,
relating to June 1, 2007 through April 16, 2008, the period prior to the Acquisition. These separate periods are presented to reflect the new
basis of accounting as well as the new legal structure established for the Company as of the Acquisition date, and have been separated by a
vertical line on the face of the financial statements to highlight the fact that the financial information for such periods has been prepared
under different historical-cost bases of accounting. The Successor consolidated financial statements also reflect the funding of the
Acquisition through the equity contribution received by Kohlberg Sports Group Inc. and the secured loan facility, the senior unsecured notes
and the revolving credit facility.
Successor
The accompanying Successor consolidated financial statements include the Company’s assets and liabilities and related income and expenses
including all of the Company’s consolidated subsidiaries.
Predecessor
The accompanying Predecessor consolidated financial statements include the equity, income and expenses of NIKE Acquisition Inc. and
Nike Bauer Hockey USA, Inc.’s operations and amounts historically reported as a component of NIKE, Inc. For the purposes of the
Predecessor’s consolidated financial statements, the net effects of the income and expenses have been recorded as Due to NIKE, Inc.
NOTE 2 — FORMATION OF THE COMPANY AND THE ACQUISITION
On April 16, 2008, the Company authorized 500,000,000 shares, par value $0.0001 each, issued 97,000,000 shares for a cash price of $1.00 per
share for the initial capitalization of the Company, and reserved up to 20,000,000 shares for grant and issuance upon exercise of options
under the Company’s Equity Incentive Plan (‘‘Equity Incentive Plan’’). The Acquisition was completed with a total consideration of
$195,706,000 including transaction costs.
The Company completed the purchase price allocation to the individual assets acquired and liabilities assumed under the purchase method
of accounting in the year ended May 31, 2009. The completion of the purchase price allocation resulted in an increase to the carrying value
of the recorded assets of $348,000 from amounts recorded at May 31, 2008. The $348,000 consists of a decrease in inventory of $1,046,000,
increase in other assets of $4,364,000, decrease in property, plant & equipment of $322,000, and a decrease in intangible assets of $2,648,000,
The related depreciation and amortization expense from the acquired assets was revised based on the final allocation. The final valuation of
assets acquired and liabilities assumed resulted in $20,734,000 of negative goodwill which was allocated to reduce non-current assets
excluding deferred income taxes.
F-12
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 2 — FORMATION OF THE COMPANY AND THE ACQUISITION (Continued)
The following table presents the allocation of purchase price related to the business as of the date of the acquisition (in thousands):
Net assets acquired:
Trade receivables . . . . . . . .
Inventory . . . . . . . . . . . .
Other assets . . . . . . . . . . .
Property, plant & equipment
Intangible assets . . . . . . . .
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Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 38,868
93,676
11,918
14,683
76,115
235,260
(31,951)
(7,603)
(39,554)
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$195,706
Cash consideration purchase price:
Paid to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transactions costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185,733
9,973
$195,706
The purchase price allocation to the identifiable intangible assets included in these financial statements is as follows (in thousands):
Weighted Average Life
Trademarks and trade names
Purchased technology . . . . .
Customer relationships . . . .
Leases . . . . . . . . . . . . . . .
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Total trademarks, trade names, and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinte
13 years
10 years
4 years
$54,604
5,405
13,457
2,649
$76,115
The majority of the intangible asset valuation relates to trademarks and trade names which are considered to have an indefinite life. This is
based on a number of factors, including the competitive environment, market share, brand history, product life cycles, and operating plan.
The purchased technology intangibles have asset lives ranging from 5 to 14 years and are amortized on a straight line basis. The estimated
customer relationship intangible asset useful life is 10 years reflecting the historical and projected customer attrition rates among the
Company’s major retailer and distributor customers. The customer relationships are amortized proportionately to projected future cash
flows. The favorable lease positions reflect the difference between market and contract rent. The favorable lease positions are amortized on
a straight line basis over the remaining lease terms.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States
of America (U.S. GAAP). The Accounting policies followed by the Company in the Successor period are consistent with those of the
Predecessor period. Included in the results of the Predecessor period from June 1, 2007 through April 16, 2008 are $13,569,000 of expenses
consisting of cross charges from the Predecessor’s parent company primarily for trademark royalty expense, payroll charges related to
U.S. employees, and liaison office expenses; offset by a cross charge to the parent company related to a research and development credit.
Refer to Note 5 — Related Party Transactions.
Principles of Consolidation
The accompanying consolidated financial statements and related notes include the accounts of Kohlberg Sports Group Inc. and Subsidiaries
as of May 31, 2010 and 2009 and for the Successor periods. The consolidated financial statements and related notes for the Predecessor
F-13
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
period include the accounts of Nike Acquisition Inc. and subsidiaries and Nike Bauer Hockey USA, Inc. and subsidiaries. All intercompany
transactions are eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make a
number of estimates and assumptions that affect the reported amount 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. Balances
and transactions which are subject to such estimates and assumptions include: fair value determination of assets and liabilities in connection
with purchase accounting and derivatives, valuation allowances for receivables and inventories, as well as product warranty, amortization
periods, income taxes, and other provisions and contingencies. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when the risks and rewards of ownership have passed to the customer based on the terms of the sale, collection of
the relevant receivable is probable, evidence of an arrangement exists and the sales price is fixed and determinable. Risk and rewards of
ownership pass to the customer upon shipment or upon receipt by the customer depending on the country of the sale and the agreement
with the customer. Provisions for sales discounts, returns and miscellaneous claims from customers are made at the time of sale.
Shipping and Handling Costs
Shipping and handling costs on outbound shipments are expensed as incurred and included in cost of goods sold. Amounts billed to
customers for shipping and handling costs are included in net revenues.
Advertising and Promotion
Advertising production costs are expensed the first time the advertisement is run. Media (TV and print) placement costs are expensed in the
month the advertising appears.
A significant amount of the Company’s promotional expenses results from payments under endorsement contracts. Accounting for
endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed on a straight-line basis
over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Prepayments made
under contracts are included in other current assets. Refer to Note 21 — Commitments and Contingencies.
Through cooperative advertising programs, the Company reimburses its retail customers for certain of their costs of advertising the
Company’s products. The Company records these costs as a reduction of net revenues at the point in time when it is obligated to its
customers for the costs, which is when the related revenues are recognized. This obligation may arise prior to the related advertisement
being run.
Total advertising and promotion expenses included in selling, general and administrative expenses for the years ended May 31, 2010 and
2009, and the period from April 17, 2008 through May 31, 2008 and the Predecessor period from June 1, 2007 through April 16, 2008 was
$14,476,000 and $15,285,000, $1,380,000, $12,842,000, respectively. Prepaid advertising and promotion expenses recorded in other current
assets totaled $694,000 at May 31, 2010 and $554,000 at May 31, 2009.
Research and Development Costs
All costs associated with research and development are charged to expense as incurred.
Stock-based Compensation
The Company estimates the fair value of options granted under the Equity Incentive Plan using the Black-Scholes option pricing model. The
company recognizes the grant date fair value of its awards over the vesting period based on the number of options expected to vest using an
accelerated method. The cost is classified in selling general and administrative expense in the consolidated statements of operations for the
Successor period. There is no stock-based compensation in the Predecessor period. Refer to Note 18 — Stock-based Compensation for more
information about the Company’s stock programs.
F-14
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic Earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding
during the year. Diluted earnings per common share is calculated by adjusting the weighted average outstanding shares, assuming conversion
of all potentially dilutive stock options. Refer to Note 19 — Earnings Per Share.
Accounts Receivable
The Company carries its accounts receivable at invoiced amounts less allowance for doubtful accounts, returns, and discounts. In
determining the amount of the allowance for doubtful accounts, management evaluates the ability to collect accounts receivable based on a
combination of factors. Reserves are maintained based on the length of time receivables are past due and on the status of a customer’s
financial position. The Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant
customers based on ongoing credit evaluations. In determining the amount of the sales return reserve, the Company considers historical
levels of returns and makes assumptions about future returns. In addition, the Company maintains a reserve for discounts related to
accounts receivable. This includes accrued volume rebates and other customer allowances.
Inventory Valuation
Inventory is stated at lower of cost or market value determined under the first-in, first-out method. The Company reserves for and writes
down its inventories for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market conditions.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets as follows:
Machinery and equipment . . . . . . . . .
Data processing equipment . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . .
Leasehold Improvements and capitalized
. . . . . . . .
. . . . . . . .
. . . . . . . .
lease assets
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2-8 years
1-10 years
3-8 years
Shorter of lease term or remaining life of the assets
Expenditures for new facilities and equipment, and those that substantially increase the useful lives of the property, are capitalized.
Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts, and gains or losses on the dispositions are reflected in results of operations.
Deferred Financing Costs
Financing costs, net of amortization, amounting to $3,959,000 at May 31, 2010 and $5,114,000 at May 31, 2009, related to the issuance of
debt, are amortized over the term of the debt and are included in other current assets and other non-current assets. Amortization expense
for the years ended May 31, 2010 and 2009, and the period from April 17, 2008 through May 31, 2008, were $1,405,000, $1,388,000, and
$147,000, respectively, and is included in interest expense. The Company amortizes financing costs utilizing the straight-line method or the
effective interest method, as appropriate, based on the terms of the debt. There were no expenses of this type in the Predecessor period from
June 1, 2007 through April 16, 2008.
Impairment of Long-Lived Assets
The Company estimates the future undiscounted cash flows to be derived from long-lived assets to assess whether or not a potential
impairment exists when events or circumstances indicate the carrying value of a long-lived asset may be impaired. Factors that would
necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant
adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable
market value of an asset, among others. If the carrying value exceeds the Company’s estimate of future undiscounted cash flows, the
Company would then calculate the impairment as the excess of the carrying value of the asset over the Company’s estimate of its fair
market value.
F-15
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
There were no impairments of long-lived assets recorded for the years ended May 31, 2010 and 2009 and the period from April 17, 2008
through May 31, 2008 and the Predecessor period from June 1, 2007 through April 16, 2008.
Intangible Assets
The Company assesses intangible assets with indefinite lives for impairment at least annually, or when events indicate that impairment may
exist. The Company’s intangible assets with indefinite lives include trademarks and trade names. In the impairment tests for indefinite-lived
intangible assets, the estimated fair value is compared to the carrying value. The Company’s estimate of fair value is measured using the
relief from royalty method, which is a standard form of discounted cash flow analysis typically used for the valuation of trademarks and
tradenames. If the carrying value exceeds the estimate of fair value, the Company would then calculate impairment as the excess of the
carrying value over the estimate of fair value.
The Company assesses the impairment of amortizing intangibles similar to long lived assets discussed above. The Company’s intangible
assets with definite lives include purchased technologies and customer relationships which are amortized over their useful lives. The
Company estimates the future undiscounted cash flows to be derived from the long-lived assets to assess whether or not a potential
impairment exists whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in
circumstances that may trigger an impairment review including significant changes in business climate, operating results, planned
investments, or an expectation that the carrying amount may not be recoverable, among others. If the carrying value exceeds the
undiscounted cash flows to be derived from the asset, the Company would then calculate the impairment as the excess of the Company’s
estimate of the fair value over the carrying value of the asset. The Company’s estimate of fair value for purchased technology is measured
using the relief from royalty method. The Company’s estimate of fair value for customer relationships is measured using the excess earnings
approach.
In making assessments for impairment the Company relies on a number of factors including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and marketplace data.
There were no impairments of intangible assets recorded for the years ended May 31, 2010 and 2009 and the period from April 17, 2008
through May 31, 2008 and the Predecessor period from June 1, 2007 through April 16, 2008.
Leases
The Company reviews all leases for capital or operating classification at lease inception. Operations are primarily conducted utilizing
operating leases. The lease term commences on the date on which the right to control the use of the leased property transfers to
the Company.
Rent expense related to operating leases, where scheduled rent increases and rent holidays exist, is determined by expensing the total
amount of rent due over the life of the operating lease on a straight-line basis. The difference between the rent paid under the terms of the
lease and the rent expensed on a straight-line basis is included in other non-current liabilities in the accompanying consolidated
balance sheets.
Warranties
The Company has a general warranty policy in which it warrants its products against manufacturing defects and workmanship; warranties
range from thirty days up to one year from the date sold, depending on the type of product. The Company maintains a warranty accrual that
estimates future warranty claims. In determining the amount of the accrual, the Company considers historical levels of claims, warranty
terms and the estimated sell-through to the end consumer. Warranty expense is recorded in cost of goods sold. Refer to Note 14 — Product
Warranty Costs.
Foreign Currency Translation and Foreign Currency Transactions
The Company’s reporting currency is the U.S. dollar. Adjustments resulting from translating foreign functional currency financial statements
into U.S. dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive (loss)
income in stockholders’ equity.
Transaction gains and losses generated by the effect of foreign exchange on recorded assets and liabilities denominated in a currency
different from the functional currency of the applicable entity are recorded in exchange losses (gains), net and other in the period in which
they occur.
F-16
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value Measurements
Effective April 17, 2008, the Company adopted the provisions of ASC Topic 820 (formerly SFAS 157, Fair Value Measurements) to fair value
measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also established a
framework for measuring fair value and expands disclosures about fair value measurements. Refer to Note 22 — Fair Value Measurements.
Risk Management and Derivatives
In the normal course of business, the financial position and results of operations of the Company are impacted by currency rate movements
in foreign currency denominated assets, liabilities and cash flows as the Company purchases and sells goods in local currencies. The
Company is also impacted by interest rate movements on its variable interest rate debt. The Company has established policies and business
practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments,
specifically foreign exchange swaps, forward contracts, and interest rate contracts to manage exposures. All derivatives are recorded at fair
value on the balance sheet. Changes to the fair value of foreign exchange swaps, forward contracts and interest rate contracts are included in
losses (gains) on derivative instruments in the consolidated statement of operations. These derivative instruments are viewed as risk
management tools and are not used for trading or speculative purposes.
On June 1, 2009, the Company adopted FASB guidance which amends the disclosure requirements for derivative instruments and hedging
activities. The amended disclosures require entities to provide information to enable users of the financial statements to understand how and
why an entity uses derivative instruments, how derivative instruments and related hedged items affect an entity’s financial position, financial
performance, and cash flows. Refer to Note 23 — Risk Management and Derivative Instruments.
Segments
The Company follows ASC 280, Segment Reporting, (formerly SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information), which establishes standards for the way public business enterprises report information about operating segments. The method
for determining what information to report is based on the way management organizes the segments with the Company for the chief
operating decision maker to allocate resources, make operating decisions, allocate resources and assess financial performance. The
Company has one operating segment.
Income Taxes
The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets
and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. Deferred income taxes are reduced by a valuation allowance if,
in the judgment of the Company’s management, it is more likely than not that such assets will not be realized.
Concentration of Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by counterparties to derivative instruments. The
counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not
eliminate the Company’s exposure to credit risk with these institutions. This credit risk is generally limited to the unrealized gains in such
contracts should any of these counterparties fail to perform as contracted. To manage this risk, the Company has established strict
counterparty credit guidelines that are continually monitored and reported to senior management according to prescribed guidelines. As a
result of the above considerations, the Company considers the risk of counterparty default to be minimal.
In addition to derivative instruments, the Company is subject to concentrations of credit risk associated with cash and accounts receivable.
The Company places cash with financial institutions with investment grade credit ratings and, by policy, limits the amount of credit exposure
to any one financial institution. The Company considers its concentration risk related to accounts receivable to be mitigated by the
Company’s credit policy, the significance of outstanding balances owed by each individual customer at any point in time and the geographic
dispersion of these customers.
F-17
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Inventory Risk
67%, 65%, 58% and 69% of the Company’s inventory purchases for the years ended May 31, 2010 and 2009, and the period from April 17,
2008 through May 31, 2008 and the Predecessor period from June 1, 2007 through April 16, 2008 respectively, were from three suppliers
which each individually represented greater than 10% of the Company’s total purchases.
Recently Adopted Accounting Pronouncements
In December 2007, the FASB issued guidance on business combinations that establishes principles and requirements for how an acquirer in a
business combination recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. This
guidance also requires that transaction costs be expensed as incurred. We adopted the provisions of this guidance for our business
combinations occurring on or after June 1, 2009.
In April 2008, the Company adopted the recognition provisions of the FASB issued related to defined benefit pension and other
postretirement plans, which requires employers to recognize on a prospective basis the funded status of their defined benefit pension and
other postretirement plans in their consolidated balance sheets and recognize as a component of comprehensive income, net of income tax,
the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit
cost. In fiscal 2009, we adopted the measurement date provisions of this guidance, which requires the funded status of a plan to be measured
as of the date of the year-end statement of financial position and requires additional disclosures in the notes to consolidated financial
statements. The adoption of the measurement date provisions did not have a material impact on our results of operations or financial
condition.
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued guidance requiring various additional disclosures regarding fair value measurements, including the
amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for any transfers in or out of Level 3,
and a gross basis of presentation for purchases, sales, issuances and settlements within the Level 3 activity rollforward. The guidance is
effective for interim or annual financial periods beginning after December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements within the Level 3 activity rollforward, which will be effective for fiscal years beginning after December 15, 2010.
The Company is currently evaluating the impact of adopting the guidance on its consolidated financial statements but does not anticipate
adoption will have a material impact.
NOTE 4 — ACQUISITION OF MISSION ITECH HOCKEY, INC.
On September 22, 2008, the Company, through its wholly owned subsidiaries, purchased all of the issued and outstanding shares of the
capital stock of Mission Itech Hockey, Inc. (‘‘Mission’’). The acquisition strengthens the Company’s position in the roller hockey product
category, as Mission is the market leader in this category. The acquisition also improves the Company’s position in the goalie protective,
youth protective and youth helmet product categories. Additionally, the Company now has entry into new product categories including
visors, goalie masks, jock shorts and neck protection.
The total cash consideration was $26,223,000, including transaction costs. The preliminary allocation of the purchase price to the individual
assets acquired and liabilities assumed under the purchase method of accounting included in the May 31, 2009 balance sheet was based on
management’s best estimates. The final valuation of assets acquired and liabilities assumed resulted in $16,864,000 of negative goodwill
which has been allocated to reduce non-current assets excluding deferred income taxes. After reducing to zero the non-current assets
excluding deferred income taxes, an excess of $5,683,000 remained. This excess was recognized as an extraordinary gain in the year ended
May 31, 2009. The negative goodwill associated with the transaction was due to the favorable market conditions and the timing of
the purchase.
F-18
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 4 — ACQUISITION OF MISSION ITECH HOCKEY, INC. (Continued)
The following table presents the final allocation of purchase price related to the business as of the date of the acquisition (in thousands):
Net assets acquired:
Cash . . . . . . . . . . .
Trade receivables . . .
Inventory . . . . . . . .
Prepaid expenses . . .
Deferred income taxes
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Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,205
27,549
10,917
893
3,609
44,173
(10,418)
(1,849)
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,267)
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,906
Cash consideration purchase price:
Paid to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transactions costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,946
2,277
$26,223
In connection with the acquisition, management approved plans to restructure the operations to close facilities and reduce costs. These costs
were recognized as liabilities assumed in the purchase combination and included severance, facility closure costs, and other exit costs. The
Company recorded liabilities of $4,535,000 as part of the purchase price allocation related to the acquisition. The liabilities included
severance and employee related charges of $3,091,000 and facility closure costs of $1,444,000. The restructuring of the operations continued
through May 31, 2009. Refer to Note 20 — Restructuring and Related Costs for the activity related to the liability for the period
September 22, 2008 to May 31, 2009 and the year ended May 31, 2010.
The following unaudited pro forma financial information has been prepared as if the acquisition of Mission had occurred at June 1, 2007
(in thousands):
Year ended
May 31, 2009
Pro forma
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$263,793
$ (25,143)
$ (0.24)
Year ended
May 31, 2008
Pro forma
(Unaudited)
$283,702
$ 7,208
$
0.07
This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that
actually would have been achieved had the acquisition been consummated at that time, nor is it intended to be a projection of future results.
NOTE 5 — RELATED PARTY TRANSACTIONS
Successor
The Company paid a transaction fee to Kohlberg & Company, L.L.C. (‘‘Kohlberg’’) as part of the Acquisition. The amount of the
transaction fee was $4,000,000. The portion of the fee relating to debt financing and debt structuring was $300,000 and is recorded in other
non-current assets. The portion relating to equity financing was $300,000 and is recorded in stockholders’ equity. The debt-related costs are
being amortized utilizing the straight-line method or the effective interest method, as appropriate, based on the terms of the loan. The
balance of the transaction fee was accounted for as a direct cost of the acquisition and is included in the allocation of purchase price.
The Company entered into a management agreement with Kohlberg as part of the Acquisition. Under the agreement Kohlberg provides
advisory and management services. In consideration of the services provided, the Company pays a management fee of $750,000 per year. The
F-19
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 5 — RELATED PARTY TRANSACTIONS (Continued)
agreement terminates automatically as of the earlier of the tenth anniversary of the agreement or a change of control as defined in the
stockholders’ agreement. Expense recognized related to these agreements for the years ended May 31, 2010 and 2009 was $750,000, and the
period from April 17, 2008 through May 31,2008 was $94,000. The expense is included in selling, general and administrative expenses.
The Company entered into agreements with certain members of the board of directors who are not employees of the Company. Under the
agreements, the board members provide consulting services to the Company. The term of the agreements is 10 years. The agreements
provide that the Company may terminate the consulting services, without cause, at any time upon notice to the consultant. In the event of
such termination, the Company will continue to pay the consultant for a period of twelve (12) months following such termination in monthly
installments. Expense recognized related to these agreements for the years ended May 31, 2010 and 2009, and the period from April 17, 2008
through May 31, 2008 was $644,000, $425,000, and $52,000, respectively. The expense is included in selling, general and administrative
expenses.
Certain members of the board of directors who are not employees of the Company participate in the Equity Incentive Plan. Refer to
Note 18 — Stock-based Compensation. Expense recognized related to these members of the board of directors for the years ended May 31,
2010 and 2009, and the period from April 17, 2008 through May 31, 2008 was $146,000, $280,000, and $2,374,000, respectively. The expense
is included in selling, general and administrative expenses.
NIKE, Inc. provided a variety of services to the Company pursuant to the terms of a transitional services agreement dated April 16, 2008.
These services included provision of voice and data networking, use of certain NIKE, Inc. facilities, and liaison office expenses. The services
were utilized through May 31, 2009 and were charged from April 17, 2008 through May 31, 2009. Expense recognized related to the
agreement was $1,081,000, and $210,000 for the year ended May 31, 2009 and the period from April 17, 2008 through May 31, 2008,
respectively, included in both cost of goods sold and selling, general and administrative expenses.
Predecessor
Due to NIKE, Inc. at April 16, 2008 principally represented the Company’s cumulative earnings and cash distributions from operations to
NIKE, Inc. in excess of the amounts charged by NIKE, Inc. to the Company for services, employee related benefits, income taxes and other
items, and is reflected as a component of stockholders’ equity in the consolidated statements of stockholders’ equity and accumulated other
comprehensive (loss) income at April 16, 2008.
Certain operating expenses for services provided by NIKE, Inc. were not allocated to the Company in the Predecessor period June 1, 2007
through April 16, 2008, and accordingly, are not included in the accompanying consolidated financial statements. These services include
expenses related to certain employee benefits, certain information technology support, audit fees of NIKE, Inc., corporate consolidation and
financial reporting, select tax services, software license fees, legal fees, treasury and cash management services, risk management
administration, insurance costs, certain regulatory services and interest costs. It is not practicable for the Company to reasonably estimate
expenses that would have been allocated to the Company.
Trademark royalty expense in the amount of $3,869,000 in the consolidated statements of operations represents a royalty equal to 2% of net
sales on all products covered by trademarks owned by NIKE, Inc.
The research and development credit in the amount of $4,690,000 in the consolidated statements of operations represents a cross charge to
NIKE, Inc. of certain research and development expenses.
The Company leased the Greenland, New Hampshire office and distribution center facilities from NIKE, Inc. Rent expense recognized in
the Predecessor period June 1, 2007 through April 16, 2008 was $423,000. Of this amount, $247,000 is included in cost of goods sold and
$176,000 is included in selling, general and administrative expenses.
Interest expense and interest income for the Predecessor period June 1, 2007 through April 16, 2008 consisted substantially of interest
related to intercompany note payables and intercompany note receivables between the Company and NIKE, Inc.
F-20
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 6 — ACCOUNTS RECEIVABLE, NET
Accounts receivable includes the following (in thousands):
May 31,
2010
2009
Trade receivables .
Other receivables .
Less: Allowance for
Less: Allowance for
. . . . . . . . . . . . . . .
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doubtful accounts . . .
returns and discounts .
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Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$71,196
5,418
(2,283)
(2,259)
$63,646
2,554
(2,390)
(1,452)
$72,072
$62,358
Other receivables at May 31, 2010 includes the current portion of a receivable in the amount of $1,948,000 from a supplier for costs incurred
related to a product recall. The long-term portion of this receivable totaled $2,253,000 and is reflected in Other non-current assets in the
consolidated balance sheets as of May 31, 2010. Refer to Note 13 — Accrued Liabilities for a description of the product recall.
NOTE 7 — INVENTORIES, NET
Inventories include the following (in thousands):
May 31,
2010
2009
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
795
81
53,519
54,395
(1,984)
$52,411
$ 1,115
146
60,405
61,666
(2,822)
$58,844
As a result of the acquisition described in Note 2 — Formation of the Company and the Acquisition, the Company stepped-up its inventories
on April 17, 2008 to fair market value. The amount of the initial inventory valuation step-up was $31,730,000. Of this amount, $1,649,000,
$23,019,000 and $3,484,000 was charged to cost of goods sold for the years ended May 31, 2010 and 2009, and the period April 17, 2008 to
May 31, 2008, respectively. The difference between the amounts charged to cost of goods sold and the original step-up balance is due to
changes in foreign exchange rates.
F-21
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 8 — PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment include the following (in thousands):
May 31,
2010
2009
Machinery and equipment . .
Data processing equipment .
Furniture and fixtures . . . .
Leasehold improvements and
Construction in process . . .
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capitalized leased assets
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Less: accumulated depreciation
Machinery and equipment . . . . . . . . . . . . . . . . . .
Data processing equipment . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements and capitalized leased assets
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Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,050
4,041
1,445
5,436
320
$ 4,732
2,952
1,356
5,195
150
15,292
14,385
$ (2,022)
(1,512)
(641)
(2,461)
$ (1,433)
(737)
(326)
(1,287)
(6,636)
(3,783)
$ 8,656
$10,602
Depreciation expense for the years ended May 31, 2010 and 2009, and the period from April 17, 2008 through May 31, 2008 and the
Predecessor period from June 1, 2007 through April 16, 2008 was $3,360,000, $3,417,000, $450,000, and $3,008,000 respectively.
NOTE 9 — INCOME TAXES
The Company’s U.S. operations in the Predecessor period represent the results of a portion of NIKE that were included in NIKE’s US
consolidated income tax return. As such, the Predecessor period tax provision for the Company’s U.S. operations has been determined on a
‘‘stand-alone’’ basis as if it was a business completely separate and distinct from NIKE. Any tax benefits or valuation allowances against net
operating loss carryforwards (‘‘NOLs’’) have been recognized and evaluated on a stand-alone basis. As a result, operating loss carryforwards
of the Company’s U.S. operations that were actually utilized on NIKE’s U.S. consolidated tax return are reflected as stand-alone deferred
tax benefits and carried forward for purposes of the Predecessor financial statements if not utilized.
The domestic (United States) and foreign (Cayman, Canada, and other jurisdictions) components of income (loss) before income tax
(expense) benefit and extraordinary gain consist of the following (in thousands):
Year ended
May 31, 2010
Year ended
May 31, 2009
For the period
April 17, 2008
through
May 31, 2008
U.S. sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,599
458
$(11,500)
(25,086)
$ (2,779)
(7,636)
$ (3,129)
23,061
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,057
$(36,586)
$(10,415)
$19,932
Income (Loss) before tax benefit:
F-22
For the period
June 1, 2007
through
April 16, 2008
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 9 — INCOME TAXES (Continued)
The expense (benefit) for income taxes consists of the following (in thousands):
Year ended
May 31, 2010
Current
U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . .
Deferred
U.S. federal
U.S. state .
Non-U.S. . .
$ 365
167
335
Year ended
May 31, 2009
$
3
—
264
267
For the period
April 17, 2008
through
May 31, 2008
$
For the period
June 1, 2007
through
April 16, 2008
279
43
—
$ —
—
4,846
322
4,846
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
867
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,036
342
584
(3,850)
(618)
(7,389)
(2,605)
(120)
—
(1,804)
(175)
3,937
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,962
(11,857)
(2,725)
1,958
Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . .
$3,829
$(11,590)
$(2,403)
$ 6,804
The domestic statutory income tax rate was 34.0% for the years ended May 31, 2010 and 2009, and the period from April 17, 2008 through
May 31, 2008 and for the Predecessor period from June 1, 2007 through April 16, 2008. The reconciliation of the income tax expense
(benefit) expected based on domestic statutory income tax rates to the expense (benefit) for income taxes included in the consolidated
statement of operations is as follows (in thousands):
Effective tax rate reconciliation
U.S. federal income tax based on
U.S. state and local taxes, net . .
Non-U.S. operations . . . . . . . .
Stock-based compensation . . . .
Change in valuation allowance . .
Change in enacted rates . . . . . .
Return to provision . . . . . . . . .
Other . . . . . . . . . . . . . . . . .
statutory
. . . . . .
. . . . . .
. . . . . .
. . . . . .
. . . . . .
. . . . . .
. . . . . .
rate
. . .
. . .
. . .
. . .
. . .
. . .
. . .
of 34.0%
. . . . . .
. . . . . .
. . . . . .
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Year ended
May 31, 2010
Year ended
May 31, 2009
For the period
April 17, 2008
through
May 31, 2008
$2,059
336
(17)
148
—
393
371
539
$(12,439)
(408)
660
360
(121)
402
33
(77)
$(3,541)
(51)
201
653
168
—
—
167
$6,777
(116)
(870)
(24)
—
952
—
85
$3,829
$(11,590)
$(2,403)
$6,804
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Income tax expense (benefit) in the consolidated statements of
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the period
June 1, 2007
through
April 16, 2008
The effect of tax rate differential (foreign taxes) relates primarily to income tax (benefit) accrued in Canada and other foreign jurisdictions.
The stock-based compensation relates to stock options granted in Canada, which are generally nondeductible under Canadian law. The
change in valuation allowance relates to an unrealized capital loss incurred in Canada in 2008 which reversed in 2009. The change in enacted
rates relates to timing differences in Canada that management expects to reverse at a different rate than the current statutory rate.
F-23
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 9 — INCOME TAXES (Continued)
The tax effect of temporary differences, which give rise to deferred tax assets (liabilities), consists of the following (in thousands):
May 31,
2010
2009
Allowance for doubtful accounts
Inventory, net . . . . . . . . . . .
Net operating loss carryforwards
Accrued expenses and reserves .
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Current deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . .
Equity compensation and retirement plans
Property, plant and equipment . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
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.
.
Long-term deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,712
1,301
—
2,654
$ 1,744
828
4,355
2,120
5,667
9,047
14,626
2,154
513
1,701
(257)
14,004
1,752
608
2,147
(878)
18,737
—
17,633
—
Non-current deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,737
17,633
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,404
$26,680
The Company has not recorded a recorded valuation allowance as of May 31, 2010 and 2009 as the Company believes it is more likely than
not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets.
As of May 31, 2010 and May 31, 2009, the Company has net operating loss carryforwards (‘‘NOLs’’) in the United States of $0 and
$4,009,000 respectively. In connection with the acquisition of Mission, the Company acquired approximately $52,971,000 of U.S. NOLs,
although none may be used to offset future taxable income of the Company under Section 382 of the Internal Revenue Code due to
ownership changes that have occurred. Accordingly, the Company has not provided a benefit for these NOLs in the above table. As of
May 31, 2010 and May 31, 2009 the Company has NOLs in Canada of $52,625,000 and $56,621,000 respectively which are fully realizable and
will begin to expire in 2028.
As of May 31, 2010 and May 31, 2009, the Company has intangible assets in the United States of $24,892,000 and $25,498,000 respectively
that are amortizable for income tax purposes. These U.S. intangible assets are amortizable for income tax purposes on a straight line basis
over 15 years. As of May 31, 2010 and May 31, 2009 the Company has intangible assets in Canada of $43,750,281 and $41,271,000
respectively that are amortizable for income tax purposes. 75% of the Canadian tax intangible assets are amortizable for income tax
purposes at a rate of 7% per year.
We have not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and associated companies that the Company
considers to be reinvested indefinitely. Deferred taxes are provided for earnings of non-U.S. affiliates and associated companies when we
determine that such earnings are no longer indefinitely reinvested.
Uncertain Tax Positions
On April 17, 2008 the Company adopted guidance which addressed the accounting for uncertainty in income taxes recognized by prescribing
a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The guidance also provides guidance on de-recognition of tax benefits previously recognized and
additional disclosures for unrecognized tax benefits, interest and penalties. The evaluation of a tax position begins with a determination as to
whether it is more-likely-than-not that a tax position will be sustained upon examination based on the technical merits of the position. A tax
position that meets the more-likely-than-not recognition threshold is then measured at the largest amount of benefit that is greater than
F-24
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 9 — INCOME TAXES (Continued)
50 percent likely of being realized upon ultimate settlement for recognition in the financial statements. A rollforward of the unrecognized tax
benefits in is as follows (in thousands):
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to initial period . . . . . .
Additions for tax positions of acquired business . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . .
Expiration of the statute of limitations for the assessment of taxes
Year ended
May 31, 2010
Year ended
May 31, 2009
For the period
April 17, 2008
through
May 31, 2008
$1,511
—
—
(121)
—
$ 121
—
1,390
—
—
$—
121
—
—
—
$ —
—
—
—
—
$1,390
$1,511
$121
$ —
.
.
.
.
.
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the period
June 1, 2007
through
April 16, 2008
The unrecognized tax position of $1,390,000 has been recorded as a reduction of acquired NOLs that have been written off based upon the
expected Section 382 limitation. Accordingly, the recognition of this tax position is not expected to impact the Company’s effective tax rate.
The Company does not anticipate the balance of unrecognized tax benefits at May 31, 2009 to significantly change during the next twelve
months.
The Company is subject to examination in various jurisdictions for the tax years ended May 31, 2010 and 2009, and the period from April 17,
2008 through May 31, 2008. The Company is also subject to examination in the Predecessor period from June 1, 2007 through April 16, 2008;
however, as a condition of the stock purchase agreement with NIKE Inc., the Company is indemnified by NIKE Inc. for any tax exposures
related to the pre-inception period. The Company’s acquired Mission entities are also subject to examination in periods prior to the
acquisition; however, as a condition to the stock purchase agreement with the Mission stockholders, the Company is indemnified for any tax
exposures related to the pre-acquisition period for Mission and its subsidiaries.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits within the Company’s tax expense. During the
years ended May 31, 2010 and 2009, and the period from April 17, 2008 through May 31, 2008 and the Predecessor period from June 1, 2007
through April 16, the Company did not accrue or recognize any interest or penalties.
NOTE 10 — INTANGIBLE ASSETS
Intangible assets with indefinite lives consist of trade names and trademarks. Intangible assets with estimated useful lives include purchased
technology, customer relationships and favorable lease positions. The favorable lease positions reflect the difference between market and
contract rent.
Intangible assets include the following (in thousands):
Weighted-average
amortization period
Trade names and trademarks
Purchased technology . . . . .
Customer relationships . . . .
Leases . . . . . . . . . . . . . .
.
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.
.
Total . . . . . . . . . . . . . . . . .
Less: accumulated amortization
Purchased technology . . . . .
Customer relationships . . . .
Leases . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total trade names, trademarks and intangible assets
Indefinite
13 years
10 years
4 years
May 31,
2010
2009
$53,240
8,798
13,094
2,599
$50,743
4,975
12,427
2,428
$77,731
$70,573
(1,033)
(6,254)
(1,498)
(8,785)
$68,946
F-25
(477)
(3,666)
(728)
(4,871)
$65,702
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 10 — INTANGIBLE ASSETS (Continued)
On November 23, 2009 the Company acquired trademarks and purchased technology from Jock Plus Hockey Inc. and Kloz, Inc. for a
combined purchase price of $3,400,000, plus acquisition fees. The purchase price of the assets is allocated to the purchased technology
acquired. The fair value of the trademarks acquired was determined to be zero, and as such, no value was assigned to these assets.
Amortization expense for intangible assets for the years ended May 31, 2010 and 2009, and the period from April 17, 2008 through May 31,
2008 was $3,706,000, $3,965,000, and $724,000, respectively, included in both cost of goods sold and selling, general and administrative
expenses.
As of May 31, 2010, the estimated future amortization expense for intangible assets for the next five years and thereafter is as follows
(in thousands):
2011 . . . .
2012 . . . .
2013 . . . .
2014 . . . .
2015 . . . .
Thereafter
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.
$ 3,255
2,399
1,836
1,515
1,267
5,434
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,706
NOTE 11 — OTHER ASSETS
Other assets consists of current and non-current other assets and include the following (in thousands):
May 31,
2010
2009
Prepaid advertising and promotion . . . . . . . . . .
Prepaid insurance . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . .
Fair value of derivative contracts (Note 22 and 23)
Prepaid other . . . . . . . . . . . . . . . . . . . . . . . .
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.
$
694
140
1,465
1,627
1,343
$
554
55
1,461
116
1,632
Total other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,269
$ 3,818
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of derivative contracts (Note 22 and 23) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,494
1,841
3,332
$ 3,653
2,703
617
Total non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,667
$ 6,973
The fair value of derivative contracts consists primarily of a foreign exchange swap agreement entered into to reduce the foreign exchange
risk associated with the U.S. Dollar denominated senior subordinated promissory notes. Refer to Note 23 — Risk Management and
Derivative Instruments.
Included in other non-current assets is a receivable from a supplier for costs incurred related to a product recall. The current and long-term
receivable totaled $1,948,000 and $2,253,000, respectively at May 31, 2010. Refer to Note 13 — Accrued Liabilities for a description of the
product recall.
F-26
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 12 — DEBT
Debt includes the following (in thousands):
May 31,
2010
2009
Short-term portion of revolving credit line . .
Long-term portion of revolving credit line . . .
Term loan due 2013 . . . . . . . . . . . . . . . . .
14.25% Senior subordinated promissory notes,
. . . . . . .
. . . . . . .
. . . . . . .
due 2013 .
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$19,023
$ 8,571
30,916
52,425
$ 3,000
$ 8,069
46,227
49,769
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,912
104,065
Less: current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,666)
(17,151)
$86,246
$86,914
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,666
8,666
77,580
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$91,912
Annual maturities of long-term debt for the fiscal years after May 31, 2010 are as follows (in thousands):
On April 16, 2008 Bauer Hockey Corp., the Company’s Canadian subsidiary and Bauer Hockey, Inc., the Company’s US subsidiary entered
into a $117,000,000 credit facility with General Electric Capital Corporation and GE Canada Finance Holding Company (together, ‘‘GE
Capital’’) and other financial institutions. The credit facility was comprised of a $42,000,000 variable interest rate term loan and a
$75,000,000 revolving credit line. Approximately $55,700,000 of the borrowings was used to fund a portion of the acquisition of the
Company. Refer to Note 2 — Formation of the Company and the Acquisition.
To fund the acquisition of Mission, refer to Note 4 — Acquisition of Mission Itech Hockey, Inc., the credit facility was amended on
September 22, 2008 to increase the credit facility to $142,000,000. The variable interest term loan increased from $42,000,000 to $52,000,000
and the available revolving credit line increased from $75,000,000 to $90,000,000. The credit facility is secured by 100% of the stock and
stock equivalents of Bauer Hockey Inc. and 65% of the stock and stock equivalents of Bauer Hockey Corp.
The term loan borrowings at the acquisition of the Company were $42,827,400 Canadian Dollars. The additional borrowings to fund the
Mission acquisition were $10,561,800 Canadian dollars. The term loan is a variable interest loan with scheduled quarterly repayments and a
maturity of April 16, 2013. The interest rate is equal to the Bankers’ Acceptance rate or Canadian base rate plus the applicable margin for
each rate. The margin is 3.25% or 4.50% depending on the type of rate obtained. The interest rate for the years ended May 31, 2010 and
2009 ranged from 4.93% to 5.50% and 6.81% to 8.00%, respectively. In accordance with the credit facility, the Company must make
quarterly principal payments on the term loan. These payment amounts are included in the short term portion of long term debt. Additional
mandatory principal payments, other than for reason of a default event, are also required if there is a change in control or if the Company
yields excess cash flow as defined in the credit facility. As a result of the credit facility’s excess cash flow provision, for the year ended
May 31, 2010, the Company will make a mandatory principal payment of $750,000 Canadian dollars in September 2010. For the year ended
May 31, 2009 the Company made a mandatory principal payment of $14,547,000 Canadian dollars in August 2009.
The revolving credit line provides for $90,000,000 U.S. dollars of committed borrowings, of which up to $10,000,000 may be used for letters
of credit. The revolving credit line provides access to U.S. dollars and Canadian dollars and matures on April 16, 2013. The Company can
borrow funds based on the lesser of the borrowing base or line commitment. Generally, the borrowing base is calculated by taking 85% of
trade receivables, net of ineligible accounts, and 65% of inventory. The balance must be paid down to $9,000,000 Canadian dollars for a
period of 30 consecutive days between the period January 15 and March 15 each year. The Company pays 0.5% for the unused portion of the
revolving credit line. The interest rate is equal to the Bankers’ Acceptance rate, Canadian base rate, LIBOR or the base rate plus the
applicable margin for each rate. The margin is 3.25% or 4.50% depending on the type of rate obtained. The interest rate for the years ended
May 31, 2010 and 2009 ranged from 4.73% to 6.50% and 5.89% to 8.25%, respectively. The Company had $40,381,000 and $61,006,000 of
available credit line available at May 31, 2010 and 2009, respectively. At May 31, 2010 there is one letter of credit in the amount of $350,000
Canadian dollars outstanding under the revolving credit line. There are no letters of credit outstanding under the revolving credit line at
May 31, 2009.
F-27
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 12 — DEBT (Continued)
The credit facility with GE Capital includes covenants that require the Company to maintain a minimum fixed charge ratio, a minimum
leverage ratio and maximum capital expenditures. The Company must maintain a minimum fixed charge ratio of 1.25:1.00. The fixed charge
ratio is defined as the ratio of cash flows to fixed charges which includes interest expense, principal payments, income taxes and management
fees. The Company’s leverage ratio must not exceed pre-established limits established by GE Capital. Leverage ratio is defined as the ratio
of EBITDA to net indebtedness. The limit as of May 31, 2010 and 2009 is 4.65:1.00 and 4.85:1.00, respectively. The Company shall not make
or commit to make capital expenditures in excess of $5,000,000 in any fiscal year. The Company may carry forward to the immediately
succeeding fiscal year 50% of the unutilized portion of that fiscal year’s limit. In addition, the credit facility contains limitations on
repurchase of common stock, certain investments, acquisitions and/or mergers; and prohibits disposition of assets other than in the normal
course of business. As of May 31, 2010 and 2009, the Company was in compliance with the covenants required under the credit facility.
At acquisition of the Company, Bauer Hockey Corp., and the Company’s Canadian subsidiary sold senior subordinated promissory notes for
$52,000,000 to AEA Mezzanine Funding LLC, AEA Mezzanine (Unleveraged) Fund and Partners Group. The borrowings were used to fund
a portion of the acquisition; refer to Note 2 — Formation of the Company and the Acquisition. The notes have a fixed interest rate of
14.25% and a maturity of October 15, 2013, requiring a lump sum payment. The interest rate is comprised of basic interest of 12.00% due in
cash each quarter and 2.25% that the Company, at its discretion, can recapitalize into the notes. For the year ended May 31, 2010, the
Company elected to recapitalize the 2.25% interest. The amount of the recapitalization is $1,171,000. The notes are unsecured.
AEA Mezzanine Funding LLC purchased $19,731,400 of the promissory notes. AEA Mezzanine (Unleveraged) Fund purchased $6,268,600
of the promissory notes. Partners Group purchased $26,512,200 Canadian dollars of the promissory notes; the equivalent of $26,000,000
U.S. dollars at time of purchase. The Company entered into a foreign exchange swap agreement to reduce the foreign exchange risk
associated with the U.S. Dollar denominated notes. Refer to Note 23 — Risk Management and Derivative Instruments.
The note purchase agreements with AEA Mezzanine Funding LLC, AEA Mezzanine (Unleveraged) Fund and Partners Group includes
covenants that require the Company to maintain a minimum fixed charge ratio, a minimum leverage ratio and maximum capital
expenditures. The Company must maintain a minimum fixed charge ratio of 1.125:1.00. The fixed charge ratio is defined as the ratio of cash
flows to fixed charges which includes interest expense, principal payments, income taxes and management fees. The Company’s leverage
ratio must not exceed pre-established limits established by the note purchasers. Leverage ratio is defined as the ratio of EBITDA to net
indebtedness. The limit as of May 31, 2010 and 2009 is 5.10:1.00 and 5.35:1.00, respectively. The Company shall not make or commit to make
capital expenditures in excess of $5,500,000 in any fiscal year. The Company may carry forward to the immediately succeeding fiscal year
50% of the unutilized portion of that fiscal year’s limit. As of May 31, 2010 and 2009, the Company was in compliance with the covenants
required under the note purchase agreements.
NOTE 13 — ACCRUED LIABILITIES
Accrued liabilities include the following (in thousands):
May 31,
2010
2009
Compensation and benefits, excluding taxes . . . . . . . . . . . . . .
Fair value of foreign curency forward contracts (Note 22 and 23)
Accrued advertising and volume rebates . . . . . . . . . . . . . . . .
Customer credit balances . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product Recall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes excluding income taxes . . . . . . . . . . . . . . . . . . . . . . .
Endorsements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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$ 7,596
535
3,667
812
2,007
3,118
779
223
1,456
4,772
$ 6,383
4,556
4,008
1,303
2,323
—
1,194
459
2,084
6,899
Total accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,965
$29,209
On March 16, 2010, the Company announced a voluntary product recall of certain junior and youth composite sticks manufactured by a
supplier. The affected composite sticks were manufactured during the period May 24, 2006 to January 21, 2010. This recall has not had a
material impact on the Company’s results of operations, as the Company was indemnified by the supplier of the composite sticks. The
product recall accrued liability represents the Company’s current estimate of costs incurred as of May 31, 2010 including those from a third
party recall service provider, as well as future claims by consumers and customers. The current and long-term receivable recorded in
accordance with the terms of a settlement and release agreement between the Company and the supplier totaled $1,948,000 and $2,253,000,
respectively at May 31, 2010. Refer to Note 6 — Accounts Receivable, net and Note 11 — Other Assets.
F-28
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 14 — PRODUCT WARRANTY COSTS
Changes in the carrying amount of accrued product warranty costs are summarized as follows (in thousands):
May 31,
2010
2009
Beginning Balance . . . . .
Warranty costs incurred . .
Product warranty accrual .
Exchange rate loss (gain) .
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Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,323
(3,392)
2,923
153
$ 2,380
(2,359)
2,703
(401)
$ 2,007
$ 2,323
NOTE 15 — DIRECT FINANCING AND CAPITAL LEASE PAYABLE
Direct financing and capital lease payable include the following (in thousands):
Direct Financing
Lease Payable
May 31,
2010
2009
Capital Lease
Payable
May 31,
2010
2009
Total
May 31,
2010
2009
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 403
1,652
$ 339
1,935
$10
—
$10
11
$ 413
1,652
$ 349
1,946
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,055
$2,274
$10
$21
$2,065
$2,295
The direct financing lease payable consists of the lease of the Company’s Quebec, Canada facility. The lease is accounted for under a direct
financing lease with a term that runs through September 2014. The Company depreciates the facility over the lease term and lease payments
are allocated between interest expense and principal. Interest expense and depreciation expense recorded for the years ended May 31, 2010
and 2009, and the period from April 17, 2008 through May 31, 2008 and the Predecessor period from June 1, 2007 through April 16, 2008
were $693,000, $713,000, $80,000, and $13,000, respectively. Refer to Note 21 — Commitments and Contingencies for the future annual
rental commitments.
NOTE 16 — BENEFIT PLANS
The Company’s benefit plans include Canadian and US supplemental pension plans, post-retirement life insurance plan, a defined
contribution Registered Retirement Savings Plan (‘‘RRSP’’), and a defined contribution 401(k) plan. The supplemental pension plans are
not registered or funded, and do not accept new participants. Additionally, current participants do not earn any additional benefits. The
post-retirement life insurance plan and the Registered Retirement Savings Plan (‘‘RRSP’’) are available to most Canadian employees. The
defined contribution 401(k) plan covers all employees in the United States.
The Canadian supplemental plan was available to designated senior management and executives. The US supplemental plan was available to
designated employees. Payouts under these plans are dependent on the Company’s ability to pay at the time the participants are entitled to
receive their payments.
The following table provides the benefit plan liabilities (in thousands):
Supplemental
Pension Plan
May 31,
2010
2009
PostRetirement
Life Insurance
May 31,
2010
2009
Total Benefit Plan
Liabilities
May 31,
2010
2009
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 349
4,452
$ 324
3,647
$—
249
$—
234
$ 349
4,701
$ 324
3,881
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,801
$3,971
$249
$234
$5,050
$4,205
F-29
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 16 — BENEFIT PLANS (Continued)
The following table provides the change in projected benefit obligation of the supplemental pension plans (in thousands):
Change in projected benefit obligation:
Beginning balance . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . .
Exchange rate loss (gain) . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . .
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Year ended
May 31, 2010
Year ended
May 31, 2009
$3,971
285
(340)
202
683
$5,173
270
(332)
(500)
(640)
$4,801
$3,971
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Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The net periodic pension cost for the years ended May 31, 2010 and 2009, and the period from April 17, 2008 through May 31, 2008 and the
Predecessor period from June 1, 2007 through April 16, 2008 was $285,000, $270,000, $38,000, and $323,000, respectively, consisting of
interest costs.
The following table provides the discount rate actuarial assumptions used for the supplemental pension plans:
Year ended
May 31,
2010
Year ended
May 31,
2009
Year ended
May 31,
2008
Canadian Plan
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.25%
5.50%
6.00%
7.25%
5.00%
5.80%
US Plan
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.50%
5.30%
6.00%
6.50%
5.50%
5.80%
The discount rate assumptions are determined by management with the aid of third-party actuaries. The discount rate is used to measure the
single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments with a rating of AA or better, would
provide the necessary cash flows to pay for pension benefits as they become due. The Company’s methodology to set the discount rate is
based on a zero-coupon yield curve derived from a bond yield curve developed by the third party using bond data provided by PC Bond
Analytics (Canada) and Barclays (US). The estimated future benefit payments of a pension plan with a similar duration to that of each of the
Company’s pension plans are discounted using the zero-coupon bond rate corresponding to the term of the estimated benefit payment. The
discount rate is the single rate that reproduces this present value.
Benefits expected to be paid, which reflect expected future service as appropriate, in each of the next fiscal years ending May 31, are as
follows (in thousands):
2011
2012
2013
2014
2015
Next
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$ 349
357
357
372
372
$1,922
The Company pays all the costs of the post-retirement life insurance plan. The plan is not funded. The accumulated benefit obligation of the
plan at May 31, 2010 was $249,000 and at May 31, 2009 was $234,000. The terms of the defined contribution Registered Retirement Savings
Plan (‘‘RRSP’’) call for annual contributions by the Company as determined by executive management. Contributions to the plan for the
years ended May 31, 2010 and 2009, and the period from April 17, 2008 through May 31, 2008 and the Predecessor period from June 1, 2007
F-30
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 16 — BENEFIT PLANS (Continued)
through April 16, 2008 were $40,000, $375,000, $62,000, and $336,000, respectively. The contributions are included in cost of goods sold and
selling, general and administrative expenses.
The defined contribution plan (401k) was adopted on May 1, 2008. Employees are eligible to participate in the plan immediately upon hire,
there is no service requirement. The plan provides for matching contributions in an amount equal to 100% of the first 5% contributed by the
employee to the Plan. Matching contributions to the plan were $340,000 for the year ended May 31, 2009 and $29,000 for the period
April 17, 2008 to May 31, 2008. The contributions are included in selling, general and administrative expenses. Matching contributions to the
plan were suspended by the Company for the year ended May 31, 2010.
NOTE 17 — OTHER LIABILITIES
Other non-current liabilities at May 31, 2010 and 2009 primarily consist of unfavorable lease obligations in connection with the acquisition
of Mission.
NOTE 18 — STOCK-BASED COMPENSATION
The Company’s Equity Incentive Plan was adopted April 16, 2008. The plan provides for the award of share options to Executive officers,
directors, consultants and other employees. The award entitles participants the right to purchase shares of the Company at specified prices.
The exercise price per share of each share option shall be 100% of the fair market value of a share, determined as of the date of grant, or
such higher amount as the Board shall determine. A total of 20,000,000 shares of stock were authorized for issuance under the plan. The
options expire ten years from the date of grant. Except for 5,350,000 shares, the options vest one-fourth each year and are subject to
accelerated vesting upon change of control.
Options to purchase 5,350,000 shares were exercisable under the plan as of May 31, 2010 and 2009. There were 1,680,000 and
2,280,000 shares available for future grants as of May 31, 2010 and 2009, respectively. Except for 5,350,000 shares, options are not exercisable
until and upon a change in control (as defined), initial public offering, voluntary resignation, termination other than for cause or death.
The Company estimates the fair value of its stock options awards on the date of grant using the Black-Scholes option pricing model that uses
the assumptions noted in the following table.
Year ended
May 31, 2010
Weighted average expected term (in years) . . .
Weighted average expected volatility . . . . . . .
Weighted average risk-free interst rate . . . . . .
Expected dividend yield . . . . . . . . . . . . . . .
Weighted average fair value per option granted
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7.77
34.74%
3.19%
0%
$0.41
Year ended
May 31, 2009
6.25
30.32%
3.09%
0%
$0.36
April 17, 2008
through
May 31, 2008
7.84
32.82%
3.34%
0%
$0.40
The expected term of options is estimated using the anticipated exercise behavior of employees and contract term (10 years) for
non-employees. For plain vanilla options granted to employees, the Company has utilized the simplified method to determine the expected
term to be used in the option pricing model. For out-of-the-money options granted to employees, an average of the simplified method and
the contractual term is utilized to determine the expected term to be used in the option pricing model. These methods are being used as the
Company does not have historical share option exercise experience. Expected volatility is based on an average volatility of comparable public
companies. The risk-free interest rate is based on the US Treasury yield curve corresponding to the stock option’s expected term. The
expected dividend yield is 0% as dividends are not expected to be paid during the expected term. To establish the fair market value of the
common stock, a combination of the market approach and income approach (discounted cash flows) was used for the year ended May 31,
2010. For the year ended May 31, 2009 and the period April 17, 2008 through May 31, 2008, the market approach was used to establish
fair value.
F-31
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 18 — STOCK-BASED COMPENSATION (Continued)
Information concerning stock option activity for the year ended May 31, 2010 is summarized as follows:
WeightedAverage
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
Options
WeightedAverage
Exercise Price
17,720,000
625,000
—
(25,000)
$1.18
1.80
—
1.00
Outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,320,000
$1.20
8.01
—
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,872,500
$1.30
7.92
—
Exercisable at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,350,000
$1.60
7.88
—
Options available for grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,680,000
Options vested and expected to vest . . . . . . . . . . . . . . . . . . . . . . . . .
18,200,250
$1.20
7.96
—
Beginning of the
Granted . . . . .
Exercised . . . .
Forfeited . . . . .
period
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Information concerning the nonvested shares as of May 31, 2010, and changes during the year ended May 31, 2010, is summarized as follows:
Nonvested Shares
Balance at June 1, 2009
Granted . . . . . . . .
Vested . . . . . . . . .
Forfeited . . . . . . . .
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Balance at May 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
Weighted
Average
Grant-Date
Fair Value
9,927,500
625,000
(3,086,250)
(18,750)
$ 3,899,109
255,966
(1,153,236)
(6,781)
7,447,500
$ 2,995,058
Compensation cost is recognized over the vesting period based on the number of options expected to vest using an accelerated method.
Compensation cost for the equity incentive plan for the years ended May 31, 2010 and 2009, and the period from April 17, 2008 through
May 31, 2008 was $1,219,000, $1,810,000, and $2,850,000, respectively. The compensation cost is included in selling, general and
administrative expenses. The total recognized tax benefit as of May 31, 2010 and 2009 was $2,154,000 and $1,752,000, respectively. The total
fair value of shares vested for the years ended May 31, 2010 and 2009, and the period from April 17, 2008 through May 31, 2008 was
$1,153,000, $916,000, and $2,369,000, respectively. As of May 31, 2010 there was $1,359,000 of unrecognized compensation cost related to
non-vested awards granted under the plan which is expected to be recognized as compensation expense in the amounts of $922,000,
$367,000, $61,000 and $9,000 for the years ended May 31, 2011, 2012, 2013 and 2014, respectively. The total unrecognized compensation cost
related to non-vested awards granted under the plan is expected to be recognized over a weighted average period of 1.38 years.
F-32
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 19 — EARNINGS PER SHARE
The computation of basic and diluted earnings (loss) per common share follows:
Successor
Year ended
May 31, 2010
Year ended
May 31, 2009
For the period
April 17, 2008
through
May 31, 2008
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . .
Assumed conversion of dilutive stock options and awards . . . . . . . . . . . . . . . . .
108,069,808
2,757,297
104,632,042
—
97,017,767
—
Diluted weighted average common shares outstanding . . . . . . . . . . . . . . . . . . .
110,827,105
104,632,042
97,017,767
Basic and diluted earnings (loss) per common share:
Net income (loss) before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.02
$
(0.24)
0.05
$
(0.08)
—
0.02
$
(0.19)
$
(0.08)
—
Options to purchase an additional 2,640,000, 2,140,000, and 2,140,000 shares of common stock were outstanding at May 31, 2010, 2009 and
2008, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.
NOTE 20 — RESTRUCTURING AND RELATED COSTS
The Company incurred net restructuring and related charges of $149,000 and $2,175,000 in the years ended May 31, 2010 and 2009,
respectively. The charge for the year ended May 31, 2010 is included in selling, general and administrative expenses in the consolidated
statements of operations. For the year ended May 31, 2009, $1,026,000 is included in cost of goods sold and $1,149,000 is included in selling,
general and administrative expenses in the consolidated statements of operations. The components of these charges are discussed below.
Mission Itech Hockey Facilities
In connection with the acquisition, the Company announced plans during the second quarter of the fiscal year ended May 31, 2009 to close
the Kirkland, Quebec and Plattsburg, New York facilities, and to restructure the operations in the Irvine, California location. Refer to
Note 4 — Acquisition of Mission Itech Hockey, Inc. The restructuring was substantially complete by May 31, 2009. The Company incurred
severance and employee related costs, as well as other fees associated with the restructuring, of $160,000 in the year ended May 31, 2010 and
$943,000 for the period September 23, 2008 to May 31, 2009 that related to activities subsequent to the acquisition.
The following table sets forth the cash components of the restructuring activity (in thousands):
Current
Severance
and employee
Other facility
related costs
closure costs
Total Current
Portion
Non-Current
Other facility
closure costs
Liability at September 22, 2008 . . . . . . . . . . . . . . .
Charges for the period September 23, 2008 through
May 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments for the period September 23, 2008 to
May 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,091
$ 407
$ 3,498
971
451
1,422
(479)
(3,388)
(29)
Liability at May 31, 2009 . . . . . . . . . . . . . . . . . . . .
Charges for the period June 1, 2009 through
May 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments for the period June 1, 2009 to
May 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
$
Liability at May 31, 2010 . . . . . . . . . . . . . . . . . . . .
$
(3,388)
674
5
(679)
0
F-33
—
$ 858
$ 1,532
(294)
(289)
(417)
$ 147
(1,096)
$
147
$1,037
Total
$ 4,535
943
(3,417)
$ 529
$ 2,061
449
160
(767)
$ 211
(1,863)
$
358
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 20 — RESTRUCTURING AND RELATED COSTS (Continued)
The current portion and the long-term portion of the liability at May 31, 2010 and 2009 are included in accrued liabilities and in other
non-current liabilities, respectively. Cash payments for the other facility costs will be paid over the next three fiscal years. The other facility
closure costs consist primarily of lease obligation costs. The reversal of other facility closure costs during the period September 23, 2008
through May 31, 2009 in the amount of $479,000 reflects a change in estimate related to the Kirkland, Quebec lease obligation. The
Company received a sublease offer for the property and adjusted the liability based on the offer. The reversal of other facility closure costs
during the year ended May 31, 2010 in the amount of $294,000 also reflects a change in estimate related to the Kirkland, Quebec lease
obligation. A sublease for the property was executed on September 1, 2009. The lease obligation liability was adjusted to reflect the terms of
the sublease.
St. Jerome Manufacturing Facility
During the fourth quarter of the fiscal year ended May 31, 2009, the Company announced plans to reduce the manufacturing operations at
the St. Jerome, Quebec facility. The Company recorded restructuring charges of $1,026,000 in the year ended May 31, 2009 for severance
and employee related charges, as well as other fees associated with the restructuring.
The following table sets forth the cash components of the restructuring activity (in thousands):
Year ended
May 31, 2010
Year ended
May 31, 2009
Severance and employee related costs:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,026
(11)
(908)
$—
1,026
—
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 107
$1,026
The restructuring charges are included in accrued liabilities at May 31, 2010 and 2009. Cash payments for the severance and employee
related cost liabilities will be paid in the year ended May 31, 2011.
Taiwan Office Leased Employees
During the year ended May 31, 2009, the Company leased certain employees located in the Taiwan office of NIKE, Inc. as part of a
Transitional Services Agreement dated April 16, 2008 between the Company and NIKE, Inc. The agreement expired on May 31, 2009. The
Company recorded restructuring charges of $206,000 in the year ended May 31, 2009 for severance and employee related charges related to
the expiration of this agreement.
The following table sets forth the cash components of the restructuring activity (in thousands):
Year ended
May 31, 2010
Year ended
May 31, 2009
Severance and employee related costs:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$206
—
—
$—
206
—
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$206
$206
The restructuring charges are included in accrued liabilities at May 31, 2010 and 2009. Cash payments for the severance and employee
related cost liabilities will be paid in the year ended May 31, 2011.
F-34
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 21 — COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases space for certain of its offices and warehouses under leases expiring from one to six years after May 31, 2010. Amounts
of minimum future annual rental commitments under non-cancelable operating and direct financing leases in each of the fiscal years ending
May 31 are as follows (in thousands):
Direct Financing
and
Capital Lease
Payments
Operating
Lease
Payments
.
.
.
.
.
.
$ 628
618
618
618
155
—
$ 5,071
2,098
1,132
894
787
460
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,637
$10,442
2011 . . . .
2012 . . . .
2013 . . . .
2014 . . . .
2015 . . . .
Thereafter
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Less amounts representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(572)
Present value of net minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,065
413
Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,652
Total contractual sublease income to be received by the Company in future years amounted to $5,108,000 at May 31, 2010, and $7,390,000 at
May 31, 2009. Rent expense, net of sublease income, included in the statements of operations for the years ended May 31, 2010 and 2009,
and the period from April 17, 2008 through May 31, 2008 and the Predecessor period from June 1, 2007 through April 16, 2008 was
$1,066,000, $1,640,000, $68,000, and $1,852,000 respectively.
The Company enters into endorsement contracts with athletes and sports teams. Amounts of commitments under endorsement contracts in
each of the fiscal years ending May 31 are as follows (in thousands):
Endorsement
Payments(1)
2011 . . . .
2012 . . . .
2013 . . . .
2014 . . . .
2015 . . . .
Thereafter
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$2,462
896
374
194
200
15
$4,141
(1) The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty
fees the Company is obligated to pay athlete and sport team endorsers of the Company’s products. Actual payments under some
contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic
achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these
contracts include provisions for reduced payments if athletic performance declines in future periods. In addition to the cash payments,
the Company is obligated to furnish the endorsers with products for their use. It is not possible to determine how much the Company
will spend on this product on an annual basis as the contracts do not stipulate a specific amount of cash to be spent on the product. The
amount of product provided to the endorsers will depend on many factors including general playing conditions, the number of sporting
events in which they participate, and the Company’s decisions regarding product and marketing initiatives. In addition, the costs to
F-35
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 21 — COMMITMENTS AND CONTINGENCIES (Continued)
design, develop, source, and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily
tracked separately from similar costs incurred for products sold to customers.
At May 31, 2010, the Company had commitments to purchase inventory of $40,925,000 and non-inventory of $540,000.
Contingencies
In connection with the formation of the Company, the Company has agreed to pay additional consideration to the seller in future periods,
based upon the attainment of a qualifying exit event. At May 31, 2010, maximum potential future consideration pursuant to such
arrangements, to be resolved over the following eight years, is $10 million.
On April 22, 2010, the Company was served with a Motion to Institute a Class Action and Be Ascribed the Status of Representative that was
filed in the Superior Court of the Province of Quebec, District of Montreal. The motion was filed by a person allegedly affected by the
Company’s recall of certain hockey sticks. Based on counsel’s analysis of Quebec case law relating to authorization of class actions, counsel
believes that the Court will likely authorize this lawsuit as a class action. Refer to Note 13 — Accrued Liabilities for a description of the
product recall. The Company believes that the claims are without merit and intends to vigorously defend its position. The ultimate outcome
of this litigation cannot presently be determined. However, in management’s opinion, the likelihood of a material adverse outcome is
remote. Accordingly, adjustments, if any, which might result from the resolution of this matter, have not been reflected in the financial
statements.
In addition to the matter above, in the ordinary course of its business, the Company is involved in various legal proceedings involving
contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. The Company does not
believe there are any pending legal proceedings that will have a material impact on the Company’s financial position or results of operations.
NOTE 22 — FAIR VALUE MEASUREMENTS
Fair Value of Financial Information
The Company measures certain financial assets and liabilities at fair value on a recurring basis. The fair values of the Company’s financial
instruments represent the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly
transaction between market participants at the measurement date. Those fair value measurements maximize the use of observable inputs.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents, trade accounts receivable, other assets (nonderivatives), trade accounts payable, and accrued expenses
(nonderivatives): the carrying amounts, at face value or cost plus accrued interest, approximate fair value because of the short maturity of
these instruments.
Derivative Assets/Liabilities: Derivative financial instruments include foreign exchange swaps, interest rate contracts and foreign currency
forward contracts. The fair value of these derivatives contracts is determined using level 2 inputs based on observable criteria such as the
forward pricing curve, currency volatilities, currency correlations and interest rates.
Long-term debt: The fair value of the Company’s term loan borrowings is based on rates currently available to the Company for debt with
similar terms and remaining maturities. Carrying value approximates fair value. The fair value of the Company’s senior subordinated
promissory notes is estimated by discounting the future cash flow using the Company’s current borrowing rates for similar types and
maturities of debt. The carrying value of the senior subordinated promissory notes as of May 31, 2010 and 2009 is $52,425,000, and
$49,769,000 respectively. The estimated fair value of the senior subordinated promissory notes as of May 31, 2010 and 2009 is $39,153,000
and $34,346,000, respectively.
Fair Value Hierarchy
The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest
priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are
as follows:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to
access at the measurement date.
F-36
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 22 — FAIR VALUE MEASUREMENTS (Continued)
• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly.
• Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is
significant to the fair value measurement in its entirety.
The following tables present the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a
recurring basis at May 31, 2010 and 2009 (in thousands):
May 31,
2010
Assets:
Foreign exchange swaps . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency forward contracts . . . . . . . . . . . . . . . . . . .
Liabilities:
Foreign currency forward contracts . . . . . . . . . . . . . . . . . . .
$1,841
1,627
$—
$1,841
1,627
$—
—
$3,468
$—
$3,468
$—
$ 535
$—
$ 535
$—
May 31,
2009
Assets:
Foreign exchange swaps . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency forward contracts . . . . . . . . . . . . . . . . . .
Liabilities:
Foreign currency forward contracts . . . . . . . . . . . . . . . . . .
Fair value measurements at reporting date using
Quoted prices in
Significant other
Significant
active markets for
observable
unobservable
identical assets
inputs
inputs
(Level 1)
(Level 2)
(Level 3)
Fair value measurements at reporting date using
Quoted prices in
Significant other
Significant
active markets for
observable
unobservable
identical assets
inputs
inputs
(Level 1)
(Level 2)
(Level 3)
$2,695
7
116
$—
—
—
$2,695
7
116
$—
—
—
$2,818
$—
$2,818
$—
$4,556
$—
$4,556
$—
NOTE 23 — RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS
The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and
uses derivatives to manage financial exposures that occur in the normal course of business. The Company’s hedging strategy uses foreign
exchange swaps, interest rate contracts, and foreign currency forwards as economic hedges, which are recorded in the consolidated balance
sheet at fair value. The Company has not elected hedge accounting and therefore the changes in the fair value of these derivatives are
recognized in current period earnings.
The Company uses foreign exchange swaps to reduce market risk associated with changes in currency market. In April 2008, the Company
entered into a foreign exchange swap agreement with Rabo Capital Services, Inc. This agreement exchanges a notional amount of
$26,338,000 Canadian dollars for $26,000,000 U.S. dollars at October 2013. Under the terms of the swap agreement, the Company will pay
the counterparty a fixed rate of 12.455% on the $26,338,000 Canadian dollar debt and will receive a fixed rate of 12% on the $26,000,000
U.S. dollar debt on a quarterly basis through October 2013.
The Company uses interest rate contracts to reduce market risk associated with changes in interest rates. In July 2008 the Company entered
into an interest rate cap agreement with Fifth Third Bank. The agreement caps, at 5%, the Canadian Banker’s Acceptance interest rate
F-37
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 23 — RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS (Continued)
applicable on the term loan amount of $21,151,200 Canadian dollars adjusted for quarterly principal payments, through April 16, 2011. The
notional amount as of May 31, 2010 and 2009 was $19,182,000 and $20,626,200 Canadian dollars, respectively.
The Company uses foreign currency forward contracts as an economic hedge to offset the effects of exchange rate fluctuations on certain of
its forecasted foreign currency denominated sales and cost of sales transactions. The Company’s cash flow exposures include recognized and
anticipated foreign currency transactions, such as foreign currency denominated sales, costs of goods sold, as well as collections and
payments. The risk in these exposures is the potential for losses associated with the remeasurement of nonfunctional currency cash flows into
the functional currency. During the year ended May 31, 2010 and 2009, the Company entered into various forward contracts with Fifth Third
Bank to hedge its Canadian Dollar and Swedish Krona currency risks. As of May 31, 2010, the Company had forward contracts, maturing at
various dates through May 2011, to sell the equivalent of $1,250,000 in foreign currencies at contracted rates and to buy the equivalent of
$91,250,000 in foreign currencies at contracted rates. As of May 31, 2009, the Company had forward contracts, maturing at various dates
through May 2010, to sell the equivalent of $3,804,000 in foreign currencies at contracted rates and to buy the equivalent of $61,500,000 in
foreign currencies at contracted rates. During the year ended May 31, 2010, the Company recognized net losses of $5,360,000 from foreign
currency forward contracts. The losses are included in losses (gains) on derivative instruments in the consolidated statements of operations.
The fair values of derivative instruments held as of May 31, 2010 and 2009 (in thousands):
Asset derivatives
May 31, 2010
May 31, 2009
B/S Location Fair value B/S Location Fair value
Derivatives not designated as hedging instruments
Foreign exchange swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency forward contracts . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets
Other assets
Other assets
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,841
—
1,627
Other assets
Other assets
Other assets
$3,468
$2,695
7
116
$2,818
Liability derivatives
May 31, 2010
May 31, 2009
B/S Location
Fair value
B/S Location
Fair value
Derivatives not designated as hedging instruments
Foreign currency forward contracts . . . . . . . . . . . . . . . . . . .
Accrued liabilities
$535
Accrued liabilities
$4,556
The changes in the fair value of foreign exchange swaps recorded in earnings are summarized below (in thousands):
Year ended
May 31, 2010
Year ended
May 31, 2009
For the
period
April 17, 2008
through
May 31, 2008
Fair value of contracts outstanding at beginning of year . . . . . . . . . . . . . . . . . . .
Net change in fair value — Unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . .
Exchange rate gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,695
(863)
9
$(1,823)
3,910
608
$ —
(1,775)
(48)
Fair value of contracts outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . .
$1,841
$ 2,695
$(1,823)
F-38
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the years ended May 31, 2010 and 2009 and the period April 17, 2008 through May 31, 2008
for the Successor and for the period June 1, 2007 through April 16, 2008 for the Predecessor
NOTE 23 — RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS (Continued)
The changes in the fair value of interest rate contracts recorded in earnings are summarized below (in thousands):
Year ended
May 31, 2010
Year ended
May 31, 2009
Fair value of contracts outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in fair value — Unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7
(7)
$—
7
Fair value of contracts outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
$ 7
The changes in the fair value of the foreign currency forward contracts recorded in earnings are summarized below (in thousands):
Year ended
May 31, 2010
Year ended
May 31, 2009
Fair value of contracts outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in fair value — Unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange rate gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(4,440)
5,666
(134)
$ —
(4,027)
(413)
Fair value of contracts outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,092
$(4,440)
The net changes in fair value are included in losses (gains) on derivative instruments in the consolidated statements of operations.
NOTE 24 — SUBSEQUENT EVENTS
On June 3, 2010, the Company acquired 100% of Maverik Lacrosse LLC (‘‘Maverik’’), a distributor of lacrosse equipment. The total
consideration paid by the Company at closing is approximately $10,346,000 in cash, plus acquisition costs. The acquisition was funded by
additional borrowings on the revolving credit line. In accordance with the purchase agreement, an additional $1,465,000 is payable to the
sellers in four equal installments during the period 12 months following the closing. Additionally, $2,250,000 is payable to the sellers should
Maverik satisfy certain performance criteria in the period 1 to 10 years following the closing. The acquisition will be accounted for in
accordance with FASB guidance on business combinations.
On June 3, 2010, the Company executed an amendment to the credit agreement. Under the terms of the original agreement, the balance of
the revolving credit line must be paid down to $9,000,000 Canadian dollars for a period of 30 consecutive days between the period
January 15 and March 15 each year. The amendment to the credit agreement increases the balance to $15,000,000 Canadian dollars.
On August 3, 2010, the Company announced plans to close the distribution center in Greenland, New Hampshire. The Company expects the
restructuring to be complete during the fiscal year ended May 31, 2011. As a result of this decision, the Company expects to incur severance
and employee related expenses of $300,000 to $350,000.
On September 2, 2010, the Company entered into an operating lease agreement for corporate headquarters in Exeter, New Hampshire. The
occupancy date is scheduled for May 1, 2011. The initial lease term is twelve years with an option to renew the lease for two five-year
periods. Total minimum future annual rental commitments under the initial lease term are $5,181,000. As part of the terms of the lease
agreement, the Company issued a letter of credit to the landlord in the amount of $990,000 on September 15, 2010.
F-39
Kohlberg Sports Group Inc. and
Subsidiaries
Consolidated Financial Statements
(Unaudited)
For the three and six months ended November 30, 2010 and 2009
F-40
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
As of
November 30,
2010
(unaudited)
ASSETS
Current assets:
Cash . . . . . . . . . .
Accounts receivable,
Inventories, net . . .
Deferred tax asset .
Other current assets
. . .
net
. . .
. . .
. . .
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.
.
.
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.
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.
.
.
.
.
.
.
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.
.
.
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,643
107,127
48,281
5,701
4,316
As of
May 31,
2010
$
4,157
72,072
52,411
5,667
5,269
173,068
17,454
(8,662)
139,576
15,292
(6,636)
.
.
.
.
.
8,792
72,998
8,824
6,491
13,750
8,656
68,946
—
7,667
18,737
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$283,923
$243,582
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . .
Current portion of direct financing and capital lease payable
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion benefit plans . . . . . . . . . . . . . . . . . . . .
.
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.
.
.
$ 28,427
7,020
511
18,867
29,761
167
358
$ 19,023
5,666
413
16,548
24,965
306
349
Total current liabilities . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . .
Direct financing and capital lease payable
Benefit plans . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . .
.
.
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.
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.
.
85,111
90,868
1,639
4,796
4,098
67,270
86,246
1,652
4,701
1,132
. . . . . . . . . .
. . . . . . . . . .
186,512
—
161,001
—
shares issued
. . . . . . . . .
. . . . . . . . .
. . . . . . . . .
. . . . . . . . .
11
114,122
(11,721)
(5,001)
11
113,598
(25,096)
(5,932)
Property, plant and equipment, net
Trademarks and intangible assets . . .
Goodwill . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . .
Deferred income taxes . . . . . . . . .
.
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TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity
Common stock, par value $0.0001 per share, 500,000,000 shares authorized; 108,069,808
and outstanding at November 30, 2010 and May 31, 2010. . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,411
82,581
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$283,923
$243,582
The accompanying notes are an integral part of the consolidated financial statements.
F-41
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
For the three months
ended November 30,
2010
2009
For the six months
ended November 30,
2010
2009
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$79,179
51,434
$60,484
42,935
$189,435
116,925
$164,163
108,397
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . .
Research and development expenses . . . . . . . . . . . . . . . . . . . .
$27,745
19,543
3,072
$17,549
16,102
2,198
$ 72,510
36,950
5,860
$ 55,766
30,612
4,469
Operating income (loss) . . . . . . . .
Other (income) expense:
Interest expense . . . . . . . . . . . .
Interest income . . . . . . . . . . . . .
Losses on derivative instruments
Exchange (gains), net and other .
$ 5,130
$ (751)
$ 29,700
$ 20,685
.....................
.
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.
.
.
.
.
.
.
3,851
(154)
6,621
(2,046)
3,383
(78)
2,193
(1,368)
7,597
(289)
3,785
(2,026)
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax expense . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .
8,272
$ (3,142)
(1,186)
4,130
$ (4,881)
(1,636)
9,067
$ 20,633
7,258
5,664
$ 15,021
6,459
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,956)
$ (3,245)
$ 13,375
$ 8,562
Basic and diluted earnings (loss) per common share . . . . . . . . .
$ (0.02)
$ (0.03)
$
$
0.12
The accompanying notes are an integral part of the consolidated financial statements.
F-42
6,637
(133)
1,647
(2,487)
0.08
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the three months
ended November 30,
2010
2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash used in operating
activities:
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss (gain) on derivative instruments . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash from changes in assets and liabilities
(excluding acquisition):
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
..
For the six months
ended November 30,
2010
2009
$ (1,956)
$ (3,245)
$ 13,375
$ 8,562
.
.
.
.
.
.
.
.
.
.
.
.
210
2,077
—
6,581
227
(1,626)
304
2,007
78
752
79
(1,781)
524
4,152
—
3,911
118
5,276
.
.
.
.
.
.
.
.
.
.
.
.
31,136
(772)
(880)
(181)
(6,053)
(3,956)
27,452
6,722
(127)
(353)
(4,499)
(2,678)
(32,979)
5,447
(359)
135
2,022
2,299
(39,687)
28,931
(166)
(439)
(9,035)
(166)
24,807
24,711
3,921
(1,912)
Net cash flows from operating activities . . . . . . . . . . . . . . . . . . . . .
609
4,063
140
(252)
(314)
5,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in property, plant and equipment . . . . . . . . . . . . . . . . .
(366)
—
(791)
(3,400)
—
(286)
(10,815)
(545)
(1,402)
(3,400)
—
(660)
Net cash flows from investing activities . . . . . . . . . . . . . . . . . . . .
(1,157)
(3,686)
(12,762)
(4,060)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from (repayments of) short-term borrowing . . . . . . . . .
(1,356)
(24,083)
(1,101)
(22,213)
(2,697)
15,000
(15,754)
20,781
Net cash flows from financing activities . . . . . . . . . . . . . . . . . . . .
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . .
INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . .
(25,439)
60
(1,729)
(23,314)
104
(2,185)
12,303
24
3,486
5,027
360
(585)
BEGINNING CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,372
11,043
4,157
9,443
ENDING CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,643
$ 8,858
$ 7,643
$ 8,858
...............
...............
$ 3,187
1,404
$ 2,688
151
$ 5,789
2,132
$ 5,834
213
...............
...............
...............
305
733
2,014
289
—
—
603
733
2,014
575
—
—
Supplemental disclosures of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . .
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash items:
Capitalized PIK interest . . . . . . . . . . . . . . .
Acquisition consideration payable . . . . . . . .
Acquisition contingent consideration . . . . . .
The accompanying notes are an integral part of the consolidated financial statements.
F-43
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three and six months ended November 30, 2010 and 2009
NOTE 1 — BASIS OF PRESENTATION
The unaudited consolidated financial statements are based on accounting policies and methods consistent in their application with those
used and described in the annual consolidated financial statements of Kohlberg Sports Group Inc. (a Cayman Island Corporation) and
Subsidiaries, (the Company) as contained in the most recent annual consolidated financial statements. The unaudited consolidated financial
statements do not include all of the financial statement disclosures included in the annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and therefore should be read in
conjunction with the Corporation’s most recent annual consolidated financial statements. The results reported in these financial statements
are not necessarily indicative of the results that may be expected for the entire year.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make a
number of estimates and assumptions that affect the reported amount 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. Balances
and transactions which are subject to such estimates and assumptions include: fair value determination of assets and liabilities in connection
with purchase accounting and derivatives, valuation allowances for receivables and inventories, as well as product warranty, amortization
periods, income taxes, and other provisions and contingencies. Actual results could differ from those estimates.
Deferred Financing Costs
Financing costs, net of amortization, amounting to $3,773,000 at November 30, 2010 and $3,959,000 at May 31, 2010, related to the issuance
of debt, are amortized over the term of the debt and are included in other current assets and other non-current assets. Amortization
expense, which is included in interest expense, was $380,000 and $352,000 for the three months ended November 30, 2010 and 2009,
respectively, and $774,000 and $683,000 for the six months ended November 30, 2010 and 2009, respectively. The Company amortizes
financing costs utilizing the straight-line method or the effective interest method, as appropriate, based on the terms of the debt.
Leases
The Company reviews all leases for capital or operating classification at lease inception. Operations are primarily conducted utilizing
operating leases. The lease term commences on the date on which the right to control the use of the leased property transfers to
the Company.
Rent expense related to operating leases, where scheduled rent increases and rent holidays exist, is determined by expensing the total
amount of rent due over the life of the operating lease on a straight-line basis. The difference between the rent paid under the terms of the
lease and the rent expensed on a straight-line basis is included in other non-current liabilities in the accompanying consolidated
balance sheets.
Segments
The Company follows ASC 280, Segment Reporting, (formerly SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information), which establishes standards for the way public business enterprises report information about operating segments. The method
for determining what information to report is based on the way management organizes the segments with the Company for the chief
operating decision maker to allocate resources, make operating decisions, allocate resources and assess financial performance. The
Company has one operating segment.
Recently Adopted and Issued Accounting Pronouncements
In December 2007, the FASB issued guidance on business combinations that establishes principles and requirements for how an acquirer in a
business combination recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. This
guidance also requires that transaction costs be expensed as incurred. The Company adopted the provisions of this guidance for our business
combinations occurring on or after June 1, 2009.
In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value
measurements. The guidance requires additional disclosures about the different classes of assets and liabilities measured at fair value, the
valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3 of the fair
value measurement hierarchy. This guidance became effective for the Company beginning June 1, 2010, except for disclosures relating to
purchases, sales, issuances and settlements of Level 3 assets and liabilities, which will be effective for the Company beginning June 1, 2011.
F-44
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As this guidance only requires expanded disclosures, the adoption did not and will not impact the Company’s consolidated financial position
or results of operations. See Note 17 — Fair Value Measurements for disclosure required under this guidance.
NOTE 3 — ACQUISITION OF MAVERIK LACROSSE LLC
On June 3, 2010, the Company purchased all of the issued and outstanding shares of the capital stock of Maverik Lacrosse LLC
(‘‘Maverik’’), a distributor of lacrosse equipment. The acquisition allows the Company to enter new product categories in a growing market.
The total consideration was $13,561,000. The acquisition was funded by additional borrowings on the revolving credit line. The Company has
completed the valuation of assets acquired and liabilities assumed. The initial allocation of the purchase price to the individual assets
acquired and liabilities assumed under the purchase method of accounting included in the November 30, 2010 balance sheet resulted in
$8,824,000 of goodwill of which the entire amount is expected to be deductible for tax purposes. The goodwill associated with the transaction
was due to management’s conclusion that the acquisition coincided with the Company’s strategy of expanding its product offerings to drive
revenue growth and expected synergies from combining operations.
The following table presents the initial allocation of purchase price related to the business as of the date of the acquisition (in thousands):
Net assets acquired:
Cash . . . . . . . . . . . . . . . .
Trade receivables . . . . . . . .
Inventory . . . . . . . . . . . . .
Property, plant and equipment
Patents and trademarks . . . .
Intangible Assets . . . . . . . .
Total assets acquired . . . . . .
Current liabilities . . . . . . . .
Noncurrent liabilities . . . . . .
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106
776
454
45
3,100
945
5,426
(416)
(273)
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(689)
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,737
Consideration:
Paid to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition consideration payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,082
1,465
2,014
Fair value of total consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,561
Transactions costs (included in selling, general and administrative expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
545
In connection with its acquisition of Maverik, the Company has agreed to pay additional consideration in future periods of $1,465,000
payable to the sellers in four equal installments during the period 12 months following the closing. The first and second installments totaling
$733,000 was paid to the sellers in the six months ended November 30, 2010. As the amount of consideration is due within 12 months
following the closing, carrying value approximates fair value. The amount payable is reflected in accrued liabilities in the consolidated
balance sheets.
If Maverik revenue is equal to or greater than $7,000,000 in a twelve-month period beginning on June 1 and ending on May 31, in the period
1 to 10 years following the closing, the Company agreed to pay additional contingent consideration of $2,250,000. The potential
undiscounted amount of the future payment that the company could be required to make under the contingent consideration arrangement is
between $0 and $2,250,000. The fair value of the contingent consideration arrangement of $2,014,000 was estimated by applying a discounted
cash flow model. The amount payable is reflected in other non-current liabilities in the consolidated balance sheets.
The amounts of Maverik’s net revenue and net loss included in the Company’s consolidated statements of operations for the three months
ended November 30, 2010 was $1,300,000 and $252,000, respectively, and the six months ended November 30, 2010 was $1,495,000 and
$857,000, respectively.
F-45
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 3 — ACQUISITION OF MAVERIK LACROSSE LLC (Continued)
The following pro forma financial information has been prepared as if the acquisition of Maverik had occurred at June 1, 2009
(in thousands):
Three months ended
November 30,
2009
Six months ended
November 30,
2009
$61,409
(3,063)
(0.03)
$165,257
8,482
0.08
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that
actually would have been achieved had the acquisition been consummated at that time, nor is it intended to be a projection of future results.
NOTE 4 — ACCOUNTS RECEIVABLE, NET
Accounts receivable includes the following (in thousands):
Trade receivables . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . .
Less: Allowance for doubtful accounts . . .
Less: Allowance for returns and discounts
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Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30,
2010
May 31,
2010
$106,664
5,318
(2,211)
(2,644)
$71,196
5,418
(2,283)
(2,259)
$107,127
$72,072
Other receivables at November 30, 2010 and May 31, 2010 include the current portion of a receivable in the amount of $1,347,000 and
$1,948,000, respectively, from a supplier for costs incurred related to a product recall. The long-term portion of this receivable is reflected in
Other non-current assets in the consolidated balance sheets and totaled $2,213,000 and $2,253,000, respectively, as of November 30, 2010
and May 31, 2010.
NOTE 5 — INVENTORIES, NET
Inventories include the following (in thousands):
November 30,
2010
Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
833
73
48,527
49,433
(1,152)
$48,281
May 31,
2010
$
795
81
53,519
54,395
(1,984)
$52,411
NOTE 6 — INCOME TAXES
The effective tax rate was 37.7% and 33.5% for the three months ended November 30, 2010 and 2009, respectively, and 35.2% and 43.0% for
the six months ended November 30, 2010 and 2009, respectively. The prior year rate included changes in enacted tax rates in Canada. The
change in Canadian enacted rates relates to timing differences that management expects to reverse at a different rate than the current
statutory rate.
The domestic statutory income tax rate was 34% for the three months ended November 30, 2010 and 2009, and 34.0% for the six months
ended November 30, 2010 and 2009.
The Company has not recorded a recorded valuation allowance as of November 30, 2010 and May 31, 2010 as the Company believes it is
more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets.
F-46
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 6 — INCOME TAXES (Continued)
The Company is subject to examination in various jurisdictions for the tax years ended May 31, 2010 and 2009, and the period from April 17,
2008 through May 31, 2008. The Company is also subject to examination in the Predecessor period from June 1, 2007 through April 16, 2008;
however, as a condition of the stock purchase agreement with NIKE Inc., the Company is indemnified by NIKE Inc. for any tax exposures
related to the pre-inception period. The Company’s acquired Mission entities are also subject to examination in periods prior to the
acquisition; however, as a condition to the stock purchase agreement with the Mission stockholders, the Company is indemnified for any tax
exposures related to the pre-acquisition period for Mission and its subsidiaries.
NOTE 7 — INTANGIBLE ASSETS AND GOODWILL
Intangible assets with indefinite lives consist of trade names and trademarks. Intangible assets with estimated useful lives include purchased
technology, customer relationships, favorable lease positions, and non-compete agreements. The favorable lease positions reflect the
difference between market and contract rent.
Intangible assets include the following (in thousands):
Trade names and trademarks
Purchased technology . . . . .
Customer relationships . . . .
Leases . . . . . . . . . . . . . .
Non-compete agreements . . .
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Weighted-average
amortization
period
November 30,
2010
May 31,
2010
Indefinite
13 years
10 years
4 years
5 years
$ 57,664
9,016
13,885
2,677
505
$53,240
8,798
13,094
2,599
—
$ 83,747
$77,731
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated amortization
Purchased technology . . . . .
Customer relationships . . . .
Leases . . . . . . . . . . . . . .
Non-compete agreements . .
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Total accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total trade names, trademarks and intangible assets . . . . . . . . . . . . . . . . . . . . . . .
(1,416)
(7,375)
(1,907)
(51)
(10,749)
(1,033)
(6,254)
(1,498)
—
(8,785)
$ 72,998
$68,946
November 30,
2010
May 31,
2010
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,824
—
$—
—
Total goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,824
$—
On November 23, 2009 the Company acquired trademarks and purchased technology from Jock Plus Hockey Inc. and Kloz, Inc. for a
combined purchase price of $3,400,000, plus acquisition fees. The purchase price of the assets is allocated to the purchased technology
acquired. The fair value of the trademarks acquired was determined to be zero, and as such, no value was assigned to these assets.
Amortization expense for intangible assets for the three months ended November 30, 2010 and 2009 was $797,000 and $892,000, respectively,
and for the six months ended November 30, 2010 and 2009 was $1,588,000 and $1,731,000, respectively, included in both cost of goods sold
and selling, general and administrative expenses.
F-47
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 7 — INTANGIBLE ASSETS AND GOODWILL (Continued)
As of November 30, 2010, the estimated future amortization expense for intangible assets for the next five years and thereafter is as follows
(in thousands):
Remainder of 2011
2012 . . . . . . . . .
2013 . . . . . . . . .
2014 . . . . . . . . .
2015 . . . . . . . . .
Thereafter . . . . .
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$ 1,721
2,564
1,985
1,676
1,452
5,936
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,334
NOTE 8 — DEBT
Debt includes the following (in thousands):
November 30,
2010
May 31,
2010
Short-term portion of revolving credit line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28,427
$19,023
Long-term portion of revolving credit line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term loan due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.25% Senior subordinated promissory notes, due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,728
29,322
53,838
$ 8,571
30,916
52,425
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,888
(7,020)
$90,868
91,912
(5,666)
$86,246
Annual maturities of long-term debt for the fiscal years after November 30, 2010 are as follows (in thousands):
Remainder of 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,553
8,935
86,400
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$97,888
To fund the acquisition of Maverik, refer to Note 3 — Acquisition of Maverik Lacrosse, LLC, the credit facility was amended on June 3,
2010. Under the terms of the original agreement, the balance of the revolving credit line must be paid down to $9,000,000 Canadian dollars
for a period of 30 consecutive days between the period January 15 and March 15 each year. The amendment to the credit agreement
increases the balance to $15,000,000 Canadian dollars.
The interest rate on the revolving credit line for the three months ended November 30, 2010 and 2009 ranged from 4.75% to 6.50% and
4.74% to 6.50%, respectively, and for the six months ended November 30, 2010 and 2009 ranged from 4.75% to 6.50% and 4.74% to 6.50%,
respectively. The Company had $44,623,000 and $40,381,000 of available credit line available at November 30, 2010 and May 31, 2010,
respectively. At November 30, 2010 there is one letter of credit in the amount of $350,000 Canadian dollars and one letter of credit of $999,
000 U.S. dollars outstanding under the revolving credit line.
The interest rate on the term loan borrowings for the three months ended November 30, 2010 and 2009 ranged from 5.57% to 6.25% and
4.94% to 5.50%, respectively, and for the six months ended November 30, 2010 and 2009 ranged from 5.23% to 6.25% and 4.93% to 5.50%,
respectively.
The leverage ratio under senior subordinated promissory notes as of November 30, 2010 and May 31, 2010 is 4.95:1.00 and 5.10:1.00,
respectively. As of November 30, 2010 and May 31, 2010, the Company was in compliance with the covenants required under the note
purchase agreements. The Company elected to recapitalize the 2.25% interest under the senior subordinated promissory notes. The amount
of the recapitalization is $305,000 and $289,000 for the three months ended November 30, 2010 and 2009, respectively, and $603,000 and
$575,000 for the six months ended November 30, 2010 and 2009, respectively.
F-48
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 8 — DEBT (Continued)
The leverage ratio under the credit facility with GE Capital as of November 30, 2010 and May 31, 2010 is 4.50:1.00 and 4.65:1.00,
respectively. As of November 30, 2010 and May 31, 2010, the Company was in compliance with the covenants required under the credit
facility.
NOTE 9 — ACCRUED LIABILITIES
Accrued liabilities include the following (in thousands):
November 30,
2010
May 31,
2010
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.
.
.
.
.
.
$ 6,488
1,376
8,959
4,126
317
1,736
6,759
$ 7,596
535
3,667
2,007
3,118
1,456
6,586
Total accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,761
$24,965
Compensation and benefits, excluding taxes . . . . . . . . . . . . . .
Fair value of foreign curency forward contracts (Note 17 and 18) .
Accrued advertising and volume rebates . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product Recall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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NOTE 10 — PRODUCT WARRANTY COSTS
Changes in the carrying amount of accrued product warranty costs are summarized as follows (in thousands):
Beginning Balance . . . . .
Warranty costs incurred .
Product warranty accrual
Exchange rate loss . . . .
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Three months ended
November 30,
2010
Three months ended
November 30,
2009
Six months ended
November 30,
2010
Six months ended
November 30,
2009
$3,167
(923)
1,785
97
$3,681
(768)
1,571
91
$ 2,007
(1,336)
3,396
59
$ 2,323
(1,063)
3,142
173
$4,126
$4,575
$ 4,126
$ 4,575
.
.
.
.
Ending Balance . . . . . . . . . . . . . . . . . . .
NOTE 11 — BENEFIT PLANS
The following table provides the benefit plan liabilities (in thousands):
Supplemental
Pension Plan
November 30, May 31,
2010
2010
Post-Retirement Life
Insurance Obligation
November 30, May 31,
2010
2010
Total Benefit Plan
Liabilities
November 30, May 31,
2010
2010
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current . . . . . . . . . . . . . . . . . . . . . . . . .
$ 358
4,540
$ 349
4,452
$—
256
$—
249
$ 358
4,796
$ 349
4,701
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,898
$4,801
$256
$249
$5,154
$5,050
F-49
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 11 — BENEFIT PLANS (Continued)
The following table provides the change in projected benefit obligation of the supplemental pension plans (in thousands):
Change in projected benefit obligation:
Beginning balance . . . . .
Interest cost . . . . . . . .
Benefits paid . . . . . . . .
Exchange rate loss (gain)
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Three months ended
November 30,
2010
Three months ended
November 30,
2009
Six months ended
November 30,
2010
Six months ended
November 30,
2009
$4,748
73
(87)
164
$4,028
71
(84)
94
$4,801
147
(174)
124
$3,971
142
(169)
165
$4,898
$4,109
$4,898
$4,109
.
.
.
.
Ending balance . . . . . . . . . . . . . . . . . . . .
The net periodic pension cost for the three months ended November 30, 2010 and 2009 was $73,000 and $71,000, respectively, and for the six
months ended November 30, 2010 and 2009 was $147,000 and $142,000, respectively, consisting of interest costs.
NOTE 12 — OTHER COMPREHENSIVE LOSS
Other comprehensive loss consists of the following:
Three months ended
November 30,
2010
Three months ended
November 30,
2009
Six months ended
November 30,
2010
Six months ended
November 30,
2009
Beginning balance . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . .
Pension liability adjustments . . . . . . . . . . .
$(6,338)
1,337
—
$(6,644)
552
12
$(5,932)
931
—
$(7,553)
1,453
20
Ending balance . . . . . . . . . . . . . . . . . . . .
$(5,001)
$(6,080)
$(5,001)
$(6,080)
NOTE 13 — STOCK-BASED COMPENSATION
The Company estimates the fair value of its stock options awards on the date of grant using the Black-Scholes option pricing model.
Assumptions used for options granted are noted in the following table:
Weighted average expected term (in years) . . .
Weighted average expected volatility . . . . . . .
Weighted average risk-free interest rate . . . . .
Expected dividend yield . . . . . . . . . . . . . . .
Weighted average fair value per option granted
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Three months ended
November 30,
2010
Six months ended
November 30,
2010
6.25
35.28%
1.44%
0%
$ 0.48
6.25
35.25%
1.99%
0%
$ 0.49
In the three and six months ended November 30, 2010 the Company granted 35,000 and 95,000 options, respectively. The Company did not
grant options during the three and six months ended November 30, 2009.
For plain vanilla options granted to employees, the Company has utilized the simplified method to determine the expected term to be used
in the option pricing model. Expected volatility is based on an average volatility of comparable public companies. The risk-free interest rate
is based on the US Treasury yield curve corresponding to the stock option’s expected term. The expected dividend yield is 0% as dividends
are not expected to be paid during the expected term. To establish the fair market value of the common stock, a combination of the market
approach and income approach (discounted cash flows) was used for the three and six months ended November 30, 2010.
Compensation cost for the equity incentive plan for the three months ended November 30, 2010 and 2009 was $210,000 and $304,000,
respectively, and for the six months ended November 30, 2010 and 2009 was $524,000 and $609,000, respectively. The compensation cost is
included in selling, general and administrative expenses. As of November 30, 2010 there was $882,000 of unrecognized compensation cost
related to non-vested awards granted under the plan which is expected to be recognized as compensation expense over a weighted average
period of 1.13 years.
F-50
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 14 — EARNINGS PER SHARE
The computation of basic and diluted earnings per common share follows:
Weighted average common shares outstanding
Assumed conversion of dilutive stock options
and awards . . . . . . . . . . . . . . . . . . . . .
Three months ended
November 30,
2010
Three months ended
November 30,
2009
Six months ended
November 30,
2010
Six months ended
November 30,
2009
108,069,808
108,069,808
108,069,808
108,069,808
3,450,837
—
3,383,913
—
Diluted weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . . .
111,520,645
108,069,808
111,453,721
108,069,808
Basic and diluted earnings (loss) per common
share . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
(0.02)
(0.03)
0.12
0.08
Options to purchase an additional 2,640,000 and 2,140,000 shares of common stock were outstanding for the three months ended
November 30, 2010 and 2009, respectively, and 2,640,000 and 2,140,000 shares of common stock were outstanding for the six months ended
November 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the options were
anti-dilutive.
NOTE 15 — RESTRUCTURING AND RELATED COSTS
Greenland, New Hampshire Distribution Center
The Company announced plans on August 3, 2010 to close the Greenland, New Hampshire distribution center. The restructuring is expected
to be complete in April 2011. The Company incurred severance and employee related costs of $166,000 in the six months ended
November 30, 2010. The costs are included in selling, general and administrative in the consolidated statements of operations.
The following table sets forth the cash components of the restructuring activity (in thousands):
Three months ended
November 30,
2010
Six months ended
November 30,
2010
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 41
125
—
$—
166
—
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$166
$166
Severance and employee related costs:
The liability at November 30, 2010 is included in accrued liabilities. Cash payments for the severance and employee related costs will be paid
beginning in January 2011 and continuing through April 2011.
NOTE 16 — COMMITMENTS AND CONTINGENCIES
On April 22, 2010, the Company was served with a Motion to Institute a Class Action and Be Ascribed the Status of Representative that was
filed in the Superior Court of the Province of Quebec, District of Montreal. The motion was filed by a person allegedly affected by the
Company’s recall of certain hockey sticks. On October 4, 2010 the plaintiff offered to desist in its claims, without prejudice, apparently due
to insufficient evidence to establish causation. The presiding judge is expected to approve the plaintiff’s withdrawal of the claim in early
2011. As the withdrawal of the claims would be without prejudice, the plaintiff could seek reinstitution of the claims in the future. In
management’s opinion, the likelihood of a material adverse outcome is remote. Accordingly, adjustments, if any, which might result from the
ultimate resolution of this matter, have not been reflected in the consolidated financial statements.
There have been no other significant subsequent developments relating to the commitments and contingencies reported on in the
Company’s annual consolidated financial statements.
F-51
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 17 — FAIR VALUE MEASUREMENTS
Fair Value of Financial Information
The Company measures certain financial assets and liabilities at fair value on a recurring basis. The fair values of the Company’s financial
instruments represent the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly
transaction between market participants at the measurement date. Those fair value measurements maximize the use of observable inputs.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents, trade accounts receivable, other assets (nonderivatives), trade accounts payable, and accrued expenses
(nonderivatives): the carrying amounts, at face value or cost plus accrued interest, approximate fair value because of the short maturity of
these instruments.
Derivative Assets/Liabilities: Derivative financial instruments include foreign exchange swaps, interest rate contracts and foreign currency
forward contracts. The fair value of these derivatives contracts is determined using level 2 inputs based on observable criteria such as the
forward pricing curve, currency volatilities, currency correlations and interest rates.
Long-term debt: The fair value of the Company’s term loan borrowings is based on rates currently available to the Company for debt with
similar terms and remaining maturities. Carrying value approximates fair value. The fair value of the Company’s senior subordinated
promissory notes is estimated by discounting the future cash flow using the Company’s current borrowing rates for similar types and
maturities of debt. The carrying value of the senior subordinated promissory notes as of November 30, 2010 and May 31, 2010 is $53,838,000
and $52,425,000, respectively. The estimated fair value of the senior subordinated promissory notes as of November 30, 2010 and May 31,
2010 is $39,754,000 and $39,153,000, respectively.
Fair Value Hierarchy
The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest
priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are
as follows:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to
access at the measurement date.
• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly.
• Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to
the fair value measurement in its entirety.
The following tables present the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring
basis at November 30, 2010 and May 31, 2010 (in thousands):
November 30,
2010
Assets:
Foreign exchange swaps . . . . . . . . . . . . . . . . . . . . . .
Foreign currency forward contracts . . . . . . . . . . . . . . .
Liabilities:
Foreign currency forward contracts . . . . . . . . . . . . . . .
Fair value measurements at reporting date using
Quoted prices in
Significant other
Significant
active markets for
obvservable
unobservable
identical assets
inputs
inputs
(Level 1)
(Level 2)
(Level 3)
$ 735
429
$—
$ 735
429
$—
—
$1,164
$—
$1,164
$—
$1,967
$—
$1,967
$—
F-52
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 17 — FAIR VALUE MEASUREMENTS (Continued)
May 31,
2010
Assets:
Foreign exchange swaps . . . . . . . . . . . . . . . . . . .
Foreign currency forward contracts . . . . . . . . . . . .
Liabilities:
Foreign currency forward contracts . . . . . . . . . . . .
Fair value measurements at reporting date using
Quoted prices in
Significant other
active markets for
obvservable
Significant unobservable
identical assets
inputs
inputs
(Level 1)
(Level 2)
(Level 3)
$1,841
1,627
$—
—
$1,841
1,627
$—
—
$3,468
$—
$3,468
$—
$ 535
$—
$ 535
$—
NOTE 18 — RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS
The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and
uses derivatives to manage financial exposures that occur in the normal course of business. The Company’s hedging strategy uses foreign
exchange swaps, interest rate contracts, and foreign currency forwards as economic hedges, which are recorded in the consolidated balance
sheet at fair value. The Company has not elected hedge accounting and therefore the changes in the fair value of these derivatives are
recognized in current period earnings.
The Company uses interest rate contracts to reduce market risk associated with changes in interest rates. In July 2008 the Company entered
into an interest rate cap agreement with Fifth Third Bank. The agreement caps, at 5%, the Canadian Banker’s Acceptance interest rate
applicable on the term loan amount of $21,151,200 Canadian dollars adjusted for quarterly principal payments, through April 16, 2011. The
notional amount as of November 30, 2010 and May 31, 2010 was $18,263,700 and $19,182,000 Canadian dollars, respectively.
The Company uses foreign exchange swaps to reduce market risk associated with changes in currency market. In April 2008, the Company
entered into a foreign exchange swap agreement with Rabo Capital Services, Inc. This agreement exchanges a notional amount of
$26,338,000 Canadian dollars for $26,000,000 U.S. dollars at October 2013. Under the terms of the swap agreement, the Company will pay
the counterparty a fixed rate of 12.455% on the $26,338,000 Canadian dollar debt and will receive a fixed rate of 12% on the $26,000,000
U.S. dollar debt on a quarterly basis through October 2013.
The Company uses foreign currency forward contracts as an economic hedge to offset the effects of exchange rate fluctuations on certain of
its forecasted foreign currency denominated sales and cost of sales transactions. The Company’s cash flow exposures include recognized and
anticipated foreign currency transactions, such as foreign currency denominated sales, costs of goods sold, as well as collections and
payments. The risk in these exposures is the potential for losses associated with the remeasurement of nonfunctional currency cash flows into
the functional currency. During the six months ended November 30, 2010 and 2009, the Company entered into various forward contracts
with Fifth Third Bank and PNC Bank to hedge its Canadian dollar currency risk. As of November 30, 2010, the Company had forward
contracts, maturing at various dates through May 2012, to sell the equivalent of $1,250,000 in foreign currencies at contracted rates and to
buy the equivalent of $161,250,000 in foreign currencies at contracted rates. During the six months ended November 30, 2010, the Company
recognized net gains of $126,000 from foreign currency forward contracts. The gains are included in losses (gains) on derivative instruments
in the consolidated statements of operations.’’
The fair values of derivative instruments held as of November 30, 2010 and May 31, 2010 (in thousands):
Asset derivatives
November 30, 2010
May 31, 2010
B/S Location
Fair value
B/S Location
Derivatives not designated as hedging
instruments
Foreign exchange swaps . . . . . . . . . . . . .
Foreign currency forward contracts . . . . .
Foreign currency forward contracts . . . . .
Other non-current assets
Other current assets
Other non-current assets
Total . . . . . . . . . . . . . . . . . . . . . . . .
$ 735
240
189
$1,164
F-53
Other non-current assets
Other current assets
—
Fair value
$1,841
1,627
—
$3,468
KOHLBERG SPORTS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
NOTE 18 — RISK MANAGEMENT AND DERIVATIVE INSTRUMENTS (Continued)
Liability derivatives
November 30, 2010
May 31, 2010
B/S Location
Fair value
B/S Location
Fair value
Derivatives not designated as hedging
instruments
Foreign currency forward contracts . . . . . . .
Foreign currency forward contracts . . . . . . .
Accrued liabilities
Other non-current liabilities
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,376
591
Accrued liabilities
—
$1,967
$535
—
$535
The changes in the fair value of foreign exchange swaps recorded in earnings are summarized below (in thousands):
Fair value of contracts outstanding at
beginning of the period . . . . . . . .
Net change in fair value — Unrealized
(loss) . . . . . . . . . . . . . . . . . . .
Exchange rate gain (loss) . . . . . . . .
. . . . .
gain
. . . . .
. . . . .
Fair value of contracts outstanding at end of
the period . . . . . . . . . . . . . . . . . . . . .
Three months ended
November 30,
2010
Three months ended
November 30,
2009
Six months ended
November
30, 2010
Six months ended
November 30,
2009
$ 1,838
$2,282
$ 1,841
$ 2,695
(1,175)
72
$
(821)
66
735
$1,527
(1,186)
80
$
735
(1,177)
9
$ 1,527
The changes in the fair value of the foreign currency forward contracts recorded in earnings are summarized below (in thousands):
Fair value of contracts outstanding at
beginning of the period . . . . . . . .
Net change in fair value — Unrealized
(loss) . . . . . . . . . . . . . . . . . . .
Exchange rate gain (loss) . . . . . . . .
. . . . .
gain
. . . . .
. . . . .
Fair value of contracts outstanding at end of
the period . . . . . . . . . . . . . . . . . . . . .
Three months ended
November 30,
2010
Three months ended
November 30,
2009
Six months ended
November 30,
2010
Six months ended
November 30,
2009
$ 3,733
$(2,950)
$ 1,092
$(4,440)
(5,406)
135
69
(85)
(2,725)
95
1,436
38
$(1,538)
$(2,966)
$(1,538)
$(2,966)
The net changes in fair value are included in (gains) losses on derivative instruments in the consolidated statements of operations.
NOTE 19 — SUBSEQUENT EVENTS
On January 18, 2011, Maverik Lacrosse entered into an operating lease agreement for its headquarters in New York, New York. The
occupancy date is scheduled for May 1, 2011. The initial lease term is five years and three months. Total minimum future annual rental
commitments under the initial lease term are $1,190,000. As part of the terms of the lease agreement, the Company issued a $1,000,000
guarantee for Maverik’s obligations under the lease and issued a letter of credit to the landlord in the amount of $228,000 on
January 18, 2011.
F-54
AUDITORS’ REPORT ON RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA
The Board of Directors and Stockholders
Kohlberg Sports Group, Inc. and Subsidiaries:
Under date of September 17, 2010, we reported on the consolidated balance sheets of Kohlberg Sports
Group, Inc. and Subsidiaries (the Company) as of May 31, 2010 and 2009 and the related consolidated
statements of operations, stockholders’ equity, comprehensive (loss) income and cash flows for the years ended
May 31, 2010 and 2009, for the period April 17, 2008 through May 31, 2008 (Successor) and for the period
June 1, 2007 through April 16, 2008 (Predecessor), which are included in the prospectus. In connection with our
audits conducted in accordance with auditing standards generally accepted in the United States of America of
the aforementioned consolidated financial statements, we have also audited the related supplemental
information ‘‘Reconciliation Between Accounting Principles Generally Accepted in the United States and
Canada’’ (the Reconciliation) included in the prospectus. The Reconciliation is the responsibility of the
Company’s management. Our responsibility is to express an opinion on the Reconciliation based on our audits.
In our opinion, the Reconciliation, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Boston, Massachusetts, USA
January 26, 2011
F-55
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA
For the years ended May 31, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
Kohlberg Sports Group, Inc. and Subsidiaries (the Company) prepares its consolidated financial statements in
conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) which in
some respects differ from Canadian generally accepted accounting principles (Canadian GAAP). The effects of
these differences on the Company’s consolidated financial statements for the years ended May 31, 2010 and
2009 is quantified below and described in the accompanying notes which should be read in conjunction with the
consolidated financial statements prepared in accordance with U.S. GAAP.
Consolidated statements of operations (in thousands):
Net income (loss) in accordance with U.S. GAAP
Adjustment for:
Deferred financing costs (Note 1) . . . . . . . .
Direct financing lease (Note 2) . . . . . . . . . .
Stock-based compensation (Note 5) . . . . . . .
Income taxes (Note 7) . . . . . . . . . . . . . . . .
........................
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Year ended
May 31, 2010
Year ended
May 31, 2009
$2,228
$(19,313)
83
74
72
(59)
230
129
133
(125)
Net income (loss) in accordance with Canadian GAAP . . . . . . . . . . . . . . . . . . . .
$2,398
$(18,946)
Basic and diluted earnings (loss) per common share under Canadian GAAP . . . . .
$ 0.02
$
Consolidated statements of stockholders’ equity (in thousands):
Common
Stock
Additional
Paid-in
Capital
.....
$11
$113,598
.
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.
.
.
.
.
.
.
.
—
—
—
—
—
Balance in accordance with Canadian GAAP .
$11
May 31, 2010
Balance in accordance with U.S. GAAP
Cumulative adjustment for:
Deferred financing costs . . . . . . . .
Direct financing lease . . . . . . . . . .
Stock-based compensation . . . . . . .
Income taxes . . . . . . . . . . . . . . . .
Pension liability . . . . . . . . . . . . . .
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F-56
—
—
(1,791)
—
—
$111,807
(0.18)
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
$(25,096)
$(5,932)
$82,581
321
201
1,791
(345)
—
21
5
—
(11)
52
$(23,128)
$(5,865)
342
206
—
(356)
52
$82,825
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (Continued)
For the years ended May 31, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
Common
Stock
Additional
Paid-in
Capital
.....
$11
$112,379
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.
.
.
.
.
—
—
—
—
—
Balance in accordance with Canadian GAAP .
$11
May 31, 2009
Balance in accordance with U.S. GAAP
Cumulative adjustment for:
Deferred financing costs . . . . . . . .
Direct financing lease . . . . . . . . . .
Stock-based compensation . . . . . . .
Income taxes . . . . . . . . . . . . . . . .
Pension liability . . . . . . . . . . . . . .
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.
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
$(27,324)
$(7,553)
$77,513
238
127
1,719
(287)
—
5
(3)
—
—
(1,719)
—
—
$110,660
—
(2)
(411)
$(25,527)
243
124
—
(289)
(411)
$(7,964)
$77,180
May 31, 2010
May 31, 2009
$243,582
(4,105)
4,066
(3,959)
(386)
$244,420
(4,051)
4,208
(5,114)
(135)
Total assets under Canadian GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$239,198
$239,328
Total liabilities under U.S. GAAP . . . .
Decrease in long-term debt . . . . . . .
Decrease in direct financing lease . .
Increase (decrease) in benefits plans
$161,001
(2,491)
(2,055)
(82)
$166,907
(3,050)
(2,274)
565
Total liabilities under Canadian GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity under U.S. GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative Canadian GAAP adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$156,373
$ 82,581
244
$162,148
$ 77,513
(333)
Shareholders’ equity under Canadian GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 82,825
$ 77,180
Total liabilities and shareholders’ equity under Canadian GAAP . . . . . . . . . . . . . .
$239,198
$239,328
Consolidated balance sheets (in thousands):
Total assets under U.S. GAAP . . . . . . . . . . . .
Decrease in property, plant and equipment .
Increase in trademarks and intangible assets
Decrease in other assets . . . . . . . . . . . . . . .
Decrease in deferred income taxes . . . . . . .
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NOTES TO RECONCILIATION TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
NOTE 1 — DEFERRED FINANCING COSTS
Under Canadian GAAP, deferred financing costs relating to long-term debt are presented as a reduction of the carrying amount of long-term
debt on the consolidated balance sheets and the effective interest method is used to amortize the costs. Under U.S. GAAP, deferred
financing costs relating to long-term debt are presented as a component of other assets and based on the terms of the debt; either the
effective interest method or straight-line method is used to amortize the costs.
Under Canadian GAAP, deferred financing costs relating to loan commitments for a revolving credit facility are presented as a component of
intangible assets on the consolidated balance sheets as compared to a component of other assets under U.S. GAAP. Under both Canadian
GAAP and U.S. GAAP, these costs are amortized on a straight-line basis over the term of the loan commitment.
F-57
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (Continued)
For the years ended May 31, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 1 — DEFERRED FINANCING COSTS (Continued)
The amount of unamortized deferred financing costs presented on the U.S. GAAP consolidated balance sheets as a component of other
assets at May 31, 2010 and 2009 was $3,959,000 and $5,114,000, respectively. Under Canadian GAAP, the amounts were reclassified as
follows (in thousands):
May 31,
2010
2009
Increase/(decrease)
Intangible assets . . . . . . . . . . .
Other current assets . . . . . . . . .
Other non-current assets . . . . . .
Current portion of long-term debt
Long-term debt . . . . . . . . . . . .
Net deficit . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . .
Accumulated other comprehensive
. . .
. . .
. . .
. . .
. . .
. . .
. . .
loss
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$ 1,810
(1,465)
(2,494)
(1,035)
(1,455)
(83)
(238)
(21)
$ 2,307
(1,461)
(3,653)
(934)
(2,116)
(230)
(8)
(5)
NOTE 2 — DIRECT FINANCING LEASE
Under Canadian GAAP, leases are evaluated by the lessee for classification as either a capital or operating lease. The Company’s St. Jerome,
Quebec facility in Canada which is accounted for as a direct financing lease under U.S. GAAP, did not meet the criteria for capitalization as
a capital lease and is classified as an operating lease under Canadian GAAP. This resulted in an increase of Canadian GAAP net income for
the years ended May 31, 2010 and 2009 of $74,000 and $129,000, respectively. The U.S. GAAP carrying value of the leased assets, net of
accumulated depreciation, of $1,849,000 and $2,150,000 at May 31, 2010 and 2009, respectively, and the related direct financing lease
obligation for the same periods of $2,055,000 and $2,274,000 is reduced to zero for both periods under Canadian GAAP.
NOTE 3 — RESEARCH AND DEVELOPMENT
Under U.S. GAAP, the Company expenses research and development costs as incurred. Under Canadian GAAP, research costs are charged
to operations as incurred and product development costs are deferred if the product or process and its market or usefulness are defined, has
reached technical feasibility, adequate resources exist or are expected to exist to complete the project and management intends to market or
use the product or process. Technical feasibility is attained when the product or process has completed testing and has been determined to be
viable for its intended use. To date, no development costs have been capitalized.
NOTE 4 — COMPUTER SOFTWARE
Under Canadian GAAP, computer software costs are presented as an intangible asset on the consolidated balance sheet as compared to
property, plant and equipment under U.S. GAAP. The amount of computer software costs, net of accumulated depreciation, presented on
the consolidated balance sheets at May 31, 2010 and 2009 was $2,256,000 and $1,901,000, respectively.
NOTE 5 — STOCK-BASED COMPENSATION
Under U.S. GAAP, the simplified method was used for plain vanilla options granted to employees in the determination of the expected term
of options in the option pricing model. The contract term (10 years) is used for options granted to non-employees. For out-of-the-money
options granted to employees, an average of the simplified method and the contractual term is utilized. These methods are being used as the
Company does not have historical share option exercise experience. Under Canadian GAAP, the simplified method may not be used. The
Company used 5.1 years in the determination of the expected term of options in the option pricing model. The Company determined that
this expected term was reliable based on an analysis of the average holding period of companies held in a common private equity portfolio.
F-58
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (Continued)
For the years ended May 31, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 5 — STOCK-BASED COMPENSATION (Continued)
This resulted in a decrease in stock-based compensation expense under Canadian GAAP of $72,000 and $133,000 for the years ended
May 31, 2010 and 2009, respectively. The changes in the option model and assumptions are detailed below.
Expected term (in years) . . . . . . . . .
Expected volatility . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . .
Expected dividend yield . . . . . . . . . .
Weighted average fair value per option
. . . . . .
. . . . . .
. . . . . .
. . . . . .
granted .
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Year ended
May 31, 2010
Year ended
May 31, 2009
5.1
35.30%
2.51%
0.00%
$ 0.29
5.1
29.46%
2.90%
0.00%
$ 0.32
.
.
.
.
.
NOTE 6 — EMPLOYEE FUTURE BENEFITS
The Company’s benefit plans include supplemental unfunded pension plans in both Canada and the United States. Under U.S. GAAP, the
net funded status of pension plans sponsored by a Company is fully reflected in the consolidated assets or liabilities of the Company. The
amount by which plan assets exceed benefit obligations or benefit obligations exceed plan assets, on a plan-by-plan basis, is reflected as an
increase in assets or liabilities, with a corresponding adjustment to accumulated other comprehensive income. Under Canadian GAAP, only
the net actuarial asset or liability is reflected in the consolidated financial statements.
The Company uses the corridor approach to recognize actuarial gains and losses in earnings. 10% of the benefit obligation is deducted from
the unamortized net actuarial gains or losses on a market-related value basis. Any excess is amortized over the average remaining service
period of active employees.
The reconciliation of defined benefit obligations to accrued benefit liabilities under Canadian GAAP is outlined below (in thousands):
May 31,
2010
2009
Plan deficit at end of year . . . . . .
Unamortized actuarial gain (loss) .
Unamortized prior service cost . . .
Unamortized transitional obligation
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Accrued benefit liability at the end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,801
(11)
—
—
$ 3,971
634
—
—
$ 4,790
$ 4,605
NOTE 7 — INCOME TAXES
Included in income taxes is the tax effect of adjustments relating to deferred financing costs, direct financing lease and stock-based
compensation expenses.
NOTE 8 — INVESTMENT TAX CREDITS
Under Canadian GAAP, Scientific Research & Experimental Development (‘‘SR&ED’’) credits are a reduction of product development
costs on the consolidated statements of operations. The Company records these credits in accordance with Canadian GAAP. There would be
no difference in net income between Canadian and U.S. GAAP resulting from the utilization of these credits.
NOTE 9 — RECENTLY ADOPTED ACCOUNTING STANDARDS
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
On January 20, 2009, the Emerging Issues Committee issued Abstract No. 173, Credit Risk and the Fair Value of Financial Assets and
Financial Liabilities (‘‘EIC 173’’). The committee reached a consensus that a company’s credit risk and the credit risk of its counterparties
should be considered when determining the fair value of its financial assets and financial liabilities, including derivative instruments. The
transitional provisions resulting from the implementation of EIC 173 require the abstract to be applied retrospectively without restatement
F-59
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (Continued)
For the years ended May 31, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 9 — RECENTLY ADOPTED ACCOUNTING STANDARDS (Continued)
of prior periods. Previously, the Company measured it financial assets and financial liabilities under ASC 820 Fair Value Measurements and
therefore a measurement difference did not exist upon the adoption of EIC 173.
Business Combinations
In January 2009, the CICA issued section 1582, Business Combination, which establishes standards for the accounting for a business
combination. This section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after January 1, 2011. Early application is permitted.
As section 1582 is substantially harmonized with U.S GAAP SFAS 141(R), Business Combinations, the Company will early adopt the
provisions of this guidance for business combinations occurring on or after June 1, 2010 to reduce the accounting differences with
U.S. GAAP. As a result of early adopting section 1582, the Company is also required to adopt sections 1601, Consolidated Financial
Statements and 1602, Non-Controlling interest.
Goodwill and Intangible Assets
The CICA issued section 3064, Goodwill and Intangible Assets, which established standards for the recognition, measurement, presentation
and disclosure of intangible assets. Section 3064 came into effect for annual reporting periods beginning on or after October 1, 2008,
replacing section 3062, Goodwill and Other Intangible Assets and section 3450, Research and Development Costs. Adoption of this new
standard commencing June 1, 2009 resulted in the reclassification of Computer software costs from Property, plant and equipment to
Intangible assets — refer to Note 4.
NOTE 10 — ANNOUNCED BUT NOT EFFECTIVE PRONOUNCEMENTS
International Financial Reporting Standards (IFRS)
The Canadian Accounting Standards Board has set January 1, 2011 as the date that IFRS will replace Canadian GAAP for publicly
accountable enterprises, which includes Canadian reporting issuers. The Company will be required to prepare its financial statements in
accordance with IFRS commencing June 1, 2011. Financial reporting under IFRS differs from Canadian GAAP in a number of respects,
some of which are significant. IFRS on the date of adoption is also expected to differ from current IFRS due to new IFRS that are expected
to be issued before the changeover date.
In Fiscal 2011, the Company commenced a diagnostic to assess and scope the significant differences between existing Canadian GAAP and
IFRS and the impact on the consolidated financial statements. The detailed analysis of the accounting policies impacted by the IFRS
convergence is expected to be completed throughout 2011. At this time, management cannot reasonably estimate the impact of adopting
IFRS on the consolidated financial statements, information systems, internal controls over financial reporting, disclosure controls and
procedures or business activities.
NOTE 11 — ADDITIONAL DISCLOSURES REQUIRED UNDER CANADIAN GAAP
Inventories
In June 2007, the CICA issued Handbook Section 3031, Inventories, which prescribes the accounting treatment for inventories. Section 3031
provides guidance on the determination of cost and its subsequent recognition as an expense, including any write down to net realizable
value. The standard also provides guidance on the cost formulas that are used to assign costs to inventories. The Company adopted this
standard effective on April 17, 2008 with no impact on the Company’s Supplemental Reconciliation of Significant Differences between
Accounting Principles Generally Accepted in the United States and Canada. While there is no impact to the Company’s results of operations
due to differences between U.S. and Canadian GAAP, Canadian GAAP requires the disclosure of the cost of inventory included in the
consolidated statements of operations, which is not included in the Company’s financial statements prepared under U.S. GAAP.
For the years ended May 31, 2010 and 2009, the Company recognized $161,261,000 and $180,967,000 in inventory costs, respectively, within
cost of goods sold in the consolidated statements of operations. Included in inventory costs for the years ended May 31, 2010 and 2009 was
$3,209,000 and $3,512,000, respectively, related to the impairment of slow moving and obsolete inventory.
F-60
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (Continued)
For the years ended May 31, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 11 — ADDITIONAL DISCLOSURES REQUIRED UNDER CANADIAN GAAP (Continued)
For the years ended May 31, 2010 and 2009, the Company recognized $3,252,000 and $2,923,000 in inventory costs, respectively, within
selling, general and administrative in the consolidated statements of operations. These costs represent inventory shipped to customers at
no charge.
Financial Instruments and Hedges
In December 2006, the CICA issued Handbook Section 3862, Financial Instruments — Disclosures, which modified the disclosure
requirements of Section 3861, Financial Instruments — Disclosures and Presentation and Section 3863, Financial Instruments — Presentations,
which carried forward unchanged the presentation requirements for financial instruments of Section 3861. Section 3862 requires entities to
provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity’s
financial position and its performance, and the nature and extent of risks arising from financial instruments to which the entity is exposed
during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 establishes standards for presentation
of financial instruments and non-financial derivatives. It deals with the classification of related interest, dividends, losses and gains, and
circumstances in which financial assets and financial liabilities are offset. This disclosure standard became effective for the Company on
June 1, 2008.
Financial Instruments — Recognition and Measurement
In January 2005, the CICA issued Handbook Section 3855, Financial Instruments-Recognition and Measurement. Section 3855 establishes
standards for recognition and measurement of financial assets, financial liabilities, and non-financial derivatives. Effective June 1, 2008, the
Company adopted this standard. The standard requires that financial assets and financial liabilities are initially recorded at fair value and are
subsequently measured based on their classification as described below. The Company classifies its financial instruments into various
categories based on the purpose for which the financial instruments were acquired and their characteristics.
Held-for-trading: Financial assets that are purchased and held with the intention of generating profits in the short-term are classified as
held-for-trading. These investments are accounted for at fair value with the change in fair value recognized in the consolidated statements of
operations in the period in which they arise. Cash and any derivatives not designated as hedges are classified as held for trading as of May 31,
2010 and 2009.
Held-to-maturity: Securities that have a fixed maturity date and which the Company has a positive intention and ability to hold to maturity
are classified as held-to-maturity and are accounted for at amortized cost using the effective interest rate method. The Company does not
recognize gains and losses arising from changes in the fair value of these instruments until the gains and losses are realized, or there is
impairment in the value of an asset. When recognized, such gains and losses are recorded directly in net income. No investments are
classified as held-to-maturity investments.
Available-for-sale: Available-for sale investments are carried at fair market value, except where the instrument does not have a quoted
market price in an active market, with foreign exchange and revaluation gains and losses included in other comprehensive income or loss
until the gains and losses are realized when equities are sold in the market or there is impairment in the value. The Company does not have
any assets classified as available-for-sale.
Receivables: The Company’s accounts receivable are classified as current assets and are recorded at amortized cost, which upon their initial
measurement is equal to their fair value. Subsequent measurement of trade receivables is at amortized cost, which usually corresponds to the
amount initially recorded less any allowance for doubtful accounts.
Other Financial Liabilities: Accounts payable, accrued liabilities, long-term debt and revolving credit facilities are classified as other
financial liabilities and are measured at amortized cost.
Fair value of Financial Instruments: The Company has determined that the fair value of its cash, accounts receivable and financial liabilities
(trade payables and accrued liabilities) approximates their respective carrying amounts as at the balance sheet dates due to their short-term
nature. The fair value of the Company’s term loan borrowings is based on rates currently available to the Company for debt with similar
terms and remaining maturities. Carrying value approximates fair value. The fair value of the Company’s senior subordinated promissory
notes is estimated by discounting the future cash flow using the Company’s current borrowing rates for similar types and maturities of debt.
Refer to Note 22 in the Company’s annual consolidated financial statements.
F-61
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
Formerly KBAU Holdings CI Limited
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (Continued)
For the years ended May 31, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 11 — ADDITIONAL DISCLOSURES REQUIRED UNDER CANADIAN GAAP (Continued)
Risk
The Company has exposure to credit risk, liquidity risk and market risk (which consists of foreign exchange risk and interest rate risk) from
its use of financial instruments. The Company’s management reviews these risks regularly as a result of changes in the market conditions as
well as the Company’s activities.
Credit risk: Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The Company is subject to concentrations of credit risk through its accounts receivable and is influenced primarily by the
individual characteristics of the customer, which management periodically assesses through its policy for the allowance for doubtful accounts
as described in Note 3 to the annual consolidated financial statements and which is also applicable under Canadian GAAP. The
demographics of the Company’s accounts receivable, including the industry and country in which customers operate, have less influence on
credit risk. For the year ended May 31, 2010, one customer accounted for 9.5% and another for 4.9% of consolidated net revenue,
respectively. For the year ended May 31, 2009, one customer accounted for 8.4% and another for 5.0% of consolidated net revenue,
respectively. At May 31, 2010 and 2009, no one customer accounted for more than 10% of the total accounts receivable balance. At May 31,
2010 and 2009, $13,952,000 and $10,983,000, respectively, of the total accounts receivable balance is past due based on contractual terms.
The Company has recorded an allowance for doubtful accounts of $2,283,000 as of May 31, 2010, which represents a $107,000 decrease from
May 31, 2009. The Company is not aware of any circumstances that would cause any of its other receivables to be impaired.
Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company
manages its liquidity risk through cash and debt management. See the Capital Disclosures note below for a more detailed discussion.
Foreign exchange risk: The Company uses foreign exchange swaps and foreign currency forward contracts to hedge anticipated transactions.
On May 31, 2010, a 1% increase or decrease in the exchange rate of the Canadian dollar compared to the U.S. dollar, assuming that all other
variables are constant, would have resulted in a $20,000 increase (decrease) in the Company’s net income for the year ended May 31, 2010
and a $164,000 decrease (increase) in the Company’s net loss for the year ended May 31, 2009, Refer to Note 23 in the Company’s annual
consolidated financial statements for a description of the contracts and the Company’s risk management strategy.
Interest rate risk: The Company is exposed to interest rate risk on the revolving credit line and the term loan as the rate is based on an index
rate. The Company uses an interest rate contract to reduce market risk associated with changes in interest rates related to the term loan. For
the year ended May 31, 2010 and 2009, a 25 basis-point increase or decrease in interest rates, assuming that all other variables are constant,
would have resulted in a $213,000 and $189,000, respectively, decrease or increase in the Company’s net income. Refer to Note 23 in the
Company’s annual consolidated financial statements for a description of the interest rate contract. The Company is not exposed to interest
rate risk on the senior subordinated promissory notes as the rate is fixed. Refer to Note 12 in the Company’s annual consolidated financial
statements for a description of the interest rates on the Company’s debt.
Capital Disclosures
Effective June 1, 2008, the Company adopted CICA Handbook Section 1535, Capital Disclosures, which requires a company to disclose
information that enables users of its financial statements to evaluate the company’s objectives, policies and processes for managing capital.
The Company’s objectives when managing capital are to:
• Ensure sufficient liquidity to pursue its organic growth combined with strategic acquisitions;
• Provide an appropriate return on investment to its shareholders; and
• Maintain a flexible capital structure that optimizes the cost of capital at acceptable risk and preserves the ability to meet financial
obligations.
The capital structure of the Company consists of cash, short and long-term debt and shareholders’ equity. In managing its capital structure,
the Company monitors performance throughout the year to ensure working capital requirements and capital expenditures are funded from
operations, available cash on deposit and, where applicable, bank borrowings. The Company may make adjustments to its capital structure in
order to support the broader corporate strategy or in light of economic conditions and the risk characteristics of the underlying assets. In
order to maintain or adjust its capital structure, the Company may issue shares or new debt, issue new debt to replace existing debt (with
different characteristics), or reduce the amount of existing debt. The Company is subject to financial covenants pursuant to the credit facility
agreements, which are measured on a quarterly basis. Refer to the Company’s annual consolidated financial statements, Note 12 for a
description of the metrics. The Company is in compliance with all such covenants as of May 31, 2010 and 2009.
F-62
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (UNAUDITED)
For the three and six months ended November 30, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
Kohlberg Sports Group, Inc. and Subsidiaries (the Company) prepares its consolidated financial statements in
conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) which in
some respects differ from Canadian generally accepted accounting principles (Canadian GAAP). The effects of
these differences on the Company’s interim consolidated financial statements for the three and six months
ended November 30, 2010 and 2009 is quantified below and described in the accompanying notes which should
be read in conjunction with the interim consolidated financial statements prepared in accordance with
U.S. GAAP.
Consolidated statements of operations (in thousands):
For the three months
ended November 30,
2010
2009
Net income (loss) in accordance with U.S. GAAP
Adjustment for:
Deferred financing costs (Note 1) . . . . . . . . .
Direct financing lease (Note 2) . . . . . . . . . .
Stock-based compensation (Note 5) . . . . . . .
Income taxes (Note 7) . . . . . . . . . . . . . . . . .
...........
For the six months
ended November 30,
2010
2009
$(1,956)
$(3,245)
.
.
.
.
(4)
13
91
(15)
20
21
18
(15)
Net income in accordance with Canadian GAAP . . . . . . . . . . . .
$(1,871)
$(3,201)
$13,456
$8,647
Basic and diluted earnings (loss) per common share under
Canadian GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (0.02)
$ (0.03)
$
$ 0.08
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$13,375
$8,562
(4)
22
78
(15)
0.12
41
39
36
(31)
Consolidated balance sheets (in thousands):
November 30, 2010
May 31, 2010
$283,923
(4,650)
4,917
(3,773)
(407)
$243,582
(4,105)
4,066
(3,959)
(386)
Total assets under Canadian GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$280,010
$239,198
Total liabilities under U.S. GAAP . .
Decrease in long-term debt . . . . .
Decrease in direct financing lease .
Decrease in benefits plans . . . . . .
$186,512
(2,162)
(1,917)
(85)
$161,001
(2,491)
(2,055)
(82)
Total liabilities under Canadian GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity under U.S. GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative Canadian GAAP adjustments . . . . . . . . . . . . . . . . . . . . . . . . .
$182,348
$ 97,411
251
$156,373
$ 82,581
244
Shareholders’ equity under Canadian GAAP . . . . . . . . . . . . . . . . . . . . . . . .
$ 97,662
$ 82,825
Total liabilities and shareholders’ equity under Canadian GAAP . . . . . . . . . .
$280,010
$239,198
Total assets under U.S. GAAP . . . . . . . . . . . .
Decrease in property, plant and equipment .
Increase in trademarks and intangible assets
Decrease in other assets . . . . . . . . . . . . . . .
Decrease in deferred income taxes . . . . . . .
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F-63
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.
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTES TO RECONCILIATION TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
NOTE 1 — DEFERRED FINANCING COSTS
Under Canadian GAAP, deferred financing costs relating to long-term debt are presented as a reduction of the carrying amount of long-term
debt on the consolidated balance sheets and the effective interest method is used to amortize the costs. Under U.S. GAAP, deferred
financing costs relating to long-term debt are presented as a component of other assets and based on the terms of the debt; either the
effective interest method or straight-line method is used to amortize the costs.
Under Canadian GAAP, deferred financing costs relating to loan commitments for a revolving credit facility are presented as a component of
intangible assets on the consolidated balance sheets as compared to a component of other assets under U.S. GAAP. Under both Canadian
GAAP and U.S. GAAP, these costs are amortized on a straight-line basis over the term of the loan commitment.
The amount of unamortized deferred financing costs presented on the U.S. GAAP consolidated balance sheets as a component of other
assets at November 30, 2010 and May 31, 2010 was $3,773,000 and $3,959,000, respectively. Under Canadian GAAP, the amounts were
reclassified as follows (in thousands):
Increase/(decrease)
Intangible assets . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . .
Other non-current assets . . . . . . . . .
Current portion of long-term debt . . .
Long-term debt . . . . . . . . . . . . . . .
Net income (deficit) . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . .
Accumulated other comprehensive loss
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November 30,
2010
May 31,
2010
$ 1,950
(1,631)
(2,142)
(820)
(1,342)
4
(321)
(22)
$ 1,810
(1,465)
(2,494)
(1,035)
(1,455)
(83)
(238)
(21)
NOTE 2 — DIRECT FINANCING LEASE
Under Canadian GAAP, leases are evaluated by the lessee for classification as either a capital or operating lease. The Company’s St. Jerome,
Quebec facility in Canada which is accounted for as a direct financing lease under U.S. GAAP, did not meet the criteria for capitalization as
a capital lease and is classified as an operating lease under Canadian GAAP. This resulted in an increase in Canadian GAAP net income for
the three and six months ended November 30, 2010 and 2009 of $13,000 and $21,000, respectively, and $22,000 and $39,000, respectively.
The U.S. GAAP carrying value of the leased assets, net of accumulated depreciation, of $1,682,000 and $1,849,000 at November 30, 2010 and
May 31, 2010, respectively, and the related direct financing lease obligation for the same periods of $1,917,000 and $2,055,000 is reduced to
zero for both periods under Canadian GAAP.
NOTE 3 — RESEARCH AND DEVELOPMENT
Under U.S. GAAP, the Company expenses research and development costs as incurred. Under Canadian GAAP, research costs are charged
to operations as incurred and product development costs are deferred if the product or process and its market or usefulness are defined, has
reached technical feasibility, adequate resources exist or are expected to exist to complete the project and management intends to market or
use the product or process. Technical feasibility is attained when the product or process has completed testing and has been determined to be
viable for its intended use. To date, no development costs have been capitalized.
NOTE 4 — COMPUTER SOFTWARE
Under Canadian GAAP, computer software costs are presented as an intangible asset on the consolidated balance sheet as compared to
property, plant and equipment under U.S. GAAP. The amount of computer software costs, net of accumulated depreciation, presented on
the consolidated balance sheets at November 30, 2010 and May 31, 2010 was $2,967,000 and $2,256,000, respectively.
NOTE 5 — STOCK-BASED COMPENSATION
Under U.S. GAAP, the simplified method was used for plain vanilla options granted to employees in the determination of the expected term
of options in the option pricing model. The contract term (10 years) is used for options granted to non-employees. For out-of-the-money
options granted to employees, an average of the simplified method and the contractual term is utilized. These methods are being used as the
Company does not have historical share option exercise experience. Under Canadian GAAP, the simplified method may not be used. The
F-64
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 5 — STOCK-BASED COMPENSATION (Continued)
Company used 5.1 years in the determination of the expected term of options in the option pricing model. The Company determined that
this expected term was reliable based on an analysis of the average holding period of companies held in a common private equity portfolio.
This resulted in a decrease to stock-based compensation expense for the three months ended November 30, 2010 and 2009 of $91,000 and
$18,000, respectively, and for the six months ended November 30, 2010 and 2009, of $78,000 and $36,000, respectively.
The assumptions for grants are detailed below.
Three months ended
November 30, 2010
Expected term (in years) . .
Expected volatility . . . . . .
Risk-free interest rate . . . .
Expected dividend yield . .
Weighted average fair value
. . . . . . .
. . . . . . .
. . . . . . .
. . . . . . .
per option
. . . . . .
. . . . . .
. . . . . .
. . . . . .
granted
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Six months ended
November 30, 2010
5.10
36.85%
1.10%
0.00%
$ 0.46
5.10
37.06%
1.66%
0.00%
$ 0.48
The Company did not grant options during the six months ended November 30, 2009.
NOTE 6 — EMPLOYEE FUTURE BENEFITS
The Company’s benefit plans include supplemental unfunded pension plans in both Canada and the United States. Under U.S. GAAP, the
net funded status of pension plans sponsored by a Company is fully reflected in the consolidated assets or liabilities of the Company. The
amount by which plan assets exceed benefit obligations or benefit obligations exceed plan assets, on a plan-by-plan basis, is reflected as an
increase in assets or liabilities, with a corresponding adjustment to accumulated other comprehensive income. Under Canadian GAAP, only
the net actuarial asset or liability is reflected in the consolidated financial statements.
The Company uses the corridor approach to recognize actuarial gains and losses in earnings. 10% of the benefit obligation is deducted from
the unamortized net actuarial gains or losses on a market-related value basis. Any excess is amortized over the average remaining service
period of active employees.
The reconciliation of defined benefit obligations to accrued benefit liabilities under Canadian GAAP is outlined below (in thousands):
Plan deficit at end of period . . . . .
Unamortized actuarial gain (loss) . .
Unamortized prior service cost . . .
Unamortized transitional obligation
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Accrued benefit liability at the end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30, 2010
May 31, 2010
$4,898
(10)
—
—
$4,801
(11)
—
—
$4,888
$4,790
NOTE 7 — INCOME TAXES
Included in income taxes is the tax effect of adjustments relating to deferred financing costs, direct financing lease and stock-based
compensation expenses.
NOTE 8 — INVESTMENT TAX CREDITS
Under Canadian GAAP, Scientific Research & Experimental Development (‘‘SR&ED’’) credits are a reduction of product development
costs on the interim consolidated statements of operations. The Company records these credits in accordance with Canadian GAAP. There
would be no difference in net income between Canadian and U.S. GAAP resulting from the utilization of these credits.
F-65
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 9 — RECENTLY ADOPTED ACCOUNTING STANDARDS
Business Combinations
In January 2009, the CICA issued section 1582, Business Combination, which establishes standards for the accounting for a business
combination. This section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after January 1, 2011. Early application is permitted.
As section 1582 is substantially harmonized with U.S GAAP SFAS 141(R), Business Combinations, the Company will early adopt the
provisions of this guidance for business combinations occurring on or after June 1, 2010 to reduce the accounting differences with
U.S. GAAP. As a result of early adopting section 1582, the Company is also required to adopt sections 1601, Consolidated Financial
Statements and 1602, Non-Controlling interest.
NOTE 10 — ANNOUNCED BUT NOT EFFECTIVE PRONOUNCEMENTS
International Financial Reporting Standards (IFRS)
The Canadian Accounting Standards Board has set January 1, 2011 as the date that IFRS will replace Canadian GAAP for publicly
accountable enterprises, which includes Canadian reporting issuers. The Company will be required to prepare its financial statements in
accordance with IFRS commencing June 1, 2011. Financial reporting under IFRS differs from Canadian GAAP in a number of respects,
some of which are significant. IFRS on the date of adoption is also expected to differ from current IFRS due to new IFRS that are expected
to be issued before the changeover date.
In Fiscal 2011, the Company commenced a diagnostic to assess and scope the significant differences between existing Canadian GAAP and
IFRS and the impact on the consolidated financial statements. The detailed analysis of the accounting policies impacted by the IFRS
convergence is expected to be completed throughout 2011. At this time, management cannot reasonably estimate the impact of adopting
IFRS on the consolidated financial statements, information systems, internal controls over financial reporting, disclosure controls and
procedures or business activities.
NOTE 11 — ADDITIONAL DISCLOSURES REQUIRED UNDER CANADIAN GAAP
Inventories
In June 2007, the CICA issued Handbook Section 3031, Inventories, which prescribes the accounting treatment for inventories. Section 3031
provides guidance on the determination of cost and its subsequent recognition as an expense, including any write down to net realizable
value. The standard also provides guidance on the cost formulas that are used to assign costs to inventories. The Company adopted this
standard effective on April 17, 2008 with no impact on the Company’s Supplemental Reconciliation of Significant Differences between
Accounting Principles Generally Accepted in the United States and Canada. While there is no impact to the Company’s results of operations
due to differences between U.S. and Canadian GAAP, Canadian GAAP requires the disclosure of the cost of inventory included in the
consolidated statements of operations, which is not included in the Company’s financial statements prepared under U.S. GAAP.
Inventory costs within cost of goods sold in the consolidated statements of operations for the three months ended November 30, 2010 and
2009 were $48,270,000 and $40,221,000, respectively, and for the six months ended November 30, 2010 and 2009 were $110,952,000 and
$102,975,000, respectively. Included in inventory costs for the three months ended November 30, 2010 was $322,000, and for the six months
ended November 30, 2010 and 2009, was $336,000 and $346,000, respectively, related to the impairment of slow moving and obsolete
inventory. The three months ended November 30, 2009 did not include expense related to the impairment of slow moving and obsolete
inventory.
Inventory costs within selling, general and administrative in the consolidated statements of operations for the three months ended
November 30, 2010 and 2009 were $1,294,000 and $757,000, respectively, and for the six months ended November 30, 2010 and 2009 were
$2,869,000 and $2,152,000, respectively. These costs represent inventory shipped to customers at no charge.
Financial Instruments and Hedges
In December 2006, the CICA issued Handbook Section 3862, Financial Instruments — Disclosures, which modified the disclosure
requirements of Section 3861, Financial Instruments — Disclosures and Presentation and Section 3863, Financial Instruments — Presentations,
which carried forward unchanged the presentation requirements for financial instruments of Section 3861. Section 3862 requires entities to
provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity’s
financial position and its performance, and the nature and extent of risks arising from financial instruments to which the entity is exposed
F-66
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 11 — ADDITIONAL DISCLOSURES REQUIRED UNDER CANADIAN GAAP (Continued)
during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 establishes standards for presentation
of financial instruments and non-financial derivatives. It deals with the classification of related interest, dividends, losses and gains, and
circumstances in which financial assets and financial liabilities are offset. This disclosure standard became effective for the Company on
June 1, 2008.
Financial Instruments — Recognition and Measurement
In January 2005, the CICA issued Handbook Section 3855, Financial Instruments-Recognition and Measurement. Section 3855 establishes
standards for recognition and measurement of financial assets, financial liabilities, and non-financial derivatives. Effective June 1, 2008, the
Company adopted this standard. The standard requires that financial assets and financial liabilities are initially recorded at fair value and are
subsequently measured based on their classification as described below. The Company classifies its financial instruments into various
categories based on the purpose for which the financial instruments were acquired and their characteristics.
Held-for-trading: Financial assets that are purchased and held with the intention of generating profits in the short-term are classified as
held-for-trading. These investments are accounted for at fair value with the change in fair value recognized in the consolidated statements of
operations in the period in which they arise. Cash and any derivatives not designated as hedges are classified as held for trading as of
November 30, 2010 and May 31, 2010.
Held-to-maturity: Securities that have a fixed maturity date and which the Company has a positive intention and ability to hold to maturity
are classified as held-to-maturity and are accounted for at amortized cost using the effective interest rate method. The Company does not
recognize gains and losses arising from changes in the fair value of these instruments until the gains and losses are realized, or there is
impairment in the value of an asset. When recognized, such gains and losses are recorded directly in net income. No investments are
classified as held-to-maturity investments.
Available-for-sale: Available-for sale investments are carried at fair market value, except where the instrument does not have a quoted
market price in an active market, with foreign exchange and revaluation gains and losses included in other comprehensive income or loss
until the gains and losses are realized when equities are sold in the market or there is impairment in the value. The Company does not have
any assets classified as available-for-sale.
Receivables: The Company’s accounts receivable are classified as current assets and are recorded at amortized cost, which upon their initial
measurement is equal to their fair value. Subsequent measurement of trade receivables is at amortized cost, which usually corresponds to the
amount initially recorded less any allowance for doubtful accounts.
Other Financial Liabilities: Accounts payable, accrued liabilities, long-term debt and revolving credit facilities are classified as other
financial liabilities and are measured at amortized cost.
Fair value of Financial Instruments: The Company has determined that the fair value of its cash, accounts receivable and financial liabilities
(trade payables and accrued liabilities) approximates their respective carrying amounts as at the balance sheet dates due to their short-term
nature. The fair value of the Company’s term loan borrowings is based on rates currently available to the Company for debt with similar
terms and remaining maturities. Carrying value approximates fair value. The fair value of the Company’s senior subordinated promissory
notes is estimated by discounting the future cash flow using the Company’s current borrowing rates for similar types and maturities of debt.
Refer to Note 22 in the Company’s annual consolidated financial statements.
Risk
The Company has exposure to credit risk, liquidity risk and market risk (which consists of foreign exchange risk and interest rate risk) from
its use of financial instruments. The Company’s management reviews these risks regularly as a result of changes in the market conditions as
well as the Company’s activities.
Credit risk: Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The Company is subject to concentrations of credit risk through its accounts receivable and is influenced primarily by the
individual characteristics of the customer, which management periodically assesses through its policy for the allowance for doubtful accounts
as described in Note 3 to the annual consolidated financial statements and which is also applicable under Canadian GAAP. The
demographics of the Company’s accounts receivable, including the industry and country in which customers operate, have less influence on
credit risk. At November 30, 2010 and May 31, 2010, $30,918,000 and $13,952,000, respectively, of the total accounts receivable balance is
past due based on contractual terms. The Company has recorded an allowance for doubtful accounts of $2,211,000 as of November 30, 2010,
F-67
KOHLBERG SPORTS GROUP, INC. AND SUBSIDIARIES
RECONCILIATION BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES AND CANADA (UNAUDITED) (Continued)
For the three and six months ended November 30, 2010 and 2009
(in U.S. Dollars, tabular amounts in thousands, except per share amounts)
NOTE 11 — ADDITIONAL DISCLOSURES REQUIRED UNDER CANADIAN GAAP (Continued)
which represents a $72,000 decrease from May 31, 2010. The Company is not aware of any circumstances that would cause any of its other
receivables to be impaired.
Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company
manages its liquidity risk through cash and debt management. See the Capital Disclosures note below for a more detailed discussion.
Foreign exchange risk: The Company uses foreign exchange swaps and foreign currency forward contracts to hedge anticipated transactions.
Refer to Note 23 in the Company’s annual consolidated financial statements for a description of the contracts and the Company’s risk
management strategy.
Interest rate risk: The Company is exposed to interest rate risk on the revolving credit line and the term loan as the rate is based on an index
rate. The Company uses an interest rate contract to reduce market risk associated with changes in interest rates related to the term loan.
Refer to Note 23 in the Company’s annual consolidated financial statements for a description of the interest rate contract. The Company is
not exposed to interest rate risk on the senior subordinated promissory notes as the rate is fixed. Refer to Note 8 in the Company’s interim
consolidated financial statements for a description of the interest rates on the Company’s debt.
Capital Disclosures
Effective June 1, 2008, the Company adopted CICA Handbook Section 1535, Capital Disclosures, which requires a company to disclose
information that enables users of its financial statements to evaluate the company’s objectives, policies and processes for managing capital.
The Company’s objectives when managing capital are to:
• Ensure sufficient liquidity to pursue its organic growth combined with strategic acquisitions;
• Provide an appropriate return on investment to its shareholders; and
• Maintain a flexible capital structure that optimizes the cost of capital at acceptable risk and preserves the ability to meet financial
obligations.
The capital structure of the Company consists of cash, short and long-term debt and shareholders’ equity. In managing its capital structure,
the Company monitors performance throughout the year to ensure working capital requirements and capital expenditures are funded from
operations, available cash on deposit and, where applicable, bank borrowings. The Company may make adjustments to its capital structure in
order to support the broader corporate strategy or in light of economic conditions and the risk characteristics of the underlying assets. In
order to maintain or adjust its capital structure, the Company may issue shares or new debt, issue new debt to replace existing debt (with
different characteristics), or reduce the amount of existing debt. The Company is subject to financial covenants pursuant to the credit facility
agreements, which are measured on a quarterly basis. Refer to the Company’s annual consolidated financial statements, Note 12 for a
description of the metrics. The Company is in compliance with all such covenants as of November 30, 2010 and May 31, 2010.
F-68
AUDITORS’ CONSENT
We have read the prospectus dated , 2011 relating to the sale and issue of common shares of Bauer
Performance Sports Ltd (the ‘‘Company’’). We have complied with Canadian generally accepted standards for
an auditor’s involvement with offering documents.
We consent to the use in the above-mentioned preliminary prospectus of:
• our report to the Board of Directors of the Company on the balance sheet of the Company as at
January 26, 2011. Our report is dated January 26, 2011;
• our report to the Board of Directors and Stockholders of Kohlberg Sports Group, Inc. and Subsidiaries
on the consolidated balance sheets of Kohlberg Sports Group, Inc. and Subsidiaries as at May 31, 2010
and 2009 and the related consolidated statements of operations, stockholders’ equity and comprehensive
(loss) income and cash flows for the years ended May 31, 2010 and 2009, for the period April 17, 2008
through May 31, 2008 (Successor), and for the period June 1, 2007 through April 16, 2008 (Predecessor).
Our report is dated September 17, 2010; and
• our report to the Board of Directors and Stockholders of Kohlberg Sports Group, Inc. and Subsidiaries
on the reconciliation between accounting principles generally accepted in the United States and Canada
as of May 31, 2010 and 2009 and the years ended May 31, 2010 and 2009. Our report is dated
January 26, 2011.
Boston, Massachusetts, USA
, 2011
F-69
CERTIFICATE OF BAUER PERFORMANCE SPORTS LTD.
Dated January 27, 2011
This prospectus constitutes full, true and plain disclosure of all material facts relating to the securities
offered by this prospectus as required by the securities legislation of each of the provinces and territories
of Canada.
(Signed) KEVIN DAVIS
Chief Executive Officer
(Signed) AMIR ROSENTHAL
Chief Financial Officer
On behalf of the Board of Directors
(Signed) CHRIS ANDERSON
Director
(Signed) SHANT MARDIROSSIAN
Director
C-1
CERTIFICATE OF THE UNDERWRITERS
Dated January 27, 2011
To the best of our knowledge, information and belief, this prospectus constitutes full, true and plain
disclosure of all material facts relating to the securities offered by this prospectus as required by the securities
legislation of each of the provinces and territories of Canada.
RBC DOMINION SECURITIES INC.
CIBC WORLD MARKETS INC.
(Signed) SHON WILKIE
Managing Director
(Signed) BRIAN HANSON
Vice Chairman
BMO NESBITT BURNS INC.
SCOTIA CAPITAL INC.
TD SECURITIES INC.
(Signed) BRAD FRASER
Managing Director
(Signed) CHARLES EMOND
Managing Director
(Signed) SIMON KWONG
Vice President and Director
MACQUARIE CAPITAL MARKETS CANADA LTD.
(Signed) RON RIMER
Executive Director
C-2
21JAN201119454623
1SEP200614461308
Printed In Canada
11-4075-1