10-K 1 d55007e10vk.htm FORM 10-K e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
 
     
o
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 29, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 333-123927
 
EASTON-BELL SPORTS, INC.
(Exact name of registrant as specified in its certificate of incorporation)
 
     
Delaware
  20-1636283
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)
 
 
 
 
 
7855 Haskell Avenue, Suite 200
Van Nuys, California 91406
(Address of principal executive offices) (Zip Code)
 
 
(818) 902-5800
(Registrant’s telephone number, including area code)
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act  Yes þ     No o
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o     No þ
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o   Accelerated filer o Non-accelerated filer þ Smaller reporting company o
                      (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of voting and non-voting common equity held by non-affiliates of Easton-Bell Sports, Inc. is $0.
 
As of February 29, 2008, 100 shares of Easton-Bell Sports, Inc. were outstanding.
 


TABLE OF CONTENTS

PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A(T). Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
Employment Agreement with Anthony B. D'Onofrio
Employment Agreement with Jackelyn E. Werblo
Subsidiaries
Certification of the Interim Principal Executive Officer - 302
Certification of the Principal Financial Officer - 302
Certification Pursuant to 18 U.S.C. Section 1350


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PART I
 
Item 1.   Business
 
Easton-Bell Sports, Inc., which was formerly known as Riddell Bell Holdings, Inc., was incorporated in Delaware in April 2003. Our executive offices are located at 7855 Haskell Avenue, Suite 200, Van Nuys, California 91406, and our telephone number is 818-902-5800. Easton-Bell Sports, Inc. is a wholly-owned subsidiary of RBG Holdings Corp. (“RBG”), which is a wholly-owned subsidiary of EB Sports Corp. (“EB Sports”), which is a wholly-owned subsidiary of Easton-Bell Sports, LLC, our ultimate parent company (“the Parent” or “our Parent”). Unless otherwise indicated, all references in this Form 10-K to “Easton-Bell,” “we”, “us”, “our”, and “the Company” refer to Easton-Bell Sports, Inc. and its consolidated subsidiaries.
 
Overview
 
We are a leading designer, developer and marketer of innovative sports equipment, protective products and related accessories under authentic brands. We offer products that are used in baseball, softball, ice hockey, football, lacrosse and other team sports, and in various action sports, including cycling, snow sports, powersports and skateboarding. Sports enthusiasts at all levels, from recreational participants to professional athletes, choose our products for their innovative designs, advanced materials and protective advantage. Throughout our history, our focus on research and development has enabled us to introduce products that have set new standards for performance in their respective sports. As a result, we are able to maintain or improve our competitive position by consistently entering new product categories, expanding and improving our existing product lines and increasing price points for our premium products.
 
We currently sell a broad range of products primarily under four brands — Easton® (baseball, softball and ice hockey equipment, apparel and cycling components), Bell® (cycling and action sports helmets and accessories), Giro® (cycling and snow sports helmets and accessories) and Riddell® (football and baseball equipment and reconditioning services). Together, these brands represent the vast majority of our sales and are among the most recognized and respected in the sporting goods industry.
 
For the period ended December 29, 2007, we had two reportable segments: Team Sports and Action Sports. Our Team Sports segment primarily consists of football, baseball, softball, ice hockey and other team sports products and reconditioning services related to certain subcategories of these products. Our Action Sports segment primarily consists of helmets, equipment, components and accessories for cycling, snow sports and powersports and fitness related products.
 
Industry Overview
 
Sporting Goods Industry
 
We participate in the sporting goods industry, which includes sports equipment, athletic footwear and apparel. According to the NPD Group, a consumer research firm, the worldwide retail sporting goods market was estimated at $256.0 billion in 2006. According to the Sporting Goods Manufacturers Association (“SGMA”), manufacturers’ sales of sporting goods in the United States, our largest market, has grown from $48.4 billion in 2000 to $66.4 billion in 2006. The SGMA also reported that sales of sporting goods in the United States rose by 5.8% in 2006. Within the industry, we believe that consumer dollars spent in the sports in which we compete are growing as a result of the increasing percentage of avid participants that prefer, and are willing to pay for, premium products that improve performance.
 
The sporting goods industry has recently undergone a period of rapid consolidation with equipment manufacturers increasingly converging around two very different strategies. Many, including some publicly traded competitors, compete on price and seek to create a competitive advantage by aggregating a multitude of brands and offering a wide range of commodity-like products to the mass retailers and largest sporting goods chains. Conversely, others, including us, employ technological innovation to create a cohesive portfolio of performance products that less price-sensitive customers typically want to buy through specialty channels.


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Baseball and Softball
 
According to the SGMA, in 2006 in the United States baseball and softball (including both fast-pitch and slow-pitch) attracted approximately 16.1 million participants and 9.8 million participants, respectively, and wholesale shipments of baseball and softball equipment were approximately $527.0 million. The SGMA reports that the baseball/softball market is growing in the low single digits and attributed the growth to an appetite by avid players for new technologies and somewhat higher prices for bats, ball gloves and batting gloves. We believe the enthusiast base in these sports will experience continued growth, driven by increasing popularity of travel ball, club baseball and softball and more frequent play.
 
Ice Hockey
 
According to the SGMA, ice hockey attracted 1.8 million U.S. participants in 2006 and U.S. wholesale shipments of ice hockey equipment was approximately $200.0 million in 2006. We estimate that the Canadian ice hockey market is at least as large as the U.S. market in terms of participants and dollars spent. The SGMA reports that U.S. participation in ice hockey in 2006 has almost doubled at the high school level since 1990, fueled by an increase in female participation. Elite athletes represent an even faster growing segment of the ice hockey market, as evidenced by the fact that the number of National Collegiate Athletic Association (“NCAA”) colleges sponsoring hockey teams in 2005 has almost doubled since 1990 to 207 teams.
 
Football Helmets
 
According to the SGMA, tackle football attracted approximately 5.8 million U.S. participants and total U.S. manufacturers’ sales of football equipment were estimated at $474.0 million in 2006. As the largest and most popular sport for high school and college males, the football market is expected to continue to grow steadily. Competitive tackle football leagues, such as the NCAA, high school leagues and Pop Warner, have increasingly emphasized the safety of participants by enforcing exacting equipment standards with an increased focus on the protective characteristics of helmets. As a result, football helmets have commanded consistently higher price points, as well as faster equipment replacement and reconditioning rates. Due to the prevalence of dedicated organizations and players that demand a high level of safety without sacrificing performance, we believe that growth in sales of high performance, technologically advanced football equipment, including helmets and shoulder pads, as well as reconditioning services resulting from this trend will continue to provide a growth opportunity.
 
Cycling Helmets and Related Accessories
 
According to the SGMA, cycling (including both road and mountain biking) attracted approximately 46.4 million participants in 2006, as compared to approximately 43.4 million in 2005, a 6.9% growth rate. Cycling has become one of the most popular physical activities in the United States and many states have laws mandating the use of helmets while riding a bicycle for those under the age of 18. According to a L.E.K. Consulting study in 2004, 42% of cyclists in the United States wore a helmet and helmet usage is expected to increase to 46% of all cycling participants by 2008.
 
The accessory segment of the U.S. bicycle industry is larger than the helmet segment and is driven by highly technical products that command premium prices. As the mix of riders has shifted towards high-end road cyclists, the demand for such accessories has increased significantly.
 
Helmets for Action Sports, including Snow Sports and Powersports
 
Participation in action sports, such as skateboarding, BMX and snowboarding, has grown dramatically since 1999. According to the SGMA, skateboarding attracted approximately 11.1 million participants in 2006, as compared to approximately 10.5 million in 2005, a growth rate of 5.7%. Events such as the ESPN X Games, the inclusion of snowboarding as a medal event in the Winter Olympics and the national recognition of leading board sport athletes have broadened general awareness of the action sports lifestyle. In addition, we believe that use of motor and other electric scooters is increasing. Growth in these sports should drive overall helmet sales as participants become more aware of the risk of head injuries.


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Sports Apparel
 
According to the SGMA, wholesale spending for consumer sports apparel in the United States grew 8.2% in 2006, reaching approximately $28.8 billion in annual sales. The sports apparel segment is benefiting from consumers’ preference toward casual, comfortable clothing. The NPD Group has found that only about 30% of sports apparel spending goes toward clothes that consumers intend to use for sports or fitness activities. Recent performance driven innovations, such as advanced features and highly technical fabrics, have fueled demand and increased prices points for athletic apparel in recent years.
 
Our Brands
 
We currently sell a broad range of products, primarily under four brands — Easton, Bell, Giro and Riddell — which represent the vast majority of our sales. We believe that our brands are among the most recognized and respected in the sporting goods industry, as demonstrated by our leading market share in many of our core categories. As a result of the high-performance nature of our products, we have been able to build and maintain relationships with professional and college sports teams, leagues and organizations and high-profile athletes. The visibility provided by these relationships reinforces the authenticity of our brands and drives demand for our products among retailers and consumers.
 
Our four primary brands include:
 
Easton.  Under the Easton brand, founded in 1922, we offer baseball, softball, ice hockey and cycling components. We believe Easton is recognized as the most innovative brand in the baseball, softball and ice hockey equipment industry. In Major League Baseball (“MLB”), All-Star players Jason Bay and Carlos Zambrano wear and use the Easton brand. We believe our hockey sticks are used by more National Hockey League (“NHL”) players than any other brand and that consumers choose Easton branded products due to superior performance, quality and value. As a result, we have been able to build and maintain relationships with some of the most visible professional athletes in the NHL, which includes All-Star players Dany Heatley and Marian Gaborik, who wear and use Easton hockey equipment.
 
Bell.  Under the Bell brand, founded in 1954, we offer helmets for cycling, motorcycles (street and motorcross), auto racing, skateboarding and other action sports, as well as various cycling and fitness accessories. We believe Bell is the number one brand by sales in cycling helmets and accessories. Bell branded products are used by cycling enthusiasts ranging from competitive athletes to recreational users. Consumers choose Bell branded cycling helmets due to superior design, fit, quality, durability and price. The Bell brand image of toughness, dependability and performance is supported through the use of Bell products by, and sponsorship of, such high-profile athletes and professional cycling teams as BMX stunt riding champion Dave Mirra, skateboarding champion Tony Hawk and motocross champion Grant Langston.
 
Giro.  Under the Giro brand, founded in 1986, we offer premium helmets for cycling and various snow sports (including skiing and snowboarding), as well as various accessories, including snow goggles and eyewear. We believe the Giro brand is the number two brand by sales in cycling helmets (second only to Bell) and the number one brand of ski and snowboard helmets. We believe that consumers are willing to pay premium prices for our Giro branded helmets due to superior product features and design. The Giro reputation for innovation as well as sleek, stylish and speed-oriented designs is further reinforced through the use of Giro products by, and sponsorship of, leading professional athletes, including Tour de France winners Lance Armstrong and Alberto Contador and Winter X Games gold metal winners Simon Dumont and Gretchen Bleiler.
 
Riddell.  The Riddell brand, founded in 1929, is one of the most recognized brands in sports. The Riddell branded helmet is used by numerous Division I NCAA football teams and has been the Official Helmet of the National Football League (“NFL”) since 1989, resulting in significant awareness of the Riddell brand with the general public, as well as with youth leagues and high schools. Under the Riddell brand, we sell football helmets, shoulder pads and related equipment, uniforms and reconditioning services for our football and other team sports products. We also sell branded collectible products, such as replica football helmets which reflect NFL and popular collegiate team logos.


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In addition to the above brands, we also sell a variety of accessories, including (i) bicycle pumps, headlights, safety lights and reflectors under the Blackburn® brand (ii) bicycle trailers and child carrier seats under the Co-Pilot® brand (founded in 2000), and (iii) a full line of mats, resistance bands, kits and other fitness accessories designed primarily for strength training, yoga and pilates under the Bell, Savasa® (launched in 2004) and Bollinger® brands. Additionally, we own the rights to use the widely recognized MacGregor® brand (exclusive of golf products), which we license to select third parties to manufacture and market footwear and other sports equipment.
 
Products and Services
 
Team Sports
 
Our Team Sports segment produces technologically advanced equipment and apparel for baseball, softball, ice hockey, and football and also provides reconditioning services for various sporting goods.
 
Baseball and Softball
 
We offer a broad line of baseball and softball (both slow-pitch and fast pitch) equipment and accessories (bats, gloves, protective equipment and apparel) for athletes and enthusiasts at all levels of competition. Substantially all of our baseball and softball products are currently sold under the Easton brand name. Since our introduction of the first aluminum bat in 1970, our bats have featured advanced designs and materials to optimize hitting performance, feel and durability. Baseball and softball products accounted for approximately 20.9% and 16.8% of our net sales in 2007 and 2006, respectively.
 
Ice Hockey
 
We offer a broad line of ice hockey equipment and accessories (sticks, blades, skates, protective equipment and apparel) for ice hockey athletes and enthusiasts at all levels of competition. All of our ice hockey products are sold under the Easton brand name. We believe our sticks are used by more NHL players than any other brand. Ice hockey products accounted for approximately 15.5% and 14.7% of our net sales in 2007 and 2006, respectively.
 
Football
 
Football Helmets — Substantially all of our football products and services are currently sold under the Riddell brand name. We believe we are the world’s leading designer, developer and marketer of football helmets. Our football helmets are designed to provide optimal on-field performance while meeting or exceeding all relevant safety standards.
 
Reconditioning Services — We believe we are the leading reconditioner of athletic equipment in the United States. We recondition football helmets and shoulder pads, baseball and lacrosse helmets, catcher’s equipment, baseball gloves and hockey helmets and shoulder pads. Approximately 90% of our reconditioning volume is comprised of football helmets and shoulder pads as reconditioning typically includes the cleaning, sanitizing, buffing and/or painting of helmets. Face guards, interior pads, chin straps and other helmet components are inspected and replaced as necessary. Helmets are recertified to conform to the standards set by the National Operating Committee on Standards for Athletic Equipment, or (“NOCSAE”), which is the leading standard-setting organization for athletic equipment.
 
Football helmets and reconditioning services accounted for approximately 10.5%, 11.4% and 17.6% of our net sales in 2007, 2006 and 2005, respectively.
 
Other Products and Licensing
 
We sell collectible football helmets that primarily reflect licensed NFL and major collegiate trademarks. Our collectible helmets are available in a variety of sizes and forms, including authentic helmets that are identical to competitive helmets used on-field by professional players, replica helmets that have a similar appearance to the authentic helmet but are constructed with less advanced materials, mini helmets that are half-scale versions of full-size helmets and pocket size helmets that appeal to both collectors and the mass market.


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In addition to the team sports products described above, we offer a range of practice wear, apparel, footwear and game uniforms under the Riddell and Easton brand names that is used on and off the field by football, baseball, softball and ice hockey athletes. These functional products incorporate highly-advanced technical materials and innovative designs, such as our Full Range Motion technology, which enables the athlete to have full range of motion without affecting the garment body.
 
We also have entered into selective licensing agreements that allow third parties to manufacture and market products under the Riddell, Easton and MacGregor brand names. Products currently licensed include Riddell footwear, certain Easton footwear, Easton table and outdoor games and MacGregor footwear and team sports equipment. We receive royalty income from sales of these products.
 
Other products and licensing accounted for approximately 10.7%, 11.5% and 17.4% of our net sales in 2007, 2006 and 2005, respectively.
 
Action Sports
 
Our Action Sports segment encompasses a number of individual sports, such as cycling, extreme sports, snow sports, powersports and fitness activities. Within many of these sports, we are primarily focused on the helmet market. Within cycling, we are also focused on the accessories and premium components markets.
 
Cycling and Extreme Sports
 
Substantially all of our recreational cycling and extreme sports helmets are sold under the Bell brand name and our premium cycling helmets are sold under the Bell and Giro brand names. We sell premium cycling components under the Easton brand name and high-performance accessories under the Blackburn brand name. We also sell other accessories under the Bell and Co-Pilot brand names and certain recreational cycling helmets and accessories under various licensed brands, including Barbie, Batman, Bratz, Hot Wheels, Sesame Street and X Games.
 
Helmets — We offer helmets designed for cycling and action sports, including skateboarding and BMX biking. These helmets incorporate many proprietary technologies and feature styling designed to appeal to sports enthusiasts. Cycling and action sports helmets accounted for approximately 18.5%, 18.4% and 30.1% of our net sales in 2007, 2006 and 2005, respectively.
 
Premium Cycling Components and Accessories — We offer premium cycling components, including handlebars, frames, tubing and wheels that are sold through specialty retailers and directly to original equipment manufacturers. Our cycling components incorporate advanced designs and materials for optimal weight, strength and shock-absorbing characteristics and are frequently used by professional racing teams. Under the Blackburn brand name, we offer a broad range of high-performance accessories, including air pumps and CO2 inflators, aluminum racks, lights, cyclometers and tools. Premium cycling components and accessories accounted for approximately 6.3%, 5.8% and 3.1% of our net sales in 2007, 2006 and 2005, respectively.
 
Cycling Accessories — We offer a wide selection of cycling accessories, including lights, mirrors, reflectors, locks, pumps, pedals, tires, protective pads, gloves and bags under our Bell and Co-Pilot brands that are sold primarily through mass retailers. Cycling accessories accounted for approximately 9.4%, 11.0% and 17.6% of our net sales in 2007, 2006 and 2005, respectively.
 
Snow Sports
 
We offer helmets for various snow sports, including snowboarding and skiing, as well as various snow sports accessories. Our snow sports helmets and accessories are sold under the Giro brand name. We have consistently been a leader in comfort and fit, as well as performance, from the first snow helmet with adjustable vents to new audio helmets, which feature specially designed headphones that are built seamlessly into the helmet ear pads and can be used with MP3 players or other portable audio devices. Snow sports helmets accounted for approximately 3.9%, 5.1% and 6.1% of our net sales in 2007, 2006 and 2005, respectively.


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Powersports
 
We offer helmets for various powersports, including motocross and auto racing, as well as various powersports accessories under the Bell brand name. Our powersports helmets are designed for motorcycles, both street and motocross, snowmobiles and auto racing. Powersports helmets and accessories accounted for approximately 2.2%, 2.5% and 4.1% of our net sales in 2007, 2006 and 2005, respectively.
 
Fitness Accessories
 
We offer a broad line of fitness accessories, including mats, resistance bands, weights and other fitness products designed primarily for strength training, yoga and pilates. All of our fitness accessories are sold under the Bell, Savasa and Bollinger brands. Fitness accessories accounted for approximately 2.1%, 2.8% and 4.0% of our net sales in 2007, 2006 and 2005, respectively.
 
Competition
 
Although we have no competitors which challenge us across all of our product lines, the markets for our products are highly competitive and we face competition from a number of sources in many of our product lines.
 
Team Sports
 
In baseball and softball, we compete with numerous national and international competitors including Rawlings Sporting Goods, Worth Sports, Wilson Sporting Goods, Louisville Slugger and Mizuno Corp. In ice hockey, we primarily compete with Bauer Hockey, Reebok-CCM Hockey and Mission ITECH Hockey. In football, we compete with several companies, such as Schutt Sports, Douglas Protective Equipment and Rawlings Sporting Goods and our reconditioning business competes with many regional companies. Our uniform and practice wear business also competes with national businesses such as Russell Athletic. We believe that we compete in each of these team sports markets on the basis of brand name recognition, product features, quality and customer service.
 
Action Sports
 
In cycling helmets and components, we compete with several national and regional competitors. Within the mass retail channel, our main competitor is PTI Sports, Inc. (“PTI”), which markets its products under such well-known brand names as Schwinn, Mongoose and GT. PTI competes with us primarily on brand name recognition and price. In the specialty retail channel, our primary competitors are Trek Bicycle Corporation and Specialized Bicycle Components, both of whom compete with us mostly on a combination of performance, price, style, quality, design and focus on cycling enthusiasts.
 
We primarily compete in the snow sports and powersports markets with a number of smaller companies and a few multinationals, which compete mostly on a combination of performance, price and design. In the snow sports helmet market, we compete with several domestic and international brands, including Boeri, Carrera, Leedom, Marker, Pro-Tec, R.E.D., which is owned by The Burton Corporation and Salomon, which is owned by Amer Sports. In the powersports helmet market, we compete against such well-known brands as Arai, Shoei, HJC and KBC.
 
Sales
 
We utilize separate sales forces and a variety of distribution channels for the various products in our segments, enabling us to design specific marketing strategies for each brand and product.
 
Sales of Team Sports Products
 
Retail Sales
 
We sell a broad selection of our team sports products, including our baseball, softball and ice hockey products, to both national and regional full-line sporting goods retailers in North America. We believe that our leading brands and the breadth and depth of our product portfolio match well with sporting goods chains’ marketing strategies, product selections and service capabilities, which generally fall between those of mass merchants and specialty


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retail accounts. Our extensive product selection allows sporting goods retailers to tailor their mix of our products to their individual selling strategies. In addition, we believe that sporting goods retailers benefit from consumer recognition and demand for our brands through increased foot traffic in their stores. We also sell team sports products to approximately 3,000 independent specialty retail accounts in North America. These retailers cater their marketing and product selections to sports enthusiasts who often seek premium products having the highest level of performance. We work with specialty customers to maximize sales and profits by providing highly visible product displays and point-of-purchase signage.
 
Our team sports products that are sold to retail customers are sold through our network of approximately 50 in-house and independent sales representatives in the United States and Canada and through various third party distributors in other regions of the world. Our in-house sales team provides sales and support services to key retail accounts. Sales efforts to these customers are led by a national account manager, supported by other members of the sales team. These sales teams visit frequently with our larger customers to assist them with in-store merchandising, signage and market guidance, as well as to receive feedback and to anticipate future needs.
 
Institutional Sales
 
We primarily sell football helmets, shoulder pads, certain other team sports equipment, uniforms, accessories and reconditioning services to educational institutions and athletic leagues. We have a direct sales force and marketing team of approximately 250 individuals, which focus on sales to the NFL and approximately 16,500 high schools, 1,000 colleges and numerous youth leagues across the United States. We believe our institutional sales force, made up primarily of former players, former coaches and experienced industry sales professionals, is the largest national direct sales force for athletic products and services in the institutional sporting goods industry and provides us with a significant competitive advantage. Their experience helps us understand the needs, budgetary and timing constraints and other concerns of our customers and also facilitates education on new product offerings. Additionally, this approach allows us to sell equipment and reconditioning services directly to our customers, which enables us to more readily explore add-on sales opportunities. Our ability to actively manage the requirements of thousands of schools, leagues and professional teams with timely and expert service has aided us in establishing a reputation for industry-leading service and a loyal customer base.
 
Sales of Action Sports Products
 
We primarily sell our broad selection of action sports products, including cycling, snow sports, powersports and skateboarding helmets and accessories, through independent specialty retail accounts, sporting goods stores and mass retailers. We also sell premium aftermarket cycling components and accessories to distributors who supply the specialty retail channel and directly to bicycle manufacturers.
 
We utilize approximately 100 in-house and independent sales professionals across North America and a network of over 100 third-party distributors in other regions of the world to distribute our action sports products. Similar to our in-house sales team for team sports products, our in-house sales team for action sports products provides sales and support services to key retail accounts, including category management services for certain of our mass retail customers. These efforts are led by a national account manager, who is supported by other members of the sales team. These sales teams work with large sporting goods and mass retail customers to assist them with in-store merchandising, signage and market guidance, as well as to receive feedback and to anticipate future needs.
 
Marketing
 
Relationships with Athletes, Teams and Organizations
 
Our Easton, Bell, Giro and Riddell brands have enjoyed high visibility around the world due to use of our products by leading athletes. Many high-profile athletes choose to use our products even though they are not sponsored by us, which gives our products increased exposure to consumer audiences, strengthens the perceived authenticity of our brands and drives demand for our products among retailers and consumers. Our brands have a strong presence in professional (MLB, the NHL and the NFL), collegiate and youth leagues, the Summer and Winter Olympics, the X Games and NASCAR.


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We sponsor over 350 individuals and 40 teams, totaling over 500 athletes, who participate in baseball, softball, ice hockey, cycling, snowboarding, skiing, motocross, auto racing and other sports around the world. In addition, we have an exclusive contract with the NFL under which our football helmets are designated the Official Helmet of the NFL. Our agreement with the NFL permits our Riddell brand mark to appear on the front and on the chin strap of each Riddell helmet used during NFL play and provides that there be no indicia of any other brand on any other helmet worn during a game. We believe that Riddell helmets are used by over 80% of the players in the NFL.
 
Advertising and Promotional Events
 
As a result of the foregoing relationships, we receive a significant amount of media exposure. We augment this exposure with advertisements highlighting the distinctive design, quality and features of our products in various media outlets, including industry periodicals, magazines, newspapers and television media. To further reinforce and build our brand recognition, we conduct a variety of marketing and promotional events in support of our products. For example, we participate in coaches clinics and equipment shows throughout the year where our product lines are displayed and promoted along with our reconditioning services. In addition, we dedicate resources to educate customers on the importance of helmet safety and proper fit and invest in initiatives designed to increase awareness of the importance of head protection in preventing brain injury.
 
Design and Product Development
 
Investment in research and development has been and continues to be a critical component of our business strategy. We are committed to the design and development of new products utilizing new technologies that provide athletes and other sports enthusiasts with performance or protective advantage over existing products. We believe that innovation drives consumer demand and often leads to higher selling prices. We have a track record for innovation in each of the markets in which we compete.
 
We also actively work with several organizations that set safety or performance standards for the sporting goods we sell. Our products meet or exceed the standards established by the most important regulatory and testing bodies, including the Department of Transportation, the Consumer Product Safety Commission (“CPSC”) and various private organizations, including NOCSAE, which is the leading standard-setting organization for athletic equipment (including football, baseball, softball and lacrosse helmets, as well as other equipment) and the Snell Memorial Foundation, which is a leading organization that tests and certifies helmets for cycling, snow sports, powersports and other action sports. We also work with various athletic leagues, including the NFL, the NHL, MLB, the NCAA and Little League Baseball and Softball, that set standards for equipment used in competition and various conferences within these athletic organizations that have their own standards. We believe that we have regularly been among the first to adopt new safety or performance standards.
 
We invest in engineering and applied research to improve both the quality and performance of our current products and to develop new products. Our in-house research and development group includes approximately 80 employees. Our product development personnel work with top athletes to understand the latest industry trends and to develop new products or features that respond to their needs as well as set new industry standards. This team is augmented by additional product development, engineering and quality control personnel in the United States and Hong Kong who assist with the engineering and design of our products. We regularly test products throughout the development and manufacturing processes and all of our products are subjected at all stages of the manufacturing process to various quality control procedures that often exceed those mandated by law.
 
Production, Sourcing and Distribution
 
We currently maintain manufacturing, assembly and distribution facilities in the United States, Canada, Mexico, China and Taiwan. We also generally employ a dual strategy for sourcing goods from third parties. For certain of our products that involve our proprietary design and materials technologies, we negotiate exclusive agreements with a limited number of manufacturing partners. For our products that are less complex to produce, we maintain relationships with a broader base of suppliers to purchase goods as needed without contractual obligation.
 
Our aluminum and composite baseball and softball bats are manufactured in Asia. We transitioned the production of our aluminum bats and certain cycling products from our Van Nuys, California facility to Asia during


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the second quarter of 2007. We manufacture composite ice hockey sticks and blades and certain cycling components at our facility in Tijuana, Mexico and custom ice hockey pants, gloves and skates at our facility in Quebec, Canada. We assemble and package a portion of our cycling, football, snow sports, powersports and other helmets at our Elyria, Ohio and Rantoul, Illinois facilities, the balance of our helmets are sourced from outside of the United States. Reconditioning services are performed at facilities strategically located throughout the United States. In addition, we maintain a silk screening operation at our Elk Grove Village, Illinois facility to customize our football practice wear and uniform products with almost any logo, team name or other design that the customer requests.
 
We complement our manufacturing infrastructure with overseas sourcing and use our large purchasing volumes to receive lower prices. In 2004 through 2007, we entered into exclusive agreements with various third-party vendors in Asia to produce a portion of our aluminum and composite products. These agreements provide us with additional flexibility and manufacturing capacity. To protect the integrity of our brands, we actively inspect products purchased from third-party vendors to ensure that they meet our high-quality standards. We have a product development team in Hong Kong that supports our Asian sourcing efforts. In addition to handling product design, this team visits and works with many of our suppliers to verify product specifications, logistics and quality control. We require our suppliers to perform factory tests periodically to ensure the material and functional integrity of our products.
 
We operate distribution facilities in Illinois, Pennsylvania, Utah, Canada and Taiwan, which allows us to maintain high service levels for our customers across all distribution channels.
 
Seasonality
 
Our business is subject to seasonal fluctuation. Sales of cycling products, baseball and softball products and accessories occur primarily during the warm weather months. Sales of football helmets, shoulder pads and reconditioning services are driven primarily by football buying patterns, where orders begin at the end of the school football season (December) and run through to the start of the next season (August). Shipments of football products and performance of reconditioning services reach a low point during the football season. Sales of ice hockey equipment are driven by ice hockey buying patterns with orders shipping in late spring for fall play. Seasonal impacts are increasingly mitigated by the rise in snow sports and powersports sales which, to a certain extent, counter the cycling, baseball, softball and football seasons.
 
Intellectual Property
 
We have a portfolio of approximately 150 patents along with approximately 100 patents pending that relate to our various products. While we believe certain of these patents are material to the success of our products based on currently competing technology, we also believe that experience, reputation, brand recognition and our distribution network provide significant benefits to our business.
 
We believe our well-established brands — Easton, Bell, Giro and Riddell — are a core asset of our business and are of great value to us. We maintain a portfolio of active registered trademarks in support of our brands. We hold all domestic rights to the Easton, Bell, Giro and Riddell trademarks and all domestic rights to the MacGregor trademark in connection with the manufacture and sale of certain products (other than golf products). We also maintain many registrations of trademarks globally, particularly the Bell, Giro and Blackburn trademarks, and maintain the Riddell trademark in select countries. We have also secured licenses to use certain popular brands on select cycling helmets and accessories from several companies including Mattel Inc., to use the Barbie and Hot Wheels brands, MGA Entertainment, Inc., to use the Bratz brand, Warner Bros. Entertainment Inc., to use the Batman brand, ESPN, Inc., to use the X Games brand and the Sesame Workshop, to use the Sesame Street brand.
 
In connection with our purchase of Easton Sports, Inc. (“Easton”) in March 2006, we licensed the Easton trademark to certain affiliates of James L. Easton solely in connection with specific products or services, none of which currently compete with us. For a discussion of this license and other related technology licenses to such James L. Easton affiliates, see “Item 13 — Certain Relationships and Related Transactions, and Director Independence.” We also license the Easton trademark to third parties with respect to the production and marketing of footwear and certain recreational games, the Riddell trademark for footwear and the MacGregor trademark


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primarily for athletic footwear and sports equipment. In addition, the Bell trademark is currently licensed to a third party for the production of motorcycle helmets and accessories sold outside of the United States, Canada and Mexico.
 
Employees
 
We believe that our relationships with our employees are good. As of December 29, 2007, we had 2,248 employees, including 123 in product design, engineering and testing, 1,467 in operations, including manufacturing and distribution, 440 in sales and marketing and 218 in administration. Approximately 52 of our employees are represented by unions. Our collective bargaining agreement with a union in York, Pennsylvania, expires in December 2009, and an agreement with a union in New Rochelle, New York, expires in January 2009.
 
Insurance and Risk Management
 
Our business exposes us to claims for product liability and warranty claims in the event our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in personal injury or death. We have various pending product liability cases against us. We vigorously defend product liability cases brought against us and actively manage our product liability exposure through research and testing, active case management and insurance. We maintain levels of insurance which we believe to be adequate. Our product liability insurance policy covers all of our products and expires in January 2009. We have additional coverage under our umbrella insurance policy that is renewed annually.
 
Governmental Regulation
 
Our products and accessories are subject to the Federal Consumer Product Safety Act, which authorizes the CPSC to protect consumers from hazardous sporting goods and other products. The CPSC has the authority to exclude from the market certain articles which are found to be hazardous and can require a manufacturer to repurchase such goods. We maintain a quality control program for our protective equipment operations and retail products that is designed to ensure compliance with applicable laws. To date, none of our products have been deemed to be hazardous by any governmental agency. Operations at all of our facilities are subject to regulation by the Occupational Safety and Health Administration, and various other regulatory agencies. Our operations are also subject to environmental regulations and controls. While some of the raw materials used in our operations may be potentially hazardous, we have not received any material environmental citations or violations and we have not been required to spend significant amounts to comply with applicable law or to remediate conditions created by releases or disposal of hazardous materials.
 
Financial Information on Geographical Areas
 
For financial information on geographic areas, see Note 8 to our Consolidated Financial Statements contained herein.
 
Item 1A.   Risk Factors
 
Our substantial indebtedness could adversely affect our financial health.
 
We have a significant amount of indebtedness. As of December 29, 2007, we had total indebtedness of at least $475.6 million (including $140.0 million of our 8.375% senior subordinated notes due 2012, $330.0 million under our senior secured credit facility, $5.5 million under our revolving credit facility and $0.1 million of capital lease obligations). For more information on our indebtedness, see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
 
Our substantial indebtedness could have important consequences. For example, it could: (i) increase our vulnerability to general adverse economic and industry conditions; (ii) require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; (iii) limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; (iv) place us at a competitive disadvantage compared to our competitors that have less debt; and (v) limit our ability to borrow additional funds.


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Certain of the documents governing our indebtedness contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts. In addition, our indirect parent company, EB Sports, has entered into a credit agreement pursuant to which it has borrowed $175.0 million. Neither our company nor any of our subsidiaries have guaranteed or are otherwise obligated to repay such indebtedness or any interest that accrues thereon. However, given that EB Sports controls our direct parent, EB Sports has the ability, subject to the terms of our existing senior secured credit facility and any other agreements which limit our ability to declare and pay dividends, to obtain money from us and our subsidiaries to fund its obligations under such loan. This credit agreement is more fully described in “Item 13 — Certain Relationships and Related Transactions, and Director Independence.”
 
Despite current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.
 
We may be able to incur substantial additional indebtedness in the future. We may borrow up to a total of $70.0 million and Cdn $12.0 million under the revolving credit facilities that are part of our senior secured credit facility. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” In addition, the terms of the indenture governing our senior subordinated notes do not fully prohibit us or our subsidiaries from doing so. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.
 
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
 
Our ability to make payments on and to repay or refinance our indebtedness, and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. Our ability to do so, to a certain extent, is subject to general economic, financial, competitive, legislative and other factors that are beyond our control. There can be no assurance that our businesses will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule, if at all, or that future borrowings will be available to us under our new senior secured credit facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. There can be no assurance that we will be able to refinance our indebtedness on commercially reasonable terms, if at all.
 
If we cannot compete successfully in our industries, our business may be adversely affected.
 
Although we have no competitors that challenge us across all of our product lines, the markets for our products are highly competitive and we face competition from a number of sources in many of our product lines. Competition is primarily based on brand name recognition, product features, style, quality, price and customer service. Our baseball and softball equipment business has numerous national and international competitors including Rawlings Sporting Goods, Worth Sports, Wilson Sporting Goods, Louisville Slugger and Mizuno Corp. Our ice hockey equipment business competes with Bauer Hockey, Reebok-CCM Hockey and Mission ITECH Hockey. Our cycling helmet, accessories and component business competes with several national and regional competitors including PTI, Trek Bicycle and Specialized Bicycle Components, as well as with several other international companies. Our football equipment business competes with several companies, including Schutt Sports, Douglas Protective Equipment and Rawlings Sporting Goods and our reconditioning business competes with many regional companies. Our uniform and practice wear business also competes with national businesses such as Russell Athletic. In the snow sports helmet market, we compete with several domestic and international brands, including Boeri, Carrera, Leedom, Marker, Pro-Tec, R.E.D., which is owned by The Burton Corporation and Salomon, which is owned by Amer Sports. In the powersports helmet market, we compete against such well-known brands as Arai, Shoei, HJC and KBC.
 
Increased competition in the markets for our products may cause us to reduce our prices to retailers and customers, which could cause our gross margin to decline if we are unable to offset price reductions with comparable reductions in our product costs. If our gross margin declines, our profitability could decline and we


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could incur operating losses that we may be unable to fund or sustain for extended periods of time, if at all. We cannot assure you that additional competitors will not enter our existing markets or that we will be able to compete successfully against existing or new competition.
 
Sales of our products may be adversely affected if we cannot effectively introduce new and innovative products.
 
The historical success of our business has been attributable, in part, to the introduction of products, which are perceived to represent an improvement in performance over products available in the market. Our future success will depend, in part, upon our continued ability to develop and introduce innovative products in the sports equipment and accessories markets in which we compete. Successful product designs can be displaced by other product designs introduced by competitors which shift market preferences in their favor. 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 adversely affect our business.
 
The value of our brand and sales of our products could be diminished if we, the athletes who use our products or the sport categories in which we compete, are associated with negative publicity.
 
Our success depends on the value of our brands. Our brands could be adversely affected if our public image or reputation were to be tarnished by 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 revenues and net income, which could have a material adverse effect on our financial condition and liquidity. Also, union strikes or lock-outs could negatively impact the popularity of a sport, which could have a material adverse effect on our net sales of products used in that sport. Furthermore, negative publicity resulting from severe injuries or death occurring in the sports in which our products are used could negatively affect our reputation and result in restrictions or bans on the use of our products.
 
For example, in the past, in response to injuries or death caused by balls hit off non-wood bats, several state legislatures and other local governing bodies have introduced bills to ban non-wood bats in youth sports. There is one instance in March 2007, where the New York City Council passed a law banning non-wood bats in high school games. In the past, the NCAA has also considered restricting the use of non-wood bats and passed regulations limiting batted ball speed. A successful bill in a state legislature or other local governing bodies or a change in NCAA regulations to restrict or ban the use of non-wood bats could adversely affect our business.
 
The success of our business is dependent on our affiliation with athletes, athletic associations and leagues.
 
We sponsor numerous professional athletes in baseball, cycling, ice hockey, action sports, snow sports and powersports who endorse and use our products, including our Easton branded bats and ice hockey sticks and our Bell and Giro branded helmets. In addition, under our agreement with the NFL, the Riddell name may appear on the front of, and on the chin strap of, all of our football helmets used in NFL play, and no other brand name may appear on a football helmet, face mask or chin strap used in NFL play. Also, our equipment is used by numerous Division I NCAA sports teams. We believe that these relationships increase sales of our products by enhancing the visibility of our brands and related trademarks and exposure of our branded products to other customers and, in certain instances, provide us with a significant competitive advantage. If we were to lose the benefits of these relationships, or if they were to deteriorate in a material way, our business and results of operations, financial condition and cash flow could be adversely affected.


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Sales of our products will be adversely affected if we cannot satisfy the standards established by testing and athletic governing bodies.
 
Our products are designed to satisfy the standards established by a number of regulatory and testing bodies, including the Department of Transportation, the CPSC, NOCSAE and the Snell Memorial Foundation, as well as by athletic organizations and governing bodies, including the NFL, NHL, MLB, NCAA and Little League Baseball and Softball. In addition, conferences within these athletic organizations have their own standards that can be stricter than the standards promulgated by the organizations. 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 a material adverse effect on our business.
 
Our results of operations may suffer if we are not able to adequately forecast demand for our products.
 
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, new product introductions by our competitors and general economic conditions. Inventory levels in excess of consumer demand may result in inventory write-downs, which could significantly harm our operating results. Inventory shortages may result in unfulfilled orders, diminish brand loyalty and result in lost revenues, any of which could harm our business.
 
The loss of one or more key customers could result in a material loss of revenues.
 
Our customers do not have any contractual obligations to purchase our products in the future. For the fiscal year ended December 29, 2007, our top 10 customers collectively accounted for approximately 30.2% of our net sales, and Wal-Mart, our largest customer, accounted for approximately 13.9% of our net sales. We face the risk that one or more of these key customers may not increase their business with us as we expect, may significantly decrease their business with us, may negotiate lower prices or may terminate their relationship with us. The failure to increase our sales to these customers as we anticipate would have a negative impact on our growth prospects and any decrease or loss of these key customers’ business could result in a material decrease in our net sales and net income. In addition, our customers in the retail industry have periodically experienced consolidation, contractions and financial difficulties. If such events happen again, we may experience a loss of customers or the uncollectability of accounts receivable in excess of amounts against which we have reserved.
 
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 suppliers and manufacturers, we may not be able to obtain quality products on a timely basis or in sufficient quantities.
 
We rely on a limited number of suppliers and manufacturers for many of our products and for many of the components in our products. During the fiscal year ended December 29, 2007, approximately 40% of our raw materials were sourced from international suppliers. In addition, a substantial portion of our products are manufactured by third-party manufacturers, and during the fiscal year ended December 29, 2007, approximately 200 international manufacturers produced approximately 88% of our purchased finished goods. We do not generally maintain long-term contracts with our third-party suppliers and manufacturers, and we compete with other businesses for raw materials, production capacity and capacity within applicable import quotas.
 
Should our current third-party manufacturers become incapable of meeting our manufacturing requirements in a timely manner or cease doing business with us for any reason, our business and financial condition could be adversely affected. If we experience significant increased demand, or need to replace an existing manufacturer, there can be no assurance that additional supplies of raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, should we decide to transition


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existing in-house manufacturing to third-party manufacturers, the risk of such a problem could increase. Even if we are able to expand existing or find new manufacturing sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. Any delays, interruption or increased costs in the supply of raw materials or manufacture of our products could have an adverse effect on our ability to meet customer demand for our products and result in lower revenues and net income both in the short and long term.
 
In addition, there can be no assurance that our suppliers and manufacturers will continue to provide raw materials and to manufacture products that are consistent with our standards and that comply with all applicable laws and regulations. We have occasionally received, and may in the future continue to 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 revenues resulting from the inability to sell those products and related increased administrative and shipping costs. 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.
 
The cost of raw materials could affect our operating results.
 
The materials used by us, our suppliers and our manufacturers involve raw materials, including carbon-fiber, aluminum and petroleum-based products. Significant price fluctuations or shortages in petroleum or other raw materials could have a material adverse effect on our cost of goods sold, operations and financial condition.
 
The success of our business is dependent upon our information systems.
 
Our ability to effectively manage and maintain our inventory, process transactions, ship products to our customers on a timely basis and maintain cost-efficient operations is dependent on information technology and on our information systems. We continue to plan for our long-term growth by investing in operations management and infrastructure. We are in the process of implementing SAP’s Enterprise Resource Program (“ERP”), an enterprise-wide software platform encompassing finance, sales and distribution, manufacturing and materials management. Until we have completed the ERP implementation, we will be dependent on multiple platforms. We may experience difficulties in implementing ERP in our business operations or in operating our business under ERP, any of which could disrupt our operations, including our ability to timely ship and track product orders to customers, project inventory requirements, manage our supply chain and otherwise adequately service our customers.
 
If we are unable to enforce and protect our intellectual property rights, our competitive position may be harmed.
 
We rely on a combination of patent and trademark laws to protect certain aspects of our business. However, while we have selectively pursued patent and trademark protection in the United States, Europe, and Canada; in some countries we have not perfected important patent and trademark rights. Our success depends in part on our ability to protect our trademarks and patents from unauthorized use by others. If substantial unauthorized use of our intellectual property rights occurs, we may incur significant financial costs in prosecuting actions for infringement of our rights, as well as the loss of efforts by engineers and managers who must devote attention to these matters. We also cannot be sure that the patents we have obtained, or other protections such as confidentiality, will be adequate to prevent imitation of our products and technology by others. If we fail to obtain worldwide patent and trademark protection or prevent substantial unauthorized use of our technology and trademarked brands, we risk the loss of our intellectual property rights. In addition, our competitors have obtained and may continue to obtain patents on certain features of their products, which may prevent or discourage us from offering such features on our products, and in turn, could result in a competitive disadvantage to us.
 
Our well-established brands and branded products include Easton, Bell, Giro and Riddell. We believe that these trademarked brands are a core asset of our business and are of great value to us. If we lose the use of a product name, our efforts spent building that brand will be lost and we will have to rebuild a brand for that product, which we may or may not be able to do. We also note that following our acquisition of Easton, certain affiliates of one of our Parent’s members, Jas. D. Easton, Inc., will have the right to continue to use the Easton brand name in certain


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product areas. Although we do not compete with these entities in such product areas, we also do not control such entities and therefore can make no assurances as to how they will conduct business under the Easton brand name.
 
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 could result in substantial costs and diversion of resources and could negatively affect our results of operations or competitive position.
 
We are subject to product liability, warranty and recall claims and our insurance coverage may not cover such claims.
 
Our business exposes us to claims for product liability and warranty claims in the event our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in personal injury or death. We have various pending product liability cases against us. We vigorously defend or attempt to settle product liability cases brought against us. However, there is no assurance that we can successfully defend or settle all such cases. We believe that we are not currently subject to any material product liability claims not covered by insurance, although the ultimate outcome of these and future claims cannot presently be determined. Because product liability claims are part of the ordinary course of our business, we maintain product liability insurance, which we believe is adequate. We cannot assure you that this coverage will remain available in the future, that our insurers will be financially viable when payment of a claim is required, that the cost of such insurance will not increase, or that this insurance will ultimately prove to be adequate. 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. Adverse determinations of material product liability and warranty claims made against us could have a material adverse effect on our financial condition and could harm our reputation, reducing the success of our business.
 
In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of that product. If we were to recall one or more of our products, it would be a substantial cost to us and our relationships with our customers could be irreparably harmed and could materially and adversely affect our business.
 
Our international sourcing and sales network subjects us to additional risks and costs, which may differ in each country in which we do business and may cause our profitability to decline.
 
During the fiscal year ended December 29, 2007, we purchased approximately $306.0 million of finished goods and raw materials from international third-party suppliers. A significant amount of these purchases were from vendors in Asia, the majority of which were located in mainland China. Most of what we purchase in Asia is finished goods rather than raw materials. We may decide to increase our international sourcing in the future. In addition, a significant percentage of our sales are to customers outside the United States, including Canada and Europe. Consequently, our business is subject to the risks generally associated with doing business abroad. We cannot predict the effect of various factors in the countries in which we sell our products or where our suppliers are located, including, among others: (i) recessionary 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 transportation delays; (v) work stoppages and labor strikes; (vi) fluctuations in exchange rates; and (vii) political unrest, terrorism and economic instability. If any of these or other factors were to render the conduct of our business in a particular country undesirable or impractical, our business and financial condition could be adversely affected.
 
Our business is also subject to the risks associated with the enactment of additional U.S. or foreign legislation and regulations relating to exports or imports, including quotas, duties, taxes or other charges or restrictions. If imposed, such legislation and regulations could have a material adverse effect on our sales and profitability.
 
We also may be adversely affected by significant fluctuations in the value of the U.S. dollar relative to other currencies. We generally purchase goods made by foreign manufacturers in U.S. dollars, and therefore, changes in the value of the U.S. dollar can have an immediate effect on the cost of our purchases. If we experience increased costs as a result of exchange rate fluctuations and we are unable to increase our prices to a level sufficient to


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compensate for such increased costs, our gross margins could decline, and we could become less price-competitive with companies who manufacture their products in the United States.
 
If we lose key personnel and management, we may not be able to successfully implement our business strategy.
 
The success of our business is dependent upon the management and leadership skills of the members of our senior management team and other key personnel, including certain members of our product development team. Competition for these resources is intense, and we may not be able to attract and retain a sufficient number of qualified personnel in the future. The loss of any such personnel or the inability to attract and retain key personnel could have a material adverse effect on our operations.
 
We may not succeed in integrating an acquisition into our operations, which could have a material adverse effect on our operations, results of operations and financial condition.
 
We may continue to expand our business and operations through strategic acquisitions. The value of our company will be affected by our ability to achieve the benefits expected from any strategic acquisitions we undertake in the future. Achieving these benefits will depend in part upon meeting the challenges inherent in the successful combination of these enterprises. In particular, we may have difficulty and may incur unanticipated expenses related to integrating management and personnel with our management and personnel. Additionally, we may not be able to achieve any anticipated cost savings for many reasons, including an inability to take advantage of expected tax savings. Failure to integrate these acquisitions successfully may have a material adverse effect on our business, results of operations and financial condition.
 
The seasonality of our sales may have an adverse effect on our operations and our ability to service our debt.
 
Our business is subject to seasonal fluctuations. This seasonality requires that we effectively manage our cash flows over the course of the year. If our sales were to fall substantially below what we would normally expect during particular periods, our annual financial results would be adversely impacted and our ability to service our debt may also be adversely affected. In addition, quarterly results may vary from year to year due to the timing of new product introductions, major customer shipments, inventory holdings of significant customers, adverse weather conditions and the sales mix of products sold. Accordingly, comparisons of quarterly information from our results of operations may not be indicative of our ongoing performance.
 
Employment related matters, such as unionization, may affect our profitability.
 
As of December 29, 2007, approximately, 52 of our 2,248 employees were unionized. Although we have positive labor relations with these unionized employees, we have little control over union activities and could face difficulties in the future. Our collective bargaining agreement with a union in York, Pennsylvania expires in December 2009 and our collective bargaining agreement with a union in New Rochelle, New York expires in January 2009. We cannot assure you that we will not experience work stoppages or other labor problems in the future at our unionized and non-union facilities or that we will be able to renew the collective bargaining agreements on similar or more favorable terms.
 
We may be subject to potential environmental liability.
 
We are subject to many federal, state and local requirements relating to the protection of the environment, and we have made and will continue to make expenditures to comply with such requirements. Past and present manufacturing operations subject us to environmental laws that regulate the use, handling and contracting for disposal or recycling of hazardous or toxic substances, the discharge of particles into the air and the discharge of process wastewaters into sewers. We believe that our operations are in compliance with these laws and regulations and we do not believe that future compliance with such laws and regulations will have a material adverse effect on our results of operations, financial condition and cash flow. If environmental laws become more stringent, our capital expenditures and costs for environmental compliance could increase. Under applicable environmental laws


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we may also become liable for the remediation of contaminated properties, including properties currently or previously owned or operated by us and properties where wastes generated by our operations were disposed. Such liability can be imposed regardless of whether we were responsible for creating the contamination. We do not believe that any of our existing remediation obligations, including at third-party sites, will have a material adverse effect on our financial results. However, due to the possibility of unanticipated factual or regulatory developments, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated and could have a material adverse effect on our financial results.
 
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting.
 
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. For example, we identified a material weakness in our internal control over financial reporting during our fiscal 2006 year-end audit. As a result, prior to the issuance of the audited consolidated financial statements included in our Annual Report on Form 10-K for fiscal 2006, we were required to make various balance sheet reclassifications and audit adjustments. We believe that our remedial efforts in fiscal 2007 have cured this material weakness.
 
Any failure to implement and maintain the improvements in the controls over our financial reporting, or difficulties encountered in the implementation of these improvements in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls to address an identified weakness could also cause investors to lose confidence in our reported financial information, which could have a negative impact on our company. There can be no assurance that we will not discover additional weaknesses in our internal control over financial reporting in the future.
 
Item 1B.   Unresolved Staff Comments
 
None.


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Item 2.   Properties
 
As of December 29, 2007 we operated 23 facilities in the United States, three in Canada, one in Mexico, one in Europe and three in Asia. Our corporate headquarters is located in Van Nuys, California. Set forth below is information regarding our principal properties:
 
                         
            Leased
    Owned
 
Location
 
Primary Use
 
Business Segment
  Sq. Ft.     Sq. Ft.  
 
Van Nuys, CA
  Corporate Headquarters and offices   Team and Action Sports     89,000          
Irving, TX
  Offices   Action Sports     27,000          
Chicago, IL
  Offices and Research and Development   Team Sports     21,000          
York, PA
  Warehouse   Action Sports             465,000  
Rantoul, IL
  Offices, Manufacturing and Warehouse   Team and Action Sports     315,000          
Rantoul, IL
  Warehouse   Team and Action Sports     169,000          
Salt Lake City, UT
  Warehouse   Team Sports     142,000          
Elyria, OH
  Offices, Reconditioning and Warehouse   Team Sports     135,000          
Paxton, IL
  Warehouse   Team and Action Sports     120,000          
Van Nuys, CA
  Offices and Manufacturing   Team and Action Sports     110,000          
Montreal, Canada
  Offices, Manufacturing and Warehouse   Team Sports     97,000          
Tijuana, Mexico
  Offices and Manufacturing   Team and Action Sports     65,000          
San Antonio, TX
  Reconditioning   Team Sports     59,000          
Stroudsburg, PA
  Manufacturing and Reconditioning   Team Sports     51,000          
Santa Cruz, CA
  Offices and Research and Development   Action Sports     50,000          
 
In addition to the primary facilities listed above, we operate other offices and facilities around the world totaling approximately 220,000 square feet. We consider each of our facilities to be in good condition and adequate for its present use. We believe that we have sufficient capacity to meet our current and anticipated manufacturing requirements.
 
Item 3.   Legal Proceedings
 
We are subject to various product liability claims and lawsuits brought against us for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured by us and, in certain cases, products manufactured by others. The ultimate outcome of these claims, or potential future claims, cannot presently be determined. Our management has established an accrual based on its best estimate of probable losses and defense costs anticipated to result from such claims, from within a range of potential outcomes, based on available information, including an analysis of historical data such as the rate of occurrence and the settlement amounts of past cases. We maintain primary and excess product liability insurance coverage under policies expiring in January 2009, and additional excess product liability insurance coverage under a policy obtained annually.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None.


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PART II
 
Item 5.   Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
There is no established public trading market for our equity securities.
 
Item 6.   Selected Financial Data
 
Set forth below is our selected historical consolidated financial and other operating data. Certain reclassifications of previously reported financial information were made to conform to the current presentation. Our selected historical consolidated financial data and other data set forth below as of December 29, 2007, December 30, 2006, December 31, 2005, December 31, 2004, December 31, 2003 and June 25, 2003 and for the fiscal years ended December 29, 2007, December 30, 2006, December 31, 2005, December 31, 2004, the period from June 25, 2003 to December 31, 2003 and the period from January 1, 2003 to June 25, 2003, have been derived from our audited consolidated financial statements. The selected historical consolidated financial and other data presented below should be read in conjunction with “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere herein.
 
                                                   
    Successor       Predecessor(1)  
                            Period from
      Period from
 
    Fiscal Year
    Fiscal Year
    Fiscal Year
    Fiscal Year
    June 25,
      January 1,
 
    Ended
    Ended
    Ended
    Ended
    2003 to
      2003 to
 
    December 29,
    December 30,
    December 31,
    December 31,
    December 31,
      June 25,
 
    2007     2006     2005     2004     2003       2003(2)  
    (Dollars in thousands)  
Statement of Operations Data:
                                                 
Net sales
  $ 724,639     $ 638,973     $ 379,855     $ 165,927     $ 53,713       $ 55,032  
Cost of sales(3)
    475,656       426,109       244,916       113,813       33,928         34,340  
                                                   
Gross profit
    248,983       212,864       134,939       52,114       19,785         20,692  
Selling, general and administrative expenses(4)
    170,022       164,243       95,421       50,128       14,972         17,196  
Restructuring and other infrequent expenses
    589       908       1,713                      
Amortization of intangibles
    13,220       12,572       8,515       4,617       1,362          
Gain on sale of property, plant and equipment
    (2,339 )                                
Transaction costs(5)
                                    19,877  
                                                   
Income (loss) from operations
    67,491       35,141       29,290       (2,631 )     3,451         (16,381 )
Interest expense, net
    41,590       42,401       21,887       18,601       4,179         6,270  
                                                   
Income (loss) before taxes
    25,901       (7,260 )     7,403       (21,232 )     (728 )       (22,651 )
Income tax expense (benefit)
    11,432       (1,408 )     4,321       (8,121 )     (100 )       (6,700 )
                                                   
Net income (loss)
  $ 14,469     $ (5,852 )   $ 3,082     $ (13,111 )   $ (628 )     $ (15,951 )
                                                   
Other Financial Data:
                                                 
Capital expenditures
  $ 16,827     $ 12,789     $ 4,999     $ 1,593     $ 728       $ 560  
 
                                                   
    Successor       Predecessor(1)  
    As of
    As of
    As of
    As of
    As of
      As of
 
    December 29,
    December 30,
    December 31,
    December 31,
    December 31,
      June 25,
 
    2007     2006     2005     2004     2003       2003  
    (Dollars in thousands)  
Balance Sheet Data:
                                                 
Cash and cash equivalents
  $ 16,923     $ 9,899     $ 3,632     $ 1,429     $ 3,672       $ 2,397  
Total assets
    956,490       948,060       480,703       470,576       164,916         92,512  
Total debt(6)
    475,641       476,198       248,897       250,098       69,931         60,382  
Total stockholder’s equity
    340,987       318,162       133,934       125,472       69,426         7,493  


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(1) Data as of June 25, 2003 and for the period from January 1, 2003 to June 25, 2003, represent the results of Riddell Sports Group, Inc. (“Riddell”) and its subsidiaries prior to their acquisition by us. Balance sheet data for June 25, 2003 was the closing balance sheet immediately preceding the acquisition of the Riddell business and did not include purchase accounting adjustments relating to the subsequent acquisition.
 
(2) Income statement data for the period of January 1, 2003 to June 25, 2003 includes charges of $4.7 million from the reevaluation of estimates for certain assets and liabilities. Some of these charges included a change in calculation methodology which is inseparable from the change in estimate.
 
(3) Cost of sales included $19.0 million, $14.2 million and $2.2 million of costs resulting from the purchase accounting write-up of inventories to fair value for the periods ended December 30, 2006, December 31, 2004 and 2003, respectively. Expenses of approximately $2.0 million and $1.7 million previously recorded in cost of sales in 2005 and 2004, respectively, have been reclassified to selling, general and administrative expenses to conform to the current year presentation.
 
(4) Selling, general and administrative (“SG&A”) expenses include management expenses in all fiscal years prior to fiscal year 2007.
 
(5) The period ended June 25, 2003 includes $19.9 million of transaction costs related to the sale of the Riddell business.
 
(6) Total debt as of December 31, 2003 and June 25, 2003 includes the current maturities of long-term debt and loans payable under Riddell’s existing revolving credit facility prior to it being refinanced in connection with the acquisition of Bell Sports Corp. (“Bell”) and put warrants which were exercised during 2003. Total debt as of December 31, 2005 and December 31, 2004 includes long-term debt payable under our then existing senior secured credit facility prior to it being refinanced in connection with the acquisition of Easton.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data,” as well as the consolidated financial statements and notes included elsewhere in this annual report.
 
Uncertainty of Forward-Looking Statements and Information
 
This annual report includes forward-looking statements. All statements other than statements of historical fact included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements give our current expectations and projections relating to the financial condition, results of operations, plans, objectives, future performance and business of our company. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. Many factors mentioned in our discussion in this annual report, including the risks outlined under “Item 1A — Risk Factors,” will be important in determining future results.
 
These forward-looking statements are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that the events, results or trends identified in these forward-looking statements will occur or be achieved. Investors should not place undue reliance on any of our forward-looking statements because they are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Furthermore, any forward-looking statement speaks only as of the date on which it is made and except as required by law we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.


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Overview
 
We are a leading designer, developer and marketer of innovative sports equipment, protective products and related accessories under authentic brands. We offer products that are used in baseball, softball, ice hockey, football, lacrosse and other team sports and in various action sports, including cycling, snow sports, powersports and skateboarding. We currently sell a broad range of products primarily under four brands — Easton (baseball, softball, ice hockey and cycling equipment), Bell (cycling and action sports helmets and accessories), Giro (cycling and snow sports helmets and accessories) and Riddell (football and baseball equipment and reconditioning services). Together, these brands represent the vast majority of our sales.
 
On March 16, 2006, we acquired 100% of the outstanding capital stock of Easton. The purchase price was funded in part by an equity investment in our parent company, Easton-Bell Sports, LLC, proceeds from a new senior secured credit facility entered into in connection with the Easton acquisition and existing cash. Easton’s results of operations are included in our results of operations from March 16, 2006. See Note 2 to our Consolidated Financial Statements herein for further details on the Easton acquisition.
 
For the period ended December 29, 2007, we had two reportable segments: Team Sports and Action Sports. Our Team Sports segment primarily consists of football, baseball, softball, ice hockey and other team sports products and reconditioning services related to certain of these products. Our Action Sports segment, formerly known as Individual Sports, primarily consists of helmets, equipment, components and accessories for cycling, snow sports and powersports and fitness related products.
 
How We Assess the Performance of Our Business
 
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales growth by segment, gross profit and selling, general and administrative expenses.
 
Net Sales
 
Net sales reflect our revenues from the sale of our products and services less returns, discounts and allowances. It also includes licensing income that we collect. The majority of Easton’s activity and all of Riddell’s activity is reflected in our Team Sports segment, which primarily consists of football, baseball, softball, ice hockey and other team sports products and reconditioning services related to certain of these products. All of Bell’s activity and Easton’s cycling activity is reflected in our Action Sports segment, which primarily consists of helmets, equipment, components and accessories for cycling, snow sports and powersports and fitness related products.
 
Cost of Sales
 
Cost of sales includes the direct cost of purchased merchandise, inbound freight, factory operating costs, distribution and all shipping expenses. Cost of sales generally changes as we incur higher or lower costs from our vendors, experience better or worse productivity in our factories and increase or decrease inventory levels as certain fixed overhead is included in inventory. A shift in the composition of our revenues can also result in higher or lower cost of sales as our gross profit margins differ by product. We review our inventory levels on an ongoing basis to identify slow-moving materials and products and generally reserve for excess and obsolete inventory. If we misjudge the market for our products, we may be faced with significant excess inventory and need to allow for higher charges for excess and obsolete inventory. Such charges have reduced our gross profit in some prior periods and may have a material adverse impact depending on the amount of the charge.
 
Gross Profit
 
Gross profit is equal to our net sales minus our cost of sales. Gross profit margin measures gross profit as a percentage of our net sales. Our gross profit may not be comparable to other sporting goods companies, as we include all or a portion of costs related to freight, in cost of sales. In addition, we state inventories at the lower of cost (determined on a first-in, first-out basis) or market and include material, labor and factory overhead costs, whereas other companies may state inventories on a last-in, first-out basis.


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Selling, General and Administrative Expenses
 
Selling, general and administrative (“SG&A”) expenses include all operating expenses not included in cost of sales, primarily, selling, marketing, administrative payroll, research and development, insurance and non-manufacturing lease expense, as well as certain depreciation and amortization. Other than selling expenses, these expenses generally do not vary proportionally with net sales. As a result, SG&A expenses as a percentage of net sales are usually higher in the winter season than the summer season due to the seasonality of net sales.
 
Results of Operations
 
For purposes of the foregoing discussion, we refer to the fiscal year ended December 29, 2007 as “2007”, the fiscal year ended December 30, 2006 as “2006” and the fiscal year ended December 31, 2005 as “2005”. Our results of operations for the fiscal year ended December 30, 2006, include the results of Easton from March 16, 2006. Also set forth below are the percentage relationships to net sales of certain items included in our consolidated statements of operations.
 
                                                 
    Year Ended
          Year Ended
          Year Ended
       
    December 29,
    % of Net
    December 30,
    % of Net
    December 31,
    % of Net
 
    2007     Sales     2006     Sales     2005     Sales  
    (Dollars in thousands)  
 
Net sales
  $ 724,639       100.0 %   $ 638,973       100.0 %   $ 379,855       100.0 %
Cost of sales
    475,656       65.6       426,109       66.7       244,916       64.5  
                                                 
Gross profit
    248,983       34.4       212,864       33.3       134,939       35.5  
Selling, general and administrative expenses
    170,022       23.5       155,993       24.4       92,421       24.3  
Management expenses
                8,250       1.3       3,000       0.8  
Restructuring and other infrequent expenses
    589       0.1       908       0.1       1,713       0.4  
Amortization of intangibles
    13,220       1.8       12,572       2.0       8,515       2.2  
Gain on the sale of property, plant and equipment
    (2,339 )     (0.3 )                        
                                                 
Income from operations
    67,491       9.3       35,141       5.5       29,290       7.8  
Interest expense, net
    41,590       5.7       42,401       6.6       21,887       5.8  
                                                 
Income (loss) before income taxes
    25,901       3.6       (7,260 )     (1.1 )     7,403       2.0  
Income tax expense (benefit)
    11,432       1.6       (1,408 )     0.2       4,321       1.1  
                                                 
Net income (loss)
    14,469       2.0       (5,852 )     (0.9 )     3,082       0.9  
Other comprehensive income (loss):
                                               
Foreign currency translation adjustment
    5,511       0.8       (126 )           158        
                                                 
Comprehensive income (loss)
  $ 19,980       2.8 %   $ (5,978 )     (0.9 )%   $ 3,240       0.9 %
                                                 
 
2007 compared to 2006
 
Net income for 2007 was $14.5 million, as compared to a $(5.9) million loss for 2006. Our results for 2007 include the following items:
 
  •  expenses of $3.0 million related to severing executives and reorganizing the Company;
 
  •  research and development expenses of $12.6 million;
 
  •  foreign currency transaction gains of $1.7 million;
 
  •  provision for excess and obsolete inventory write-offs of $5.0 million;
 
  •  product liability settlement and litigation expenses of $6.8 million;


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  •  gain on sale of property, plant and equipment of $2.3 million;
 
  •  interest expense (net) of $41.6 million;
 
  •  equity compensation expense of $2.8 million;
 
  •  income tax expense of $11.4 million;
 
  •  consulting fees related to the Sarbanes-Oxley compliance program of $3.2 million; and
 
  •  restructuring and other infrequent expenses of $0.6 million, primarily related to the closure of our Van Nuys, California manufacturing facility
 
Our results for 2006 included the following items:
 
  •  amortization of $19.0 million of purchase price write-up of inventory to fair market value in relation to the Easton acquisition, which was charged to cost of sales;
 
  •  settlement of lawsuits, which resulted in $8.1 million of expense;
 
  •  expenses of $7.5 million related to severing executives and reorganizing the combined company;
 
  •  equity compensation expense of $3.1 million, comprised of $0.8 million related to the redemption of vested units under the 2003 Equity Plan and $2.3 million related to the 2006 Equity Plan;
 
  •  consulting fees related to the Sarbanes-Oxley compliance program of $0.8 million;
 
  •  management expenses of $8.3 million, which reflect a $7.5 million payment to satisfy our contractual obligations to pay future management expenses;
 
  •  restructuring and other infrequent expenses of $0.9 million, primarily related to the closure of our Chicago, Illinois manufacturing facility;
 
  •  an increase in amortization of intangible assets of $4.1 million related to the Easton acquisition; and
 
  •  interest expense (net) of $42.4 million related to higher debt levels in 2006 as a result of the Easton acquisition.
 
Net Sales
 
Net sales for 2007 were $724.6 million, as compared to $639.0 million in 2006. The increase is primarily attributable to the inclusion of Easton for a full fiscal year during 2007, as compared to 2006, which only included such business from the date of acquisition on March 16, 2006. The following table sets forth, for the periods indicated, the impact to net sales related primarily to the Easton and Cyclo/Shanghai Cyclo acquisitions and the results for each of our segments:
 
                                                 
                      Change Due to
 
                Change     Acquisitions  
    2007     2006     $     %     $     %  
    (Dollars in millions)  
 
Team Sports
  $ 416.5     $ 347.8     $ 68.7       19.8 %   $ 62.9       18.1 %
Action Sports
    308.1       291.2       16.9       5.8 %     5.4       1.9 %
                                                 
    $ 724.6     $ 639.0     $ 85.6       13.4 %   $ 68.3       10.7 %
                                                 
 
During 2007, an additional $67.9 million and $0.4 million in net sales were attributable to the Easton and Cyclo/Shanghai Cyclo acquisitions, respectively, with $62.9 million attributable to Team Sports and $5.4 million attributable to Action Sports. Team Sports net sales increased $68.7 million, or 19.8%, as compared to 2006. In addition to the acquisition of Easton, other factors contributing to the increase in Team Sports net sales included increased football shoulder pad and apparel sales and reconditioning services. Action Sports net sales increased $16.9 million, or 5.8%, when compared to 2006. The increase resulted from the inclusion of a full fiscal year of Easton’s cycling business and the acquisition of Cyclo/Shanghai Cyclo, growth in sales of cycling helmets and


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specialty channel accessories and the introduction of Giro branded eyewear, all of which were partially offset by a mild decrease in sales of snow helmets.
 
The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in our consolidated statements of operations:
 
                                         
    2007     2006        
          % of
          % of
    Change Due to
 
    $     Net Sales     $     Net Sales     Acquisitions  
    (Dollars in millions)  
 
Net sales
  $ 724.6       100.0 %   $ 639.0       100.0 %   $ 68.3  
Cost of sales
    475.7       65.6 %     426.1       66.7 %     27.0  
                                         
Gross profit
    248.9       34.4 %     212.9       33.3 %     41.3  
Selling, general and administrative expenses
    170.0       23.5 %     156.0       24.4 %     10.5  
Management expenses
                8.3       1.3 %      
Restructuring and other infrequent expenses
    0.6       0.1 %     0.9       0.1 %      
Amortization of intangibles
    13.2       1.8 %     12.6       2.0 %     0.6  
Gain on sale of property, plant and equipment
    (2.3 )     (0.3 )%                 (0.5 )
                                         
Income from operations
  $ 67.4       9.3 %   $ 35.1       5.5 %   $ 30.7  
                                         
 
Cost of Sales
 
For 2007, cost of sales was $475.7 million, or 65.6% of net sales, as compared to $426.1 million, or 66.7% of net sales for 2006. The decrease in cost of sales as a percentage of sales is primarily attributable to the cost savings realized from transitioning the manufacturing of certain aluminum products to Asia from the United States, foreign currency gains in our international operations and the impact in 2006 of expensing the purchase accounting inventory write up associated with the Easton acquisition of $19.0 million, partially offset by sales mix changes and increased distribution costs, freight costs and inventory write-offs. Team Sports cost of sales was $256.7 million, or 61.6% of net sales, as compared to $228.3 million, or 65.6% of net sales for 2006. The decrease in Team Sports cost of sales as a percentage of net sales is primarily attributable to the cost savings realized from transitioning the manufacturing of certain aluminum products to Asia from the United States, foreign currency gains in our international operations and the impact in 2006 of expensing the purchase accounting inventory write up associated with the Easton acquisition, partially offset by increased distribution costs, freight costs and inventory write-offs. Action Sports cost of sales was $219.0 million, or 71.1% of net sales, as compared to $197.8 million, or 67.9% of net sales in 2006. The increase in Action Sports cost of sales as a percentage of net sales is due to sales mix changes, the inclusion of a full first quarter of the Easton cycling business and increased distribution costs, product costs, freight costs and inventory write-offs.
 
Gross Profit
 
For 2007, gross profit was $248.9 million, or 34.4% of net sales, as compared to $212.9 million, or 33.3% of net sales for 2006. The increase in gross profit as a percentage of net sales is primarily attributable to the cost savings realized from transitioning the manufacturing of certain aluminum products to Asia from the United States, foreign currency gains in our international operations and the impact in 2006 of expensing the purchase accounting inventory write-up associated with the Easton acquisition, partially offset by sales mix changes and increased distribution costs, freight costs and inventory write-offs. Team Sports gross profit percentage was 38.4% of net sales, an increase of 3.9 percentage points, as compared to 2006. The increase in Team Sports gross profit as a percentage of net sales is primarily attributable to the cost savings realized from transitioning the manufacturing of certain aluminum products to Asia from the United States, foreign currency gains in our international operations and the impact in 2006 of expensing the purchase accounting inventory write up associated with the Easton acquisition, partially offset by increased distribution costs, freight costs and inventory write-offs. Action Sports


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gross profit percentage was 28.9% of net sales, a decrease of 3.1 percentage points, as compared to 2006, primarily due to a change in sales mix and increased distribution costs, product costs, freight costs and inventory write-offs.
 
Selling, General and Administrative Expenses
 
During 2007, SG&A expenses increased $14.0 million or 9.0%, as compared to 2006. The increase is primarily attributable to the inclusion of a full fiscal year of Easton’s business during 2007, as compared to 2006, which only included such business from the date of acquisition on March 16, 2006. Other factors contributing to the increase are expenses related to marketing, R&D, product liability settlement and litigation, information technology and Sarbanes-Oxley compliance, partially offset by lower compensation expenses.
 
Management Expenses
 
Management expenses decreased $8.3 million for 2007, as compared to 2006, due to the cancellation of the obligation to pay annual management fees to Fenway Partners, LLC at the time of the Easton acquisition.
 
Restructuring and Other Infrequent Expenses
 
Restructuring and other infrequent expenses decreased $0.3 million for 2007, as compared to 2006. Restructuring expenses were $0.6 million and $0.9 million for 2007 and 2006, respectively. The 2007 expenses related to the closure of the Van Nuys facility and the 2006 expenses reflect the impact of facility closure costs associated with our manufacturing facility previously located in Chicago, Illinois. See “Restructuring and Other Infrequent Expenses” for additional information.
 
Amortization of Intangibles
 
Amortization of intangibles increased $0.6 million to $13.2 million in 2007 from $12.6 million in 2006 as a result of a full year of amortization in 2007 relating to intangible assets acquired in the Easton acquisition.
 
Gain on Sale of Property, Plant and Equipment
 
The sale of land and building located in Chicago, Illinois in May 2007 and the sale of machinery located in Van Nuys, California in September 2007 resulted in gains on the sales of $1.8 million and $0.5 million, respectively. The sales were related to the restructurings described in “Restructuring and Other Infrequent Expenses”.
 
Interest Expense, Net
 
Net interest expense decreased $0.8 million to $41.6 million for 2007 from $42.4 million in 2006. The decrease was due to 2006 reflecting the expensing of $1.6 million of debt acquisition costs upon extinguishment of certain debt and lower borrowing rates in 2007, offset partially by a full year of interest expense related to the senior credit facility entered into in conjunction with the Easton acquisition.
 
Income Tax Expense (Benefit)
 
We recorded an income tax expense of $11.4 million in 2007, an effective tax rate of 44.1%, as compared to an income tax benefit of $1.4 million in 2006, an effective tax rate of 19.4%. The change in the effective tax rate is primarily attributable to the change from a domestic loss to domestic income.
 
2006 compared to 2005
 
Net (loss) income for 2006 was $(5.9) million, as compared to $3.1 million for 2005. Our results for 2006 include the following items:
 
  •  amortization of $19.0 million of purchase price write-up of inventory to fair market value in relation to the Easton acquisition, which was charged to cost of sales;
 
  •  settlement of lawsuits, which resulted in $8.1 million of expense;


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  •  expenses of $7.5 million related to severing executives and reorganizing the combined company;
 
  •  equity compensation expense of $3.1 million, comprised of $0.8 million related to the redemption of vested units under the 2003 Equity Plan and $2.3 million related to the new 2006 Equity Plan;
 
  •  consulting fees related to the Sarbanes-Oxley compliance program of $0.8 million;
 
  •  management expenses of $8.3 million, which reflect a $7.5 million payment to satisfy our contractual obligations to pay future management expenses;
 
  •  restructuring and other infrequent expenses of $0.9 million, primarily related to the closure of our Chicago, Illinois manufacturing facility;
 
  •  an increase in amortization of intangible assets of $4.1 million related to the Easton acquisition; and
 
  •  increased interest expense of $20.5 million related to higher debt levels in 2006 as a result of the Easton acquisition.
 
Our results for 2005 included the following items:
 
  •  equity compensation expense of $4.6 million, primarily related to the vesting of Class B Common Units of our Parent awarded to certain members of our management and directors;
 
  •  restructuring and other infrequent expenses of $1.7 million, primarily related to the closure of our Chicago, Illinois manufacturing facility, as well as other cost reduction activities to reduce our overall cost structure;
 
  •  an increase in amortization of intangible assets of $3.9 million related to amortizing a full year of the Bell intangible assets; and
 
  •  increased interest expense of $3.3 million related to higher debt levels in 2005 as a result of the Bell acquisition.
 
Net Sales
 
Net sales for 2006 were $639.0 million, as compared to $379.9 million in 2005. The increase was primarily attributable to the inclusion of Easton from the date of acquisition on March 16, 2006. The following table sets forth, for the periods indicated, the impact to net sales related to the Easton and Cyclo Manufacturing acquisitions and the results for each of our segments:
 
                                                 
                      Change Due to
 
                Change     Acquisitions  
    2006     2005     $     %     $     %  
    (Dollars in millions)  
 
Team Sports
  $ 347.8     $ 132.8     $ 215.0       161.9 %   $ 198.5       149.5 %
Action Sports
    291.2       247.1       44.1       17.8 %     22.0       8.9 %
                                                 
    $ 639.0     $ 379.9     $ 259.1       68.2 %   $ 220.5       58.0 %
                                                 
 
Net sales of the Team Sports segment for 2006 increased $215.0 million or 161.9% over the net sales for 2005, with $198.5 million of the growth attributable to the Easton acquisition. Growth related to football helmets, shoulder pads, apparel, reconditioning services and collectible products was $16.5 million. Net sales of the Action Sports segment increased $44.1 million or 17.8% in 2006, as compared to 2005, with $22.0 million of the growth attributable to the Easton acquisition. Growth related to cycling helmets and accessories and snow helmets was $22.1 million.


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The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in our consolidated statements of operations:
 
                                         
    2006     2005        
          % of
          % of
    Change Due to
 
    $     Net Sales     $     Net Sales     Acquisitions  
    (Dollars in millions)  
 
Gross profit
  $ 212.9       33.3 %   $ 134.9       35.5 %   $ 58.6  
Selling, general and administrative expenses
    164.3       25.7 %     95.4       25.1 %     40.0  
Restructuring and other infrequent expenses
    0.9       0.1 %     1.7       0.4 %      
Amortization of intangibles
    12.6       2.0 %     8.5       2.2 %     4.1  
                                         
Income from operations
  $ 35.1       5.5 %   $ 29.3       7.8 %   $ 14.5  
                                         
 
Cost of Sales
 
For 2006, cost of sales was $426.1 million, or 66.7% of net sales, as compared to $244.9 million or 64.5% of net sales for 2005. The higher cost of sales was primarily attributable to the Easton acquisition and the resulting amortization of $19.0 million of purchase accounting write-up of inventory to fair market value, which was charged to cost of sales.
 
Gross Profit
 
For 2006, gross profit was $212.9 million, or 33.3% of net sales, as compared to $134.9 million or 35.5% of net sales for 2005. The lower gross margin was primarily attributable to the Easton acquisition and the resulting amortization of $19.0 million of purchase accounting write-up of inventory to fair market value, which was charged to cost of sales. In addition, the benefit of new product introductions, sales growth in products with higher gross margins and cost reduction efforts more than offset commodity cost increases.
 
Selling, General and Administrative Expenses
 
SG&A expenses increased $68.9 million in 2006, as compared to 2005. The primary increase was due to the Easton acquisition. SG&A expenses in 2006 also reflect $8.1 million for the settlement of several lawsuits relating to product liability and lawsuits concerning the alleged infringement of a cycling helmet patent in France. Management expenses reflect a payment of $7.5 million in 2006 to satisfy our contractual obligations to pay future management expenses and we incurred $7.5 million of expenses in 2006 to sever senior level executives. Equity compensation for 2006 decreased $1.5 million, as compared to 2005, attributable to a new equity incentive program introduced by our Parent in conjunction with the Easton acquisition. Lastly, we incurred $0.8 million of expenses in relation to our Sarbanes-Oxley compliance program.
 
Restructuring and Other Infrequent Expenses
 
During 2006, we incurred approximately $0.9 million in expenses related to our plans for operational changes and initiatives to improve manufacturing efficiencies. See “Restructuring and Other Infrequent Expenses” for additional information.
 
Amortization of Intangibles
 
Amortization of intangibles increased $4.1 million to $12.6 million in 2006 from $8.5 million in 2005 as a result of amortization on intangible assets acquired in the Easton acquisition.
 
Interest Expense, Net
 
Net interest expense increased $20.5 million to $42.4 million for 2006 from $21.9 million in 2005. The increase was primarily due to increased debt related to the Easton acquisition, which included interest on (i) our


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term loan of $335.0 million; and (ii) our $70.0 million U.S revolving credit facility and Cdn $12.0 million Canadian revolving credit facility.
 
Income Tax (Benefit) Expense
 
We recorded an income tax benefit of $1.4 million in 2006, an effective tax rate of 19.4%, as compared to an income tax expense of $4.3 million in 2005, an effective tax rate of 58.4%. The effective tax rate in 2005 was negatively impacted by the non-deductible nature of our stock option program.
 
Restructuring and Other Infrequent Expenses
 
In connection with our acquisition of Easton, a restructuring plan was initiated to implement actions to reduce the overall cost structure and to drive sustainable improvements in operating and financial performance. As part of the restructuring plan, we commenced the closure of our manufacturing facility in Van Nuys, California. Substantially all manufacturing at this location, which relates to our Team Sports segment, ceased during the second fiscal quarter of 2007. While some of the machinery was transferred to other locations, most of the machinery was sold in September 2007 and a gain on the sale of $0.5 million was realized.
 
The following table summarizes the components of the restructuring accrual initiated in 2006 and accounted for under Emerging Issues Task Force (EITF) No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”:
 
                         
          Facility
       
    Employee
    Closure
       
    Severance     Costs     Total  
    (Dollars in thousands)  
 
Balance as of December 31, 2005
  $     $     $  
Provision
    2,100       2,238       4,338  
Less: Cash Activity
    (210 )           (210 )
                         
Balance as of December 30, 2006
    1,890       2,238       4,128  
Provision
          487       487  
Less: Cash Activity
    (1,694 )     (2,355 )     (4,049 )
                         
Balance as of December 29, 2007
  $ 196     $ 370     $ 566  
                         
 
The accrual of $4.1 million as of December 30, 2006 was included as part of the purchase accounting related to the Easton acquisition, with an additional $0.5 million provision recorded in 2007 for facility closure costs. The employee severance costs were accrued per the Company’s policy and relate to the termination of approximately 215 employees. As of December 29, 2007, approximately 200 employees had been terminated. The $0.6 million of restructuring costs accrued as of December 29, 2007 are expected to be paid in 2008.
 
During 2005, we announced and initiated a restructuring plan associated with management’s decision to implement actions to reduce its overall cost structure and to drive sustainable improvements in operating and financial performance. As part of the restructuring plan, we commenced the consolidation and integration of several facilities and announced the closure of our manufacturing operations in Chicago, Illinois, which relates to our Team Sports segment. Substantially all manufacturing at the Chicago, Illinois location ceased during 2005. We outsourced manufacturing of some of our parts and components previously produced at the Chicago, Illinois facility to outside vendors and transferred critical key assembly and distribution operations to existing facilities in Elyria, Ohio and Rantoul, Illinois. As disclosed in our 2006 Form 10-K, the restructuring accrual related to our Chicago, Illinois operations was utilized in 2006. The Chicago, Illinois facility, consisting of land and building was sold in May 2007 and a gain on the sale of $1.8 million was recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss).


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Quarterly Results
 
The following table presents unaudited interim operating results. We believe that the following information includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our results of operations for the periods presented. Each quarter is comprised of 13 weeks and in 2007, the quarters ended were March 31, June 30, September 29 and December 29, 2007. The operating results for any period are not necessarily indicative of results for any future period.
 
During the fourth quarter of 2006, we made final purchase accounting adjustments with respect to the Easton acquisition. It was determined that the inventory write-up recorded initially in purchase accounting at the date of acquisition and charged to cost of sales during the first three quarters of the year had been understated by $5.1 million. We corrected this during the fourth quarter of 2006 and charged the additional inventory write-up of $5.1 million to cost of sales. In the Company’s Form 10-Q filings for the second and third fiscal quarters of 2007, the amounts for 2006 were restated and disclosed in the notes to the financial statements. The amounts previously reported for gross profit and (loss) income from operations for the second and third quarters of 2006 have been restated by $2.6 million and $2.5 million, respectively, to reflect the effect of the additional inventory write-up on the cost of sales for these quarters. The net (loss) income for the second and third quarters of 2006 have also been restated by $1.3 million and $0.8 million, respectively, after giving effect to income tax expense.
 
                                 
    For the Following Quarterly Periods  
    First     Second     Third     Fourth  
    (Dollars in thousands)
 
    (Unaudited)  
 
2007:
                               
Net sales
  $ 174,634     $ 206,370     $ 188,565     $ 155,070  
Gross profit
    58,513       76,384       65,348       48,738  
Income from operations
    13,073       29,689       22,620       2,109  
Net income (loss)
    1,279       12,061       6,845       (5,716 )
2006:
                               
Net sales
  $ 111,172     $ 198,275     $ 186,485     $ 143,041  
Gross profit
    36,865       59,917       65,933       50,149  
(Loss) income from operations
    (1,242 )     15,436       19,526       1,421  
Net (loss) income
    (7,744 )     4,220       3,705       (6,033 )
 
Liquidity and Capital Resources
 
The cash generated from operating activities and availability under our senior secured credit facility are our principal sources of liquidity. Each are described below. Based on our current level of operations and anticipated cost savings and operational improvements, we believe our cash flow from operations, available cash and available borrowings under our senior secured credit facility will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule, that future borrowings will be available to us under our senior secured credit facility in an amount sufficient to enable us to repay our indebtedness, including our senior subordinated notes, or to fund other liquidity needs. As a result, we may have to request relief from our lenders on occasion with respect to financial covenant compliance. While we do not currently anticipate asking for any relief, it is possible that we would require relief in the future.
 
Senior Secured Credit Facilities
 
Existing Senior Secured Credit Facility
 
In connection with our acquisition of Easton, we, together with RBG and certain of our domestic and Canadian subsidiaries, entered into a senior secured credit facility with Wachovia Bank, National Association, as the administrative agent, and a syndicate of lenders. This new senior secured credit facility provides for a $335.0 million term loan facility, a $70.0 million U.S. revolving credit facility and a Cdn $12.0 million Canadian revolving credit


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facility. All three facilities are scheduled to mature in March 2012. As of December 29, 2007, we had $330.0 million outstanding under our term loan facility, $5.5 million outstanding under our U.S. revolving credit facility and we had availability to borrow an additional $61.8 million and Cdn $12.0 million under the U.S. revolving credit facility and Canadian revolving credit facility, respectively. In addition, at December 29, 2007, outstanding letters of credit issued under the revolving credit facility totaled $2.7 million.
 
The interest rates per annum applicable to the loans under our senior secured credit facility, other than swingline loans, equal an applicable margin percentage plus, at our option, (1) in the case of U.S. dollar denominated loans, a U.S. base rate or a London Interbank Offered Rate (“LIBOR”) and (2) in the case of Canadian dollar denominated loans, a Canadian base rate or a Canadian bankers’ acceptance rate. Swingline loans bear interest at the U.S. base rate for U.S. dollar denominated loans and the Canadian base rate for Canadian dollar denominated loans. The applicable margin percentage for the term loan was initially 1.75% for the LIBOR rate and 0.75% for the U.S. base rate, which is subject to adjustment to 1.50% for the LIBOR rate and 0.50% for the U.S. base rate based upon the Company’s leverage ratio as calculated under the credit agreement. The applicable margin percentage for the revolving loan facilities were initially 2.00% for the LIBOR rate or Canadian bankers’ acceptance rate and 1.00% for the Canadian base rate. The applicable margin percentage for the revolving loan facilities varies between 2.25% and 1.50% for the LIBOR rate or Canadian bankers’ acceptance rate, or between 1.25% and 0.50% for the U.S. and Canadian base rates, based upon the Company’s leverage ratio as calculated under the credit agreement.
 
Under our senior secured credit facility, RBG and certain of our domestic subsidiaries have guaranteed all of our obligations (both U.S. and Canadian), and we and certain of our Canadian subsidiaries have guaranteed the obligations under the Canadian portion of our revolving credit facility. Additionally, we and our subsidiaries have granted security with respect to substantially all of our real and personal property as collateral for our U.S. and Canadian obligations (and related guarantees) under our senior secured credit facility. Furthermore, certain of our domestic subsidiaries and certain of our other Canadian subsidiaries have granted security with respect to substantially all of their real and personal property as collateral for the obligations (and related guarantees) under our Canadian revolving credit facility (and in the case of our domestic subsidiaries, the obligations (and related guarantees) under our senior secured credit facility generally).
 
Our senior secured credit facility imposes limitations on our ability and the ability of our subsidiaries to incur, assume or permit to exist additional indebtedness, create or permit liens on their assets, make investments and loans, engage in certain mergers or other fundamental changes, dispose of assets, make distributions or pay dividends or repurchase stock, prepay subordinated debt, enter into transactions with affiliates, engage in sale-leaseback transactions and make capital expenditures. In addition, our senior secured credit facility requires us to comply on a quarterly and annual basis with certain financial covenants, including a maximum total leverage ratio test, a minimum interest coverage ratio test and an annual maximum capital expenditure limit. As of December 29, 2007, the Company was in compliance with all of its covenants.
 
Our senior secured credit facility contains events of default customary for such financings, including but not limited to nonpayment of principal, interest, fees or other amounts when due; violation of covenants; failure of any representation or warranty to be true in all material respects when made or deemed made; cross default and cross acceleration to certain indebtedness; certain ERISA events; change of control; dissolution, insolvency and bankruptcy events; material judgments; and actual or asserted invalidity of the guarantees or security documents. Some of these events of default allow for grace periods and materiality concepts.
 
Senior Subordinated Notes
 
In September 2004, in connection with the acquisition of Bell, we issued $140.0 million of 8.375% senior subordinated notes due 2012 (the “Notes”). The Notes are general unsecured obligations and are subordinated in right of payment to all existing or future senior indebtedness. Interest is payable on the Notes semi-annually on April 1 and October 1 of each year. Beginning October 1, 2008, we may redeem the Notes, in whole or in part, initially at 104.188% of their principal amount, plus accrued interest, declining to 100% of their principal amount, plus accrued interest, at any time on or after October 1, 2010. In addition, before October 1, 2008, we may redeem


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the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus accrued interest and a make-whole premium.
 
The indenture governing the Notes contains certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and engage in certain other activities. The Notes are guaranteed by all of our domestic subsidiaries.
 
Other Matters
 
Operating activities provided $16.3 million of cash for the year ended December 29, 2007, as compared to $23.6 million of cash provided in the year ended December 30, 2006. The decrease in cash provided by operating activities reflects our working capital needs. We had $262.8 million in working capital at December 29, 2007, as compared to $225.0 million at December 30, 2006. Accounts receivable and inventories, combined, were $18.6 million higher than at December 30, 2006.
 
The Team Sports business is seasonal and driven primarily by baseball and softball, football and ice hockey buying patterns. Sales of baseball and softball products and accessories occur primarily during the warm weather months. Sales of football helmets, shoulder pads and reconditioning services are driven primarily by football buying patterns, where orders begin at the end of the school football season (December) and run through to the start of the next season (August). Shipments of football products and performance of reconditioning services reach a low point during the football season. Sales of ice hockey equipment are driven primarily by hockey buying patterns with orders shipping in late spring for fall play.
 
Working capital typically experiences a buildup in the first half of the year as Team Sports seeks to balance its manufacturing and reconditioning facilities, and therefore, increases inventory. This pattern is magnified by the preference of many school districts to pay for items in the budget year in which they will be used. As July 1st often marks the start of the budget year for these customers, receivable balances generated during the first half of the year are historically reduced as collections are made in the second half of the year.
 
The Action Sports business is also seasonal and driven primarily by the warm weather months conducive to cycling. As such, Action Sports sales are lowest during the fourth calendar quarter. The seasonal impacts have been mitigated slightly by the rise in snow sports sales which are sold primarily during the last two quarters of the year.
 
Action Sports typically experiences an increase in working capital in the first two fiscal quarters of the year as it builds inventory for late spring and summer selling seasons and ships preseason cycling helmet and accessory orders. Working capital decreases in the third and fourth fiscal quarters as inventories are reduced through the summer selling season and accounts receivable are collected.
 
Capital expenditures for 2007 were $16.8 million, as compared to $12.8 million in 2006. We are in the process of implementing SAP’s ERP, an enterprise-wide software platform encompassing finance, sales and distribution, manufacturing and materials management. This program will ultimately replace the various software platforms used in our business operations, many of which are legacy platforms used by our predecessor companies. We employ an implementation team of specialists and expect to complete our phased roll-out of ERP across all of our businesses in 2009. We estimate the aggregate cost of implementation to be approximately $17.0 million. Through December 29, 2007, expenditures associated with this roll-out were approximately $11.4 million. For the fiscal year of 2007, we capitalized interest related to the project of $0.2 million.
 
Our debt to capitalization ratio, which is total debt divided by the sum of total debt and stockholder’s equity, was 58.2% at December 29, 2007, as compared to 59.6% at December 30, 2006. The decrease was primarily attributable to the decrease in debt and the increase in shareholder’s equity as a result of the net income for 2007.
 
From time to time, we review acquisition opportunities as well as changes in the capital markets. If we were to consummate a significant acquisition or elect to take advantage of favorable opportunities in the capital markets, we may supplement availability or revise the terms under our senior secured credit facility or complete public or private offerings of debt securities.


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Outlook
 
Although other factors will likely impact us, including some we do not foresee, we believe our performance for 2008 will be affected by the following:
 
  •  Retail Market Conditions.  As a result of the slowing U.S. economic conditions, the retail market for sports equipment has slowed and is extremely competitive, with strong pressure from retailers for lower prices. However, despite these trends, our focus on innovation and providing the “best in class” products has been a proven recipe during strong economic times and one that we are confident will be successful, albeit at a slower pace, during “softer” economic times.
 
  •  Introduction of New Products.  In 2008, we expect to introduce several new products that capitalize on the strength of our brands. Those introductions include a new line of snow goggles and cycling sunglasses under the Giro brand and an expanded line of premium composite and aluminum bats and composite hockey sticks, along with the introduction of hockey helmets under the Easton brand. Other new products include premium cycling and snow helmets under the Bell and Giro brands and an expanded line of carbon fiber wheels under the Easton brand. Successful new product introductions have historically driven enthusiasm for our brands and resulted in higher average selling prices and higher gross profit margins. We also expect that we will enter adjacent categories and sports from time-to-time through either organic initiatives or through acquisitions.
 
  •  ERP Implementation.  We continue to plan for our long-term growth by investing in our operations management and infrastructure. We are in the process of implementing SAP’s ERP, an enterprise-wide software platform encompassing finance, sales and distribution, manufacturing and materials management. This program will ultimately replace the various software platforms used in our business operations, many of which are legacy platforms used by our predecessor companies. We expect that this enterprise-wide software solution will enable management to better and more efficiently conduct our operations and gather, analyze and assess information across all business segments and geographic locations. However, we may experience difficulties in implementing ERP in our business operations or in operating our business under SAP’s ERP, any of which could disrupt our operations, including our ability to timely ship and track product orders to customers, project inventory requirements, manage our supply chain and otherwise adequately service our customers. Further, the cost to implement SAP’s ERP could be higher than initially anticipated. We employ an implementation team of specialists and expect to complete our phased roll-out of ERP across all of our businesses in 2009. When completed, we expect that the system will streamline reporting and enhance internal controls.
 
  •  Operations and Manufacturing.  In 2008, we will begin a comprehensive three year effort to further streamline our distribution, logistics and manufacturing operations worldwide. During 2007, we contracted with a well-known operations consulting group to identify and scope our options to lower costs, improve customer service, and gain incremental capacity from our supply chain. This is part of the continuing plan to support our long-term growth by investing in our operations management and infrastructure. This process will ultimately bring uniform methodologies for inventory management, transportation optimization, manufacturing efficiency and the delivery of a high level of customer service to each of our businesses. We expect that this enterprise-wide implementation will change the size, nature and number of our distribution and manufacturing facilities with minimal risk to ongoing operations. We will utilize an implementation team of Easton-Bell operation’s executives and expect to complete our phased roll-out across all of our businesses by 2010. When completed, we expect to have lowered costs to produce and deliver our products to the market place through an infrastructure built to meet the needs of our long-term growth plans. However, as we have in the past and may continue in the future to transition the production of products from our own facilities to third party suppliers, we become more vulnerable to increased sourced product costs and our ability to mitigate such cost increases may be diminished.
 
  •  Interest Expense and Debt Repayment.  In connection with our acquisition of Easton, we entered into a new senior secured credit facility providing for a $335.0 million term loan facility, a $70.0 million U.S. revolving credit facility and a Cdn $12.0 million Canadian revolving credit facility. As of December 29, 2007, the outstanding principal balance under our term loan facility was $330.0 million and we had $5.5 million outstanding under our U.S. revolving credit facility. We expect our interest expense in 2008 to decrease due to lower borrowing rates and reduced debt levels. We presently hedge only a portion of our variable interest rate debt, and our actual interest expense will be largely determined by LIBOR trends.


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Contractual Requirements
 
Future payments required under our significant contractual obligations as of December 29, 2007 are as follows:
 
                                         
          Payments Due by Period  
    Total     2008     2009 to 2010     2011 to 2012     2013 and Beyond  
    (Dollars in thousands)  
 
Long-term debt(1)
  $ 469,975     $ 3,350     $ 6,700     $ 459,925     $  
Interest payments related to long-term debt(2)
    149,636       34,214       67,739       47,683        
Capital lease obligations
    220       35       66       64       55  
Operating lease obligations
    32,730       7,643       10,931       7,630       6,526  
U.S. revolving credit facility
    5,500       5,500                    
Sponsorship/royalty agreements
    13,174       5,172       5,565       1,612       825  
                                         
Total contractual cash obligations
  $ 671,235     $ 55,914     $ 91,001     $ 516,914     $ 7,406  
                                         
 
                                         
          Amount of Commitment Expiration per Period  
    Total     2008     2009 to 2010     2011 to 2012     2013 and Beyond  
 
Standby letters of credit and similar instruments
  $ 2,679     $ 2,679     $     $     $  
                                         
Total commercial commitments and letters of credit
  $ 2,679     $ 2,679     $     $     $  
                                         
 
 
(1) Amounts include obligations pursuant to the senior secured credit facility and senior subordinated notes that were outstanding on December 29, 2007. See “Liquidity and Capital Resources.”
 
(2) Estimated interest payments are calculated assuming current interest rates over minimum maturity periods specified in debt agreements. Debt may be repaid sooner or later than such minimum maturity periods.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Critical Accounting Policies
 
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. In the preparation of these financial statements, we make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies followed in the preparation of the financial statements are detailed in Note 1 in the Notes to Consolidated Financial Statements. We believe that our application of the policies discussed below involve significant levels of judgments, estimates and complexity. These estimates are reviewed from time to time and are subject to change if the circumstances so indicate. The effect of any such change is reflected in results of operations for the period in which the change is made.
 
Revenue Recognition.  Sales of products are recognized when title passes and risks of ownership have been transferred to the customer, which usually is upon shipment. Title generally passes to the dealer or distributor upon shipment from our facilities and the risk of loss upon damage, theft or destruction of the product in transit is the responsibility of the dealer, distributor or third party carrier. Reconditioning revenue is recognized upon the completion of services. Allowances for sales returns, discounts and allowances, including volume-based customer incentives, are estimated and recorded concurrent with the recognition of the sale. Royalty income, which is not material, is recorded when earned based upon contract terms with licensees which provide for royalties.


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Accounts Receivable and Allowances.  We review the financial condition and creditworthiness of potential customers prior to contracting for sales and record accounts receivable at their face value upon completion of the sale to our customers. We record an allowance for doubtful accounts based upon management’s estimate of the amount of uncollectible receivables. This estimate is based upon prior experience including historic losses as well as current economic conditions. The estimates can be affected by changes in the retail industry, customer credit issues and customer bankruptcies. Uncollectible receivables are written-off once management has determined that further collection efforts will not be successful. We generally do not require collateral from our customers.
 
Inventories.  Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market and include material, labor and factory overhead. Provisions for excess and obsolete inventories are based on management’s assessment of slow-moving and obsolete inventory on a product-by-product basis. We record adjustments to our inventory for estimated obsolescence or a decrease in market value equal to the difference between the cost of the inventory and the estimated market value, based on market conditions. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual experience if future economic conditions, levels of consumer demand, customer inventory levels or competitive conditions differ from our expectations.
 
Long-Lived and Finite-Lived Intangible Assets.  We follow the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 provides that goodwill and trademarks, which have indefinite lives, are not amortized. The carrying values of all long-lived assets, excluding goodwill and indefinite lived intangibles, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable (such as a significant decline in sales, earnings or cash flows or material adverse changes in the business climate). The impairment review includes a comparison of future cash flows expected to be generated by the asset or group of assets with their associated carrying value. If the carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges), an impairment loss would be recognized to the extent that the carrying value exceeds the fair value. The estimate of future cash flows is based upon, among other things, certain assumptions about expected future operating performance. These estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, changes in general economic conditions, customer requirements and our business model. For goodwill, on an annual basis the fair value of our reporting units are compared with their carrying value and an impairment loss is recognized if the carrying value of a reporting unit exceeds fair value to the extent that the carrying value of goodwill exceeds its fair value. The fair value of the reporting units are estimated using the discounted present value of estimated future cash flows. The fair value of the reporting units could change significantly due to changes in estimates of future cash flows as a result of changing economic conditions, our business environment and as a result of changes in the discount rate used.
 
Deferred financing costs are being amortized by the straight-line method over the term of the related debt, which does not vary significantly from an effective interest method. We amortize certain acquired intangible assets on a straight-line basis over estimated useful lives of seven to 19 years for patents, seven to 20 years for customer relationships, four to five years for licensing and other agreements and seven years for finite-lived trademarks and tradenames.
 
Income Taxes.  We follow the provisions of SFAS No. 109, “Accounting for Income Taxes.” Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities (excluding non-deductible goodwill) using enacted tax rates in effect for the years in which the differences are expected to become recoverable or payable. A portion of our deferred tax assets relate to net operating loss carryforwards. The realization of these assets is based upon estimates of future taxable income. Changes in economic conditions and the business environment and our assumptions regarding realization of deferred tax assets can have a significant effect on income tax expense.
 
Product Liability Litigation Matters and Contingencies.  We are subject to various product liability claims and/or suits brought against us for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured or reconditioned by us or our subsidiaries and, in certain cases, products manufactured by others. The ultimate outcome of these claims, or potential future


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claims, cannot currently be determined. We estimate the uninsured portion of probable future costs and expenses related to claims, as well as incurred but not reported claims and record an accrual in this amount on our consolidated balance sheets. These accruals are based on managements’ best estimate of probable losses and defense costs anticipated to result from such claims, from within a range of potential outcomes, based on available information, including an analysis provided by an independent actuarial services firm, previous claims history and available information on alleged claims. However, due to the uncertainty involved with estimates, actual results could vary substantially from these estimates.
 
Derivative Instruments and Hedging Activity.  One of our foreign subsidiaries enters into foreign currency exchange forward contracts to reduce its risk related to inventory purchases. These contracts are not designated as hedges, and therefore, under SFAS No. 133, “Accounting for Derivatives,” they are recorded at fair value at each balance sheet date, with the resulting change charged or credited to cost of sales in the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Warranty Liability.  We record a warranty obligation at the time of sale based on our historical experience. We estimate our warranty obligation by reference to historical product warranty return rates, material usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, material usage or service delivery costs differ from the historical rates, revisions to the estimated warranty liability would be required.
 
Stock-Based Compensation.  Effective January 1, 2006, we have adopted SFAS No. 123R “Share Based Payment” (SFAS 123R) which amends SFAS No. 123 “Accounting for Stock Based Compensation” (SFAS 123), which requires us to expense Units granted under equity compensation plans based upon the fair market value of the Units on the date of grant. We are amortizing the fair market value of Units granted over the vesting period of the Units and we are using the prospective method of adoption as defined under SFAS 123R.
 
For Units issued prior to January 1, 2006, we accounted for these Units using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. We had previously adopted only the disclosure provision of SFAS 123.
 
Recent Accounting Pronouncements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. This standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. There are numerous previously issued statements dealing with fair values that are amended by SFAS No. 157. We are currently evaluating the impact SFAS 157 will have on our consolidated financial statements.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 gives the irrevocable option to carry most financial assets and liabilities at fair value, with changes in fair value recognized in earnings. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact SFAS 159 will have on our consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS 141(R) in the first quarter of fiscal 2009 and apply the provisions of this Statement for any acquisition after the adoption date. We are currently evaluating the potential impact, if any, of the adoption of SFAS 141(R) on our consolidated financial statements.


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Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
Foreign Currency Risk
 
Our net sales and expenses are predominantly denominated in U.S. dollars. During the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005, approximately 85.9%, 87.5% and 93.8% of our net sales were in U.S. dollars, respectively, with substantially all of the remaining sales in Canadian dollars, British pounds, Euros and Taiwan dollars. In addition, we purchase a number of materials abroad, including finished goods and raw materials from third parties. A significant amount of these purchases were from vendors in Asia, the majority of which were located in mainland China. We may decide to increase our international sourcing in the future. As a result, we have exposure to currency exchange risks.
 
Most of what we purchase in Asia is finished goods rather than raw materials. As a result, with respect to many of our products, we do not immediately experience the impact of commodity price changes or higher manufacturing wages. Such costs are generally passed on to us only after the vendors have experienced them for some time. However, because we generally purchase these goods in U.S. dollars, changes in the value of the U.S. dollar can have a more immediate effect on the cost of our purchases. If we are unable to increase our prices to a level sufficient to cover any increased costs, it could adversely affect our margins.
 
One of our foreign subsidiaries enters into foreign currency exchange forward contracts to reduce its risks related to inventory purchases. At December 29, 2007, there were foreign currency forward contracts in effect for the purchase of U.S. $12.5 million aggregated notional amounts, or approximately Cdn $12.2 million. In the future, if we feel our foreign currency exposure has increased, we may consider entering into additional hedging transactions to help mitigate that risk.
 
Considering both the anticipated cash flows from firm purchase commitments and anticipated purchases for the next quarter and the foreign currency derivative instruments in place at year-end, a hypothetical 10% weakening of the U.S. dollar relative to other currencies would not have a material adverse affect on our expected first quarter 2008 earnings or cash flows. This analysis is dependent on actual purchases during the next quarter occurring within 90% of budgeted forecasts. The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables, including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects shown above. In addition, it is unlikely currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. Moreover, any negative effect of a weakening U.S. dollar in terms of increased materials costs would likely be partially offset by a positive impact on revenues due to our sales internationally and the conversion of those international sales into U.S. dollars.
 
Interest Rate Risk
 
We are exposed to market risk from changes in interest rates that can affect our operating results and overall financial condition. In connection with our acquisition of Easton, we entered into a senior secured credit facility, consisting of a $335.0 million term loan facility, a $70.0 million U.S. revolving credit facility and a Cdn $12.0 million Canadian revolving credit facility. As of December 29, 2007, the outstanding principal balance under our term loan facility was $330.0 million and we had $5.5 million outstanding under our U.S. revolving credit facility. The interest rates on the term loan and outstanding amounts under the revolving credit facilities are based on the prime rate or LIBOR plus an applicable margin percentage. A hypothetical 10% increase from the current interest rate level would result in approximately a $2.5 million increase in interest expense for the fiscal year ended December 29, 2007.
 
As of June 15, 2006, our senior secured credit facility required us to have interest rate agreements in place such that not less than 50% of our outstanding term and senior subordinated indebtedness is fixed rate indebtedness. As of December 29, 2007, approximately 56.4% of our outstanding term and senior subordinated indebtedness was fixed rate indebtedness. We have entered into an interest rate cap for $125.0 million of our outstanding term indebtedness.


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Item 8.   Financial Statements and Supplementary Data
 
The following Consolidated Financial Statements of Easton-Bell Sports, Inc. and its subsidiaries for each of the years in the three-year period ended December 29, 2007 are included in this Item:
 
         
    Page
 
    39  
    40  
    41  
    42  
    43  
    44  
 
The information under the heading “Quarterly Results” of Item 7 on page 30 of this Form 10-K is incorporated herein by reference.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholder of
Easton-Bell Sports, Inc.
 
We have audited the accompanying consolidated balance sheets of Easton-Bell Sports, Inc. (the “Company”) and subsidiaries as of December 29, 2007 and December 30, 2006 and the related consolidated statements of operations and comprehensive income (loss), stockholder’s equity, and cash flows for each of the three years in the period ended December 29, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries at December 29, 2007 and December 30, 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 29, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company adopted FASB Statement No. 123R, “Share Based Payment” effective January 1, 2006.
 
/s/  Ernst & Young LLP
 
Los Angeles, California
March 6, 2008


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
 
                 
    December 29,
    December 30,
 
    2007     2006  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 16,923     $ 9,899  
Accounts receivable, net
    200,380       182,234  
Inventories, net
    135,335       134,847  
Prepaid expenses
    9,774       10,449  
Deferred taxes
    6,782       10,224  
Other current assets
    5,450       1,611  
                 
Total current assets
    374,644       349,264  
Property, plant and equipment, net
    40,622       34,198  
Deferred financing fees, net
    15,633       19,271  
Intangible assets, net
    317,225       330,445  
Goodwill
    203,441       207,327  
Other assets
    4,925       7,555  
                 
Total assets
  $ 956,490     $ 948,060  
                 
 
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
               
Current portion of long-term debt
  $ 3,350     $ 3,350  
Revolving credit facility
    5,500       3,500  
Current portion of capital lease obligations
    21       36  
Accounts payable
    60,586       56,950  
Accrued expenses
    42,338       60,405  
                 
Total current liabilities
    111,795       124,241  
Long-term debt, less current portion
    466,625       469,138  
Capital lease obligations, less current portion
    145       174  
Deferred taxes
    25,058       23,681  
Other noncurrent liabilities
    11,880       12,664  
                 
Total liabilities
    615,503       629,898  
                 
Stockholder’s equity:
               
Common stock: $0.01 par value, 100 shares authorized, 100 shares issued and outstanding at December 29, 2007 and December 30, 2006
           
Additional paid-in capital
    337,277       334,432  
Accumulated deficit
    (2,040 )     (16,509 )
Accumulated other comprehensive income
    5,750       239  
                 
Total stockholder’s equity
    340,987       318,162  
                 
Total liabilities and stockholder’s equity
  $ 956,490     $ 948,060  
                 
 
See accompanying notes to consolidated financial statements.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    December 29,
    December 30,
    December 31,
 
    2007     2006     2005  
    (Amounts in thousands)  
 
Net sales
  $ 724,639     $ 638,973     $ 379,855  
Cost of sales
    475,656       426,109       244,916  
                         
Gross profit
    248,983       212,864       134,939  
Selling, general and administrative expenses
    170,022       155,993       92,421  
Management expenses
          8,250       3,000  
Restructuring and other infrequent expenses
    589       908       1,713  
Amortization of intangibles
    13,220       12,572       8,515  
Gain on sale of property, plant and equipment
    (2,339 )            
                         
Income from operations
    67,491       35,141       29,290  
Interest expense, net
    41,590       42,401       21,887  
                         
Income (loss) before income taxes
    25,901       (7,260 )     7,403  
Income tax expense (benefit)
    11,432       (1,408 )     4,321  
                         
Net income (loss)
    14,469       (5,852 )     3,082  
Other comprehensive income (loss):
                       
Foreign currency translation adjustment
    5,511       (126 )     158  
                         
Comprehensive income (loss)
  $ 19,980     $ (5,978 )   $ 3,240  
                         
 
See accompanying notes to consolidated financial statements.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
                                         
          Additional
          Cumulative
    Total
 
    Common
    Paid-in
    Accumulated
    Translation
    Stockholder’s
 
    Shares     Capital     Deficit     Adjustment     Equity  
    (Amounts in thousands, except share data)  
 
Balance as of December 31, 2004
    100     $ 139,004     $ (13,739 )   $ 207     $ 125,472  
Capital attributable to vesting of management equity incentives in Parent’s equity
          4,617                   4,617  
Capital contributed by Parent
          605                   605  
Net income in 2005
                3,082             3,082  
Foreign currency translation adjustment
                      158       158  
                                         
Balance as of December 31, 2005
    100       144,226       (10,657 )     365       133,934  
Capital contributed in connection with the Easton acquisition
          191,367                   191,367  
Capital distribution
          (4,270 )                 (4,270 )
Other capital contributions by Parent
          760                   760  
Equity compensation expense
          2,349                   2,349  
Net (loss) in 2006
                (5,852 )           (5,852 )
Foreign currency translation adjustment
                      (126 )     (126 )
                                         
Balance as of December 30, 2006
    100       334,432       (16,509 )     239       318,162  
Equity compensation expense
          2,845                   2,845  
Net income in 2007
                14,469             14,469  
Foreign currency translation adjustment
                      5,511       5,511  
                                         
Balance as of December 29, 2007
    100     $ 337,277     $ (2,040 )   $ 5,750     $ 340,987  
                                         
 
See accompanying notes to consolidated financial statements.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    December 29,
    December 30,
    December 31,
 
    2007     2006     2005  
    (Amounts in thousands)  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 14,469     $ (5,852 )   $ 3,082  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Depreciation and amortization
    23,126       20,879       13,809  
Amortization of deferred financing fees
    3,638       3,260       1,913  
Deferred financing fees of old debt written-off
          1,613        
Equity compensation expense
    2,845       2,349       4,617  
Deferred income tax expense (benefit)
    4,282       (5,120 )     2,739  
Effect of purchase accounting inventory write-up
          19,010        
Writedown of inventory
          391        
Gain on sale of property, plant and equipment
    (2,339 )            
Disposal of property, plant and equipment
    382       164       290  
Changes in operating assets and liabilities, net of effects from purchase of businesses:
                       
Accounts receivable, net
    (14,615 )     (13,523 )     (20,586 )
Inventories, net
    1,823       (15,156 )     (5,307 )
Other current and noncurrent assets
    (1,083 )     1,317       1,584  
Accounts payable
    3,328       21,269       3,397  
Accrued expenses
    (18,723 )     (6,857 )     3,243  
Other current and noncurrent liabilities
    (784 )     (139 )     (259 )
                         
Net cash provided by operating activities
    16,349       23,605       8,522  
                         
Cash flows from investing activities:
                       
Purchase of property, plant and equipment
    (16,827 )     (12,789 )     (4,999 )
Proceeds from sale of property, plant and equipment
    3,331              
Settlement of preacquisition contingency
    4,920              
Purchase of businesses, net of cash acquired
    (1,534 )     (407,415 )     (363 )
                         
Net cash used in investing activities
    (10,110 )     (420,204 )     (5,362 )
                         
Cash flows from financing activities:
                       
Proceeds from revolving credit facility
    107,100       104,154       113,669  
Payments on revolving credit facility
    (105,100 )     (100,654 )     (113,669 )
Payments on new senior term notes
    (2,513 )     (2,512 )      
Proceeds from issuance of senior term notes
          335,000        
Payments on old senior term notes
          (108,625 )     (1,100 )
Capital contribution
          192,127       605  
Capital distribution
          (4,270 )      
Payments on capital lease obligations
    (44 )     (62 )     (101 )
Payment of debt issuance costs
          (12,166 )     (519 )
                         
Net cash (used in) provided by financing activities
    (557 )     402,992       (1,115 )
                         
Effect of exchange rate changes on cash and cash equivalents
    1,342       (126 )     158  
                         
Increase in cash and cash equivalents
    7,024       6,267       2,203  
Cash and cash equivalents, beginning of year
    9,899       3,632       1,429  
                         
Cash and cash equivalents, end of year
  $ 16,923     $ 9,899     $ 3,632  
                         
 
See accompanying notes to consolidated financial statements.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except as specified)
 
1.   Business and Summary of Significant Accounting Policies
 
Organization and Business
 
References to the “Company” or “Successor” refer to Easton-Bell Sports, Inc. and its consolidated subsidiaries. References to “Easton”, “Bell” and “Riddell” refer to Easton Sports, Inc. and its consolidated subsidiaries, Bell Sports Corp. and its consolidated subsidiaries, and Riddell Sports Group, Inc. and its consolidated subsidiaries, respectively, in each case, prior to their acquisition by Easton-Bell Sports, Inc. Easton-Bell Sports, Inc. is a subsidiary of RBG Holdings Corp. (“RBG”), which is a subsidiary of EB Sports Corp., which is a subsidiary of Easton-Bell Sports, LLC, the ultimate parent company (“the Parent”).
 
The Company, formerly known as Riddell Bell Holdings, Inc., acquired the Easton business on March 16, 2006 and changed its name to Easton-Bell Sports, Inc. This transaction is further described in Note 2 and is included in the Company’s consolidated financial statements from the acquisition date. Currently, Easton, Bell and Riddell are all subsidiaries of the Company.
 
The Company’s outstanding common stock and limited liability company member units prior to its reorganization to a corporation in September 2004, are owned by Easton-Bell Sports, LLC (the “Parent”) through its direct wholly owned subsidiary, RBG Holdings Corp (“RBG”).
 
The Company is a designer, developer and marketer of sporting goods and related accessories under authentic brands. The Company’s products are used in baseball, softball, ice hockey, football, lacrosse and other team sports, and in various action sports, including cycling, snow sports, powersports and skateboarding. The Company currently sells a broad range of products primarily under four brands — Easton (baseball, softball, ice hockey and cycling equipment), Bell (cycling and action sports helmets and accessories), Giro (cycling and snow sports helmets and accessories) and Riddell (football and baseball equipment and reconditioning services).
 
Reporting Period
 
The Company follows a 52 week fiscal year, which ends on the last Saturday in December. Fiscal year 2007 (“2007”) was comprised of 52 weeks and ended on December 29, 2007. Fiscal year 2006 (“2006”) was comprised of 52 weeks and ended on December 30, 2006. Fiscal year 2005 (“2005”) was comprised of 52 weeks and ended on December 31, 2005.
 
Principles of Consolidation
 
The consolidated financial statements of the Company and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany accounts and transactions have been eliminated.
 
Cash and Cash Equivalents
 
The Company considers all investments with an original maturity of three months or less to be cash equivalents. Cash equivalents at December 29, 2007 and December 30, 2006 were $16,923 and $8,899, respectively.
 
Accounts Receivable and Concentration of Credit Risk
 
Accounts receivable at December 29, 2007 and December 30, 2006 are net of allowances for doubtful accounts of $4,944 and $5,575, respectively. The Company sells its products to a wide range of customers. The customers are not geographically concentrated. As of December 29, 2007 and December 30, 2006, 29.2% and 28.9%, respectively, of the Company’s gross accounts receivable were attributable to its top ten customers. In 2007, 2006 and 2005, one Action Sports customer accounted for 13.9%, 13.9% and 22.6% of the Company’s net sales, respectively, but no other customer accounted for more than 10% of the Company’s net sales. The Company’s top ten customers


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
accounted for approximately 30.2%, 35.4% and 37.1% of the Company’s net sales for 2007, 2006 and 2005, respectively. Ongoing credit evaluations of customers are performed and collateral on trade accounts receivable is generally not required. An allowance is determined based on the age of the accounts receivable balance and specific charge-off history. Trade accounts receivable are charged to the allowance when the Company determines that the receivable will not be collectable. Trade accounts receivable balances are determined to be delinquent when the amount is past due based on the payment terms with the customer.
 
Inventories
 
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market and include material, labor and factory overhead. Provisions for excess and obsolete inventories are based on management’s assessment of excess and obsolete inventory on a product-by-product basis. At December 29, 2007 and December 30, 2006, the Company had a reserve for excess and obsolete inventories of $7,365 and $6,880, respectively.
 
Inventories consisted of the following at December 29, 2007 and December 30, 2006:
 
                 
    2007     2006  
 
Raw materials
  $ 14,862     $ 18,220  
Work-in-process
    1,928       3,550  
Finished goods
    118,545       113,077  
                 
    $ 135,335     $ 134,847  
                 
 
The cost of inventories acquired in 2006 included a purchase accounting write-up of $19,010 over the historical pre-acquisition costs. The entire $19,010 purchase price write-up was charged to cost of sales during the period from March 16, 2006 to December 30, 2006.
 
Property, Plant and Equipment
 
Property, plant and equipment are stated at acquisition cost less accumulated depreciation. Property under capital lease is recorded at the lower of fair market value of the asset or the present value of future minimum lease payments. Repairs and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. Depreciation, which includes amounts amortized under capital leases, is being computed using the straight-line method over the estimated useful lives of the related assets, except for leasehold improvements, which are depreciated over the lesser of the lease term or their useful life, as follows:
 
     
Buildings and leasehold improvements
  Ten to twenty years
Machinery and equipment
  Three to seven years
Office equipment and furniture
  Three to five years
Computer equipment and software
  Three to five years


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Property, plant and equipment consisted of the following at December 29, 2007 and December 30, 2006:
 
                 
    2007     2006  
 
Land
  $ 105     $ 105  
Building and leasehold improvements
    9,384       9,066  
Machinery and equipment
    16,769       23,252  
Office equipment and furniture
    4,073       2,949  
Computer equipment and software
    12,813       10,613  
Construction in progress
    11,925       5,408  
                 
      55,069       51,393  
Less accumulated depreciation
    (14,447 )     (17,195 )
                 
    $ 40,622     $ 34,198  
                 
 
Depreciation expense relating to all property, plant and equipment amounted to $9,906, $8,307 and $5,294 for 2007, 2006 and 2005, respectively.
 
Capitalized costs of internal use software is amortized on a straight-line basis over the estimated useful life commencing from the date the software asset is ready for its intended use in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”
 
Goodwill and Intangible Assets
 
The Company follows the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Any goodwill and other indefinite-lived intangible assets resulting from acquisitions are not amortized. SFAS 142 prescribes that a fair value method of testing goodwill and other indefinite-lived intangible assets for impairment be completed on an annual basis, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of the indefinite-lived intangible asset or a reporting unit (for goodwill) below its carrying value. The Company’s annual impairment assessments are performed as of the fiscal year end date by determining an estimate of the fair value of the Company’s indefinite-lived intangible assets or, for goodwill, the fair value of the reporting units in order to evaluate whether an impairment exists. A reporting unit is an operating segment or one level below an operating segment (e.g., a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and the Company’s executive management team regularly reviews the operating results of that component.
 
The results of the Company’s analyses indicated that no impairment occurred in the carrying amount of goodwill and other indefinite-lived intangible assets in 2007, 2006 or 2005.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s acquired intangible assets are as follows at December 29, 2007 and December 30, 2006:
 
                                 
    December 29, 2007     December 30, 2006  
    Gross
          Gross
       
    Carrying
    Accumulated
    Carrying
    Accumulated
 
    Amounts     Amortization     Amounts     Amortization  
 
Amortized intangible assets:
                               
Trademarks and tradenames
  $ 1,702     $ (1,086 )   $ 1,702     $ (840 )
Customer relationships
    59,180       (20,042 )     59,180       (14,787 )
Patents
    60,345       (16,900 )     60,345       (10,441 )
Licensing and other
    5,900       (2,258 )     5,900       (998 )
                                 
Total
  $ 127,127     $ (40,286 )   $ 127,127     $ (27,066 )
                                 
Indefinite-lived intangible assets:
                               
Trademarks
  $ 230,384             $ 230,384          
                                 
 
The Company amortizes certain acquired intangible assets on a straight-line basis over estimated useful lives of 7 years for finite-lived trademarks and tradenames, 7 to 20 years for customer relationships, 7 to 19 years for patents and 4 to 5 years for licensing and other agreements. The weighted average life is 7.0 years for finite-lived trademarks and tradenames, 12.4 years for customer relationships, 10.2 years for patents, 4.7 years for licensing and other agreements and the overall weighted average life for acquired intangible assets is approximately 10.9 years. For 2007, 2006 and 2005 acquired intangible asset amortization was $13,220, $12,572 and $8,515, respectively. The Company estimates amortization of existing intangible assets will be $13,407 for each of 2008 and 2009, and $11,764, $9,576 and $9,351 for 2010, 2011 and 2012, respectively.
 
In accordance with SFAS 142, the Company does not amortize most of its trademarks, which are determined to have indefinite lives. The Riddell tradename has been in existence since 1929. The Riddell brand is currently one of the most widely recognized and sold football helmet brands in the world. This brand is one of the primary product lines of the Company’s business and management plans to use the trademark for an indefinite period of time. The Company plans to continue to make investments in product development to enhance the value of the brand in the future. There are no legal, regulatory, contractual, competitive, economic or other factors that the Company is aware of that the Company believes would limit the useful life of the trademark. The Riddell trademark registration can be renewed in the countries in which the Company operates at a nominal cost.
 
As a result of the Company’s acquisition of Bell in September 2004, the Company identified the Bell, Giro and Blackburn trademarks as indefinite-lived assets. The Bell, Giro and Blackburn trademarks have been in existence since 1952, 1986 and 1988, respectively. The Bell, Giro and Blackburn brands are currently sold in approximately 47 countries around the world. The Company plans to use these trademarks for an indefinite period of time and will continue to make investments in product development to enhance the value of the brands in the future. There are no legal, regulatory, contractual, competitive, economic or other factors that the Company is aware of that the Company believes would limit the useful life of the trademarks. The Bell, Giro and Blackburn trademark registrations can be renewed in the countries in which the Company operates at a nominal cost. As a result of the Company’s acquisition of Easton in March 2006, the Company identified the Easton trademark as an indefinite-lived asset. The Company plans to use this trademark for an indefinite period of time and will continue to make investments in product development to enhance the value of the brand in the future. There are no legal, regulatory, contractual, competitive, economic or other factors that the Company is aware of that the Company believes would


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
limit the useful life of the Easton trademark. Changes in the carrying amount of goodwill during the year ended December 29, 2007 and December 30, 2006 are summarized as follows:
 
                         
    Team
    Action
       
    Sports     Sports     Consolidated  
 
Balance as of December 31, 2005
  $ 41,970     $ 58,033     $ 100,003  
Adjustment to purchase price allocations
    1,029       640       1,669  
Acquisitions
    103,898       1,757       105,655  
                         
Balance as of December 30, 2006
    146,897       60,430       207,327  
Adjustment to purchase price allocations
    (4,920 )           (4,920 )
Acquisitions
          1,034       1,034  
                         
Balance as of December 29, 2007
  $ 141,977     $ 61,464     $ 203,441  
                         
 
In 2007, the carrying amount of goodwill related to the Team Sports segment was reduced by $4,920, due to the settlements of preacquisition contingencies for $2,178 and $2,892 in connection with the Easton and Riddell acquisitions, respectively, and was offset by $150 in earn-out payments related to Riddell, which increased goodwill for Team Sports. In connection with the acquisition of Cyclo Manufacturing, goodwill increased $954 in the Action Sports segment as the result of an earn-out provision and the Company also reclassified $80 from current assets to goodwill upon determination that the amount, from a previous acquisition in the Action Sports segment, required reclassification.
 
In 2006, the Company recorded approximately $103,898 for goodwill as part of the purchase price allocation related to the acquisition of Easton in accordance with SFAS No. 141, “Business Combinations” and, accordingly, allocated the purchase price to the assets acquired and the liabilities assumed based on an independent third-party asset valuation as of the acquisition date. Also in 2006, the Company acquired substantially all the assets of Cyclo Manufacturing and $1,757 was recognized as goodwill. The adjustments in 2006 of $1,029 and $640 represent tax related purchase price adjustments. The $1,029 adjustment resulted from a correction of a tax adjustment made during purchase accounting related to the Riddell Sports acquisition and the $640 adjustment relates to a decrease of a deferred tax asset incorrectly recorded during purchase accounting related to the Bell Sports acquisition.
 
Long-Lived Assets
 
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Under SFAS 144, an impairment loss is recognized when the undiscounted future cash flows estimated to be generated by the asset to be held and used are not sufficient to recover the unamortized balance of the asset. An impairment loss would be recognized based on the difference between the carrying values and estimated fair value. The estimated fair value will be determined based on either the discounted future cash flows or other appropriate fair value methods with the amount of any such deficiency charged to income in the current year. If the asset being tested for recoverability was acquired in a business combination, amortizable intangible assets resulting from the acquisition that are related to the asset are included in the assessment. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. The Company also evaluates the amortization periods assigned to its intangible assets to determine whether events or changes in circumstances warrant revised estimates of useful lives. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less estimated costs to sell. During 2007 and 2006, the Company did not have any impairment of long-lived assets.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Deferred Financing Fees
 
Deferred financing costs are being amortized by the straight-line method over the term of the related debt, which does not vary significantly from the effective interest method. Accumulated amortization was $7,961 and $4,323 at December 29, 2007 and December 30, 2006, respectively.
 
Income Taxes
 
The Company follows the provisions of SFAS No. 109, “Accounting for Income Taxes.” Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities (excluding non-deductible goodwill) using enacted tax rates in effect for the years in which the differences are expected to become recoverable or payable.
 
Revenues
 
Sales of products are recognized when title passes and risks of ownership have been transferred to the customer, which usually is upon shipment. Title generally passes to the dealer or distributor upon shipment from the Company’s facilities and the risk of loss upon damage, theft or destruction of the product in transit is the responsibility of the dealer, distributor or third party carrier. Reconditioning revenue is recognized upon the completion of services. Allowances for sales returns, discounts and allowances, including volume-based customer incentives, are estimated and recorded concurrent with the recognition of the sale. Royalty income, which historically has not been material, is recorded when earned based upon contract terms with licensees which provide for royalties.
 
Warranty Obligations
 
The Company records a product warranty obligation at the time of sale based on the Company’s historical experience. The Company estimates its warranty obligation by reference to historical product warranty return rates, material usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, material usage or service delivery costs differ from the historical rates, revisions to the estimated warranty liability would be required.
 
The following is a reconciliation of the changes in the Company’s product warranty liability for 2007 and 2006. The increase in the warranty liability in 2006 is primarily related to the acquisition of Easton.
 
                 
    Year Ended  
    2007     2006  
 
Beginning of year
  $ 2,981     $ 283  
Warranty liability acquired through Easton acquisition
          2,764  
Warranty costs incurred during the period
    (5,825 )     (4,174 )
Warranty cost liability recorded during the period
    6,234       4,108  
                 
End of year
  $ 3,390     $ 2,981  
                 
 
Advertising Costs
 
The Company expenses all advertising costs as incurred. Cooperative advertising costs are recorded as a reduction of sales at the time the revenue is earned. Advertising costs were $4,208, $4,227 and $2,793, for 2007, 2006 and 2005, respectively.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Shipping and Handling
 
All shipping and handling fees billed to customers are included as a component of net sales. Shipping and handling costs incurred by the Company are included in cost of sales.
 
Research and Development Expenses
 
The Company expenses all research and development costs as incurred. Research and development expenses were approximately $12,615, $8,543 and $5,213 for 2007, 2006 and 2005, respectively, and are included in selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amount of revenues during the reporting period. Actual results could differ from those estimates. The estimates made by management primarily relate to accounts receivable allowances, inventory reserves, deferred income taxes, intangible assets, goodwill and certain other liabilities.
 
Foreign Currency Translation
 
The financial position and results of operations outside the United States are measured using the local currency as the functional currency. Revenues and expenses are translated into U.S. dollars at average exchange rates prevailing during the fiscal period, and assets and liabilities are translated using the exchange rates at the balance sheet date. Translation adjustments are included in accumulated other comprehensive income in stockholder’s equity. Gains and losses, which result from foreign currency transactions, are included in earnings. The Company recorded transaction gains of $1,671, $144 and $200 for 2007, 2006 and 2005, respectively.
 
Fair Values of Financial Instruments
 
The carrying amounts reported in the Company’s Consolidated Balance Sheets for “Cash and cash equivalents,” “Accounts receivable” and “Accounts payable” approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount of long-term debt under the Company’s senior secured credit facility approximates fair value based on borrowing rates currently available to the Company for loans with similar terms and average maturities. The estimated fair value of the Company’s 8.375% senior subordinated notes based on their quoted market value was $129,632 and $141,491, as compared to its carrying value of $142,932 and $142,891 at December 29, 2007 and December 30, 2006, respectively.
 
Stock-Based Employee Compensation
 
Effective January 1, 2006, the Company has adopted SFAS No. 123R “Share Based Payment” (SFAS 123R) which amends SFAS No. 123 “Accounting for Stock Based Compensation” (SFAS 123). SFAS 123R requires the Company to expense Units granted under equity compensation plans based upon the fair market value of the Units on the date of grant. The Company adopted SFAS 123R using the prospective method of adoption as defined under SFAS 123R. The Company amortizes the fair market value of Units granted over the vesting period of the Units.
 
For Units issued prior to January 1, 2006, the Company accounted for these Units using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. The Company had previously adopted only the disclosure provision of SFAS 123.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Recent Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. There are numerous previously issued statements dealing with fair values that are amended by SFAS 157. The Company is currently evaluating the impact SFAS 157 will have on the Company’s consolidated financial statements.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 gives the Company the irrevocable option to carry most financial assets and liabilities at fair value, with changes in fair value recognized in earnings. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS 159 will have on the Company’s consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company will adopt SFAS 141(R) in the first quarter of fiscal 2009 and apply the provisions of this Statement for any acquisition after the adoption date. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141(R) on its consolidated financial statements.
 
2.   Acquisitions
 
Easton Sports, Inc.
 
On March 16, 2006 (the “Closing Date”), the Company acquired 100% of the outstanding capital stock of Easton Sports, Inc. The purchase price for Easton, including the refinancing of Easton’s existing indebtedness and transaction costs, was $405,466 in cash, of which $389,271 was paid on the Closing Date and $16,195 was paid on July 20, 2006 as a working capital adjustment. The purchase price for the acquisition of Easton was funded, in part, by an equity investment, proceeds from a new senior secured credit facility entered into in connection with the acquisition of Easton and existing cash.
 
The primary reason for the Easton acquisition was to build a preeminent branded sports equipment company dedicated to enhancing athletic performance and protection with innovative equipment. The addition of Easton strengthened the Company’s position as a leading designer, developer and marketer of innovative sports equipment, protective products and related accessories. The purchase price and resulting goodwill was based on negotiations and eventual agreement between a willing buyer and seller.
 
Easton’s core business is developing, manufacturing, marketing and distributing baseball, softball, ice hockey and cycling components for both sports professionals and enthusiasts. Easton’s products are primarily sold and distributed through specialty retailers, sporting goods chains and distributors. Easton’s results of operations are included in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) from March 16, 2006.
 
In connection with the Easton acquisition, the Company, together with RBG and certain of the Company’s domestic and Canadian subsidiaries, including Easton, entered into a new senior secured credit facility with


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Wachovia Bank, National Association, as the administrative agent, and a syndicate of lenders. The Company’s new senior secured credit facility provides for a $335,000 term loan facility, a $70,000 U.S. revolving credit facility and a Cdn $12,000 Canadian revolving credit facility. All three facilities are scheduled to mature in March 2012. In connection with the closing of the acquisition of Easton, the Company’s new term loan facility was drawn in full, together with borrowings of $22,846 under its new U.S. revolving credit facility and U.S. $1,000 and Cdn $1,000 under its new Canadian revolving loan facility, to refinance the Company’s and Easton’s obligations under their then-existing credit facilities (which were thereafter terminated), to finance the acquisition of Easton and to pay related fees and expenses. The Company’s new U.S. and Canadian revolving credit facilities are available to provide financing for working capital and general corporate purposes. See Note 4 herein.
 
In addition, prior to the consummation of the acquisition of Easton, the management agreements described in Note 13, were amended to remove any obligation to pay an annual management fee. In return for such amendment, the Company paid to Fenway Partners, LLC (formerly known as Fenway Partners, Inc.) (and its designee) $7,500, which payment was made just prior to the consummation of the acquisition of Easton. This amount is included in management expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) in 2006.
 
Also, in connection with the consummation of the acquisition of Easton, the Parent repurchased approximately $4,270 of its outstanding Class A Common and Class B Common Units, many of which were held by the executive officers and employees of the Company. Finally, the Parent cancelled most of the outstanding unvested Class B Common Units and reissued new unvested Class B Common Units to the holders of such units at different vesting terms such that, following the consummation of the acquisition of Easton, substantially all outstanding Class B Common Units were unvested and subject to future vesting based on similar terms.
 
The new Class B Common Units were issued pursuant to a new 2006 Equity Incentive Plan adopted by the Parent, which amended and restated the 2003 Equity Incentive Plan. The 2006 Equity Incentive Plan is described in Note 12 herein.
 
The acquired net assets of Easton consisted primarily of inventories, accounts receivable, property, plant and equipment, tradenames, trademarks, customer relationships and patents for baseball, softball, ice hockey, cycling and other accessories. The acquisition of Easton was accounted for in accordance with SFAS No. 141, “Business Combinations,” and accordingly, the Company has allocated the purchase price to the assets acquired and the liabilities assumed based on an independent third party valuation as of the Closing Date. The Company recorded $101,720 of goodwill and $166,100 of other identifiable intangible assets such as tradenames, trademarks, patents and customer relationships as part of the purchase price allocation.
 
For tax purposes, domestic goodwill and identifiable intangibles associated with the Easton acquisition total $79,702 and $170,800, respectively, and are amortized over a period of 180 months. With respect to the international goodwill and identifiable intangibles, no tax deductions are permitted.
 
The carrying amount of goodwill changed during 2007 due to the settlement of a preacquisition contingency in connection with the Easton acquisition. The Company settled litigation that had been filed by Easton in May of 2005, and was pending at the time of the acquisition of Easton. The litigation involved misappropriation of trade secrets and intentional interference with business expectations in connection with a potential acquisition by Easton. The litigation was settled in the first quarter of 2007 with Easton receiving $2,178 in cash. SFAS No. 141 requires pre-acquisition contingencies to be included in the purchase price allocation if the fair value of the pre-acquisition contingency can be determined during the allocation period. Sufficient information was available prior to the end of the allocation period for the Easton acquisition indicating that it was probable that an asset existed and the Company accordingly estimated the amount of the asset and recorded the amount as an adjustment to goodwill.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table presents the allocation of the Easton acquisition cost, including professional fees and other related acquisition costs, to the assets acquired and liabilities assumed, based upon their final fair values:
 
         
Net purchase price including cost of the transaction
  $ 405,466  
Add:
       
Liabilities assumed (mainly accounts payable and accrued expenses)
    40,799  
Less amounts allocated to specific asset categories:
       
Accounts receivable
    (81,123 )
Inventory
    (83,888 )
Other current assets
    (3,434 )
Property, plant and equipment
    (11,273 )
Other assets
    (2,874 )
Patents
    (22,000 )
Licensing agreements
    (4,300 )
Trademarks and tradenames (indefinite-lived)
    (128,300 )
Non-compete agreement
    (1,600 )
Customer relationships
    (9,900 )
Net deferred tax liabilities relating to differences in the financial statements and the tax basis of certain assets and liabilities
    4,147  
         
Excess of cost over net assets acquired (goodwill)
  $ 101,720  
         
 
The weighted average useful lives of the acquired intangible assets are seven years for patents, 20 years for customer relationships, five years for licensing agreements and four years for non-compete agreements. The weighted average life for the acquired intangible assets in total is 10.1 years.
 
The following pro forma data summarizes the results of operations for the years ended December 30, 2006 and December 31, 2005 as if the Easton acquisition had occurred at January 1, 2006 and 2005, respectively. The unaudited pro forma information has been prepared for comparative purposes only and does not purport to represent what the results of operations of the Company actually would have been had the transaction occurred on the dates indicated or what the results of operations may be in any future period.
 
                 
    Year Ended
    Year Ended
 
    December 30,
    December 31,
 
    2006     2005  
    (Unaudited)  
 
Net sales
  $ 694,348     $ 619,337  
Net (loss)
    (2,953 )     (4,388 )
 
Other Acquisitions
 
During 2006, the Company’s Action Sports segment acquired substantially all the assets of Cyclo Manufacturing, a manufacturer of solid core innertubes for the cycling market, for a cash amount of $1,949 and recorded $1,757 as goodwill. During the first quarter of 2007, the Company purchased substantially all the assets of Shanghai Cyclo (a related company) for a cash amount of $500. In June 2007, an earn-out provision was finalized related to the purchase of Cyclo Manufacturing and an additional $954 was recognized as goodwill, and was paid in July 2007 to the former owners of Cyclo Manufacturing. Both the Cyclo Manufacturing and Shanghai Cyclo acquisitions were accounted for in accordance with SFAS No. 141, “Business Combinations”.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In June 2007, the Company paid an earn-out of $115 to the former owners of Pro-Line Team Sports, Inc. (“Pro-Line”), a football reconditioning business in the Team Sports segment in connection with a 2004 acquisition. Such amount was recognized as additional goodwill.
 
3.   Restructuring
 
In connection with the Company’s acquisition of Easton, a restructuring plan was initiated to implement actions to reduce the overall cost structure and to drive sustainable improvements in operating and financial performance. As part of the restructuring plan, the Company commenced the closure of one of its manufacturing facilities in Van Nuys, California. Substantially all manufacturing at this location, which relates to the Company’s Team Sports segment, ceased during the second fiscal quarter of 2007. The closure of this facility is consistent with the Company’s strategy to lower overall product costs. While some of the machinery was transferred to other locations, most of the machinery was sold in September 2007 and a gain on the sale of $487 was recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
The following table summarizes the components of the restructuring accrual initiated in 2006 and accounted for under Emerging Issues Task Force (EITF) No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”:
 
                         
          Facility
       
    Employee
    Closure
       
    Severance     Costs     Total  
 
Balance as of December 31, 2005
  $     $     $  
Costs accrued during purchase accounting
    2,100       2,238       4,338  
Less: Paid during the year
    (210 )           (210 )
                         
Balance as of December 30, 2006
    1,890       2,238       4,128  
Costs accrued and expensed in 2007
          487       487  
Less: Paid during the year
    (1,694 )     (2,355 )     (4,049 )
                         
Balance as of December 29, 2007
  $ 196     $ 370     $ 566  
                         
 
The accrual of $4,128 as of December 30, 2006 was included as part of the purchase accounting related to the Easton acquisition, with an additional $487 provision recorded and expensed in 2007 for facility closure costs. The employee severance costs were accrued per the Company’s policy and relate to the termination of approximately 215 employees. As of December 29, 2007, approximately 200 employees had been terminated. The $566 of restructuring costs accrued at December 29, 2007 are expected to be paid in 2008.
 
During 2005, the Company announced and initiated a restructuring plan to implement actions to reduce its overall cost structure and to drive sustainable improvements in operating and financial performance. As part of the restructuring plan, the Company commenced the consolidation and integration of several facilities and announced the closure of its manufacturing operations in Chicago, Illinois, which relates to its Team Sports segment. The Chicago, Illinois facility, consisting of land and building was sold in May 2007 and a gain on the sale of $1,852 was recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss).


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.   Long-term Debt
 
Long-term debt consisted of the following at December 29, 2007 and December 30, 2006:
 
                 
    2007     2006  
 
Senior Secured Credit Facility:
               
Term loan facility
  $ 329,975     $ 332,488  
U.S. revolving credit facility
    5,500       3,500  
8.375% Senior subordinated notes due 2012
    140,000       140,000  
Capital lease obligations
    166       210  
                 
Total long-term debt
    475,641       476,198  
Less current maturities of long-term debt
    (8,871 )     (6,886 )
                 
Long-term debt, less current portion
  $ 466,770     $ 469,312  
                 
 
On March 16, 2006, in connection with the Easton acquisition as described in Note 2, the Company entered into a Credit and Guaranty Agreement (the “Credit Agreement”) which provided for (i) a $335,000 term loan facility, (ii) a new $70,000 U.S. revolving credit facility and (iii) a Cdn $12,000 Canadian revolving credit facility. All three facilities are scheduled to mature in March 2012. The term loan facility was drawn in full by the Company on the Closing Date, together with borrowings of $22,846 under its new U.S. revolving credit facility and $1,000 U.S. and Cdn $1,000 under its new Canadian revolving credit facility, to refinance the Company’s and Easton’s obligations under their then-existing credit facilities (which were thereafter terminated), to finance the acquisition of Easton and to pay related fees and expenses. The Company’s new U.S. and Canadian revolving credit facilities are available to provide financing for working capital and general corporate purposes. At December 29, 2007, the Company had $5,500 outstanding under the U.S. revolving credit facility and no amounts outstanding under the Canadian revolving credit facility.
 
The applicable margin percentage for the term loan is initially 1.75% for the London Interbank Offered Rate (“LIBOR”) and 0.75% for the U.S. base rate, which is subject to adjustment to 1.50% for the LIBOR rate and 0.50% for the U.S. base rate based upon the Company’s leverage ratio as calculated under the credit agreement. The applicable margin percentage for the revolving loan facilities are 2.00% for the LIBOR rate or Canadian bankers’ acceptance rate and 1.00% for the Canadian base rate. The applicable margin percentage for the revolving loan facilities varies between 2.25% and 1.50% for the LIBOR rate or Canadian bankers’ acceptance rate, or between 1.25% and 0.50% for the U.S. and Canadian base rates, based upon the Company’s leverage ratio as calculated under the credit agreement.
 
The Company is the borrower under the term loan facility and U.S. revolving credit facility and the Company’s Canadian subsidiaries are the borrowers under the Canadian revolving credit facility. Under the Credit Agreement, RBG and certain of the Company’s domestic subsidiaries have guaranteed all of the obligations (both U.S. and Canadian) under the Credit Agreement, and the Company and certain of the Company’s Canadian subsidiaries have guaranteed the obligations under the Canadian revolving credit facility. Under the terms of the pledge and security agreement entered into by the Company and certain of the Company’s domestic subsidiaries, as well as the terms set forth in the other U.S. collateral documents, the Company and such subsidiaries have granted security with respect to substantially all of their real and personal property as collateral for the U.S. and Canadian obligations (and related guarantees) under the Credit Agreement. Under the terms of the Canadian pledge and security agreement entered into by the Canadian borrowers (certain affiliates of the Company) and certain of the Company’s domestic and Canadian subsidiaries, as well as the terms set forth in the Canadian collateral documents, the Canadian borrowers and such subsidiaries have granted security with respect to substantially all of their real and personal property as collateral for the obligations (and related guarantees) under the Canadian revolving credit facility (and in the case of the Company’s domestic subsidiaries, the obligations (and related guarantees) under the Credit Agreement generally).


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Credit Agreement limits the Company’s ability to incur or assume additional indebtedness, make investments and loans, engage in certain mergers or other fundamental changes, dispose of assets, make distributions or pay dividends or repurchase stock, prepay subordinated debt, enter into transactions with affiliates, engage in sale-leaseback transactions and limits capital expenditures. In addition, the Credit Agreement requires the Company to comply on a quarterly and annual basis with certain financial covenants, including a maximum total leverage ratio test, a minimum interest coverage ratio test and an annual maximum capital expenditure limit.
 
The Credit Agreement contains events of default customary for such financings, including but not limited to nonpayment of principal, interest, fees or other amounts when due; violation of covenants; failure of any representation or warranty to be true in all material respects when made or deemed made; cross default and cross acceleration to certain indebtedness; certain ERISA events; change of control; dissolution, insolvency and bankruptcy events; material judgments; and actual or asserted invalidity of the guarantees or security documents. Some of these events of default allow for grace periods and materiality concepts. As of December 29, 2007, the Company was in compliance with all of its covenants.
 
On September 30, 2004, the Company issued $140,000 of 8.375% senior subordinated notes due 2012. The Company’s indebtedness under its senior subordinated notes was not amended in connection with the acquisition of Easton and otherwise remains outstanding. The senior subordinated notes are general unsecured obligations and are subordinated in right of payment to all existing and future senior indebtedness. Interest is payable on the notes semi-annually on April 1 and October 1 of each year. Beginning October 1, 2008, the Company may redeem the notes, in whole or in part, initially at 104.188% of their principal amount, plus accrued interest, declining to 100% of their principal amount, plus accrued interest, at any time on or after October 1, 2010. In addition, before October 1, 2008, the Company may redeem the notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus accrued interest and a make-whole premium.
 
The indenture governing the senior subordinated notes contains certain restrictions on the Company, including restrictions on its ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and engage in certain other activities. The senior subordinated notes are guaranteed by all of the Company’s domestic subsidiaries.
 
As of December 29, 2007, the aggregate contracted maturities of long-term debt are as follows:
 
                                         
          Senior
                   
          Subordinated
    Revolving
    Capital
       
Fiscal Year Ending
  Term Loan     Notes     Credit     Leases     Total  
 
2008
  $ 3,350     $     $ 5,500     $ 21     $ 8,871  
2009
    3,350                   22       3,372  
2010
    3,350                   22       3,372  
2011
    3,350                   24       3,374  
2012
    316,575       140,000             26       456,601  
Thereafter
                      51       51  
                                         
    $ 329,975     $ 140,000     $ 5,500     $ 166     $ 475,641  
                                         
 
Cash payments for interest were $38,547, $33,661 and $20,759 for 2007, 2006 and 2005, respectively.
 
The Company has arrangements with various banks to issue standby letters of credit or similar instruments, which guarantee the Company’s obligations for the purchase of certain inventories and for potential claims exposure for insurance coverage. At December 29, 2007, outstanding letters of credit issued under the revolving credit facility totaled $2,679. The amount of unused lines of credit at December 29, 2007 and December 30, 2006, was $74,085 and $73,257, respectively. The average interest rate on the short term borrowings under the credit facility outstanding at December 29, 2007 and December 30, 2006, was 7.1% and 8.3%, respectively.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In connection with the refinancing on the Closing Date, the Company expensed $1,613 in 2006 in debt acquisition costs associated with the prior debt as it represented a material modification of the related syndicated debt. The Company also incurred bank and other fees of $15,489 and other fees to third parties related to the acquisition of the new syndication of debt. In accordance with EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”, the Company recorded $12,166 as new debt acquisition costs and recorded $3,323 as expense during the year ended December 30, 2006, for bank and other third party fees that did not qualify for capitalization. In addition, the Company amortized $3,638, $3,260 and $1,913 of debt issuance costs during 2007, 2006 and 2005, respectively.
 
On November 17, 2006, EB Sports Corp., a subsidiary of the Company’s Parent and the direct parent of RBG (and therefore an indirect parent of the Company), entered into a Credit Agreement with Wachovia Investment Holdings, LLC, as administrative agent for a group of lenders, pursuant to which EB Sports Corp. borrowed $175.0 million for the purpose of paying a dividend (the “EBS Credit Agreement”). The loan matures on May 1, 2012. The EBS Credit Agreement imposes limitations on EB Sports Corp. and its direct and indirect subsidiaries, including RBG and Easton-Bell, to, among other things, incur additional indebtedness, make investments and loans, engage in certain mergers or other fundamental changes, dispose of assets, declare or pay dividends or make distributions, repurchase stock, prepay subordinated debt and enter into transactions with affiliates. The EBS Credit Agreement contains events of default, including but not limited to nonpayment of principal, interest, fees or other amounts when due, failure to comply with certain provisions, cross-payment-default and cross-acceleration to certain indebtedness, dissolution, insolvency and bankruptcy events and material judgments. Some of these events of default allow for grace periods and materiality concepts. Borrowings under the EBS Credit Agreement bear interest at a rate per annum, reset semi-annually, equal to LIBOR plus 6.00% per annum. EB Sports Corp. has the option to pay interest either in cash or in-kind by adding such interest to principal.
 
Borrowings under the EBS Credit Agreement are not guaranteed by Easton-Bell or any of its subsidiaries and are senior unsecured obligations of EB Sports Corp. However, given that EB Sports controls the Company’s direct parent, EB Sports has the ability, subject to the terms of the Company’s existing senior secured credit facility and any other agreements which limit the Company’s ability to declare and pay dividends, to obtain money from the Company and its subsidiaries in order to fund its obligations under such loan.
 
5.   Accrued Expenses
 
Accrued expenses consist of the following at December 29, 2007 and December 30, 2006:
 
                 
    2007     2006  
 
Salaries, wages, commissions and bonuses
  $ 6,875     $ 13,902  
Advertising
    5,017       6,009  
Restructuring
    566       4,128  
Defective products
    938       1,990  
Rebates
    4,412       2,634  
Warranty
    3,390       2,981  
Product liability — current portion
    2,443       2,162  
Royalties
    1,858       2,458  
Interest
    3,227       3,604  
Other
    13,612       20,537  
                 
    $ 42,338     $ 60,405  
                 


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
6.   Leases
 
The Company leases various facilities and equipment. As of December 29, 2007, future minimum commitments for capital leases and for operating leases with non-cancelable terms are as follows:
 
                 
    Capital
    Operating
 
Fiscal Year Ending
  Leases     Leases  
 
2008
  $ 35     $ 7,643  
2009
    34       5,764  
2010
    32       5,167  
2011
    32       4,167  
2012
    32       3,463  
Thereafter
    55       6,526  
                 
Total minimum lease payments
    220     $ 32,730  
                 
Less amount representing interest
    (54 )        
                 
Present value of minimum lease payments, including current maturities of $21
  $ 166          
                 
 
Property and equipment includes the following amounts under capital leases at December 29, 2007 and December 30, 2006:
 
                 
    2007     2006  
 
Leasehold improvements
  $ 247     $ 246  
Machinery and equipment
          4  
Furniture and fixtures
    19       158  
                 
      266       408  
Less accumulated depreciation
    (139 )     (242 )
                 
    $ 127     $ 166  
                 
 
Rent expense for operating leases was approximately $9,471, $7,713 and $4,631 for 2007, 2006 and 2005, respectively.
 
7.   Employee Benefit Plans
 
As of December 29, 2007, the Company had two noncontributory defined benefit pension plans that cover certain unionized employees. Funding and administrative expense for these plans was approximately $14, $0, and $6 for 2007, 2006 and 2005, respectively. Further disclosures have not been made due to the immateriality of these plans.
 
As of December 29, 2007, the Company had one defined contribution plan covering substantially all of its non-union employees. Prior to 2007, the Company had three defined contribution plans which were combined at the beginning of the 2007 fiscal year. The Company’s contributions to these plans are based on a percentage of employee contributions. Expenses related to these plans amounted to approximately $1,956, $1,755 and $620 for 2007, 2006 and 2005, respectively.
 
8.   Segment Information
 
The Company has two reportable segments: Team Sports and Action Sports. The vast majority of Easton’s activity is reflected in the Company’s Team Sports segment which primarily consists of football, baseball, softball, ice hockey and other team products and reconditioning services related to certain of these products. The Company’s


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Action Sports segment, formerly known as Individual Sports, consists of helmets, equipment, components and accessories for cycling, snow sports and powersports and fitness related products. Following the acquisition of Easton, the Company’s Action Sports segment includes Easton’s cycling business. The Company evaluates segment performance primarily based on income from operations excluding equity compensation expense, management expenses, restructuring and other infrequent expenses, amortization of intangibles and corporate expenses. The Company’s selling, general and administrative expenses, excluding corporate expenses, are charged to each segment based on the division where the expenses are incurred. Segment operating income as presented by the Company may not be comparable to similarly titled measures used by other companies. As a result, the components of operating income for one segment may not be comparable to another segment.
 
Segment results for 2007, 2006 and 2005 are as follows:
 
                         
    Team
    Action
       
    Sports     Sports     Consolidated  
 
Year ended December 29, 2007:
                       
Net sales
  $ 416,558     $ 308,081     $ 724,639  
Income from operations
    70,790       30,187       100,977  
Depreciation
    4,629       4,017       8,646  
Capital expenditures
    10,432       6,395       16,827  
Year ended December 30, 2006:
                       
Net sales
  $ 347,791     $ 291,182     $ 638,973  
Income from operations
    38,637       32,849       71,486  
Depreciation
    4,219       4,088       8,307  
Capital expenditures
    2,828       9,961       12,789  
Year ended December 31, 2005:
                       
Net sales
  $ 132,798     $ 247,057     $ 379,855  
Income from operations
    19,045       31,005       50,050  
Depreciation
    1,742       3,552       5,294  
Capital expenditures
    2,122       2,877       4,999  
 
                         
As of December 29, 2007 and
  Team
    Action
       
December 30, 2006, Respectively
  Sports     Sports     Consolidated  
 
Assets
                       
2007
  $ 589,965     $ 366,525     $ 956,490  
2006
    587,187       360,873       948,060  
 
                         
    For Years Ended in  
2007, 2006 and 2005, Respectively
  2007     2006     2005  
 
Segment income from operations
  $ 100,977     $ 71,486     $ 50,050  
Equity compensation expense
    (2,845 )     (3,097 )     (4,617 )
Restructuring and other infrequent expenses
    (589 )     (908 )     (1,713 )
Amortization of intangibles
    (13,220 )     (12,572 )     (8,515 )
Management expenses
          (8,250 )     (3,000 )
Corporate expenses
    (16,832 )     (11,518 )     (2,915 )
                         
Consolidated income from operations
  $ 67,491     $ 35,141     $ 29,290  
                         
 
(a)  The following table summarizes net sales by product lines. The categorization of the Company’s products into product lines is based on the characteristics of the individual products and is subject to judgment in some cases


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
and can vary over time. In instances where products move between product lines, the Company reclassifies the amounts in the product lines for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within each product line.
 
                                                 
    2007     2006     2005  
          % of
          % of
          % of
 
    Net Sales     Net Sales     Net Sales     Net Sales     Net Sales     Net Sales  
 
Team Sports
                                               
Baseball and softball products
  $ 151,103       20.9 %   $ 107,287       16.8 %   $       %
Ice hockey products
    112,307       15.5       94,078       14.7              
Football products and reconditioning
    75,762       10.5       72,818       11.4       67,043       17.6  
Other products and licensing
    77,386       10.7       73,608       11.5       65,755       17.4  
                                                 
    $ 416,558       57.6 %   $ 347,791       54.4 %   $ 132,798       35.0 %
Action Sports
                                               
Cycling helmets
  $ 133,799       18.5 %   $ 117,589       18.4 %   $ 114,472       30.1 %
Snow sports helmets
    28,702       3.9       32,374       5.1       23,076       6.1  
Powersports products
    16,284       2.2       16,231       2.5       15,727       4.1  
Premium cycling components
    45,813       6.3       37,032       5.8       11,786       3.1  
Fitness accessories
    15,201       2.1       17,844       2.8       15,207       4.0  
Cycling accessories
    68,282       9.4       70,112       11.0       66,789       17.6  
                                                 
    $ 308,081       42.4 %   $ 291,182       45.6 %   $ 247,057       65.0 %
                                                 
Total Net Sales
  $ 724,639       100.0 %   $ 638,973       100.0 %   $ 379,855       100.0 %
                                                 
 
(b) Net sales by customer location for 2007, 2006 and 2005 were as follows:
 
                         
    2007     2006     2005  
 
Net sales:
                       
North America
  $ 625,572     $ 546,778     $ 343,000  
Europe
    70,897       77,841       32,470  
Other
    28,170       14,354       4,385  
                         
    $ 724,639     $ 638,973     $ 379,855  
                         
 
(c) Property, plant and equipment, net by location as of December 29, 2007 and December 30, 2006 was as follows:
 
                 
    2007     2006  
 
North America
  $ 40,225     $ 33,837  
Other
    397       361  
                 
    $ 40,622     $ 34,198  
                 
 
(d) Total assets by location as of December 29, 2007 and December 30, 2006 was as follows:
 
                 
    2007     2006  
 
North America
  $ 947,980     $ 943,009  
Other
    8,510       5,051  
                 
    $ 956,490     $ 948,060  
                 


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
9.   Product Liability, Litigation and Other Contingencies
 
Product Liability
 
The Company is subject to various product liability claims and/or suits brought against it for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured by the Company and, in certain cases, products manufactured by others. The ultimate outcome of these claims, or potential future claims, cannot presently be determined. Management retains the services of an independent actuarial services firm and has established an accrual for probable losses based on this analysis, their previous claims history and available information on alleged claims. However, due to the uncertainty involved with estimates, actual results could vary substantially from those estimates.
 
The Company maintains product liability insurance coverage under policies that include a combined primary and excess policy written under multi-year programs with a combined limit of $23,000 expiring in January 2009, and an annual excess liability policy providing an additional limit of $20,000 excess of $23,000 expiring in January 2009, for a total limit of $43,000. These policies provide coverage against claims resulting from alleged injuries sustained during the policy period, subject to policy terms and conditions. The primary portion of the multi-year product liability policy is written with a $3,000 limit per occurrence, structured as a limit of $2,250 (fully funded by the Company) excess of a $750 self-insured retention.
 
Litigation and Other Contingencies
 
In addition to the matters discussed in the preceding paragraphs, the Company is a party to various non-product liability legal claims and actions incidental to its business, including without limitation, claims relating to intellectual property as well as employment related matters. Management believes that none of these claims or actions, either individually or in the aggregate, is material to its business or financial condition.
 
10.   Income Taxes
 
In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”). The interpretation addresses the determination of whether tax benefits claimed, or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
 
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Interest accrued on unrecognized tax benefits at December 29, 2007 was zero. The total amount of unrecognized tax benefits at December 29, 2007 was also zero.
 
The Company adopted the provisions of FIN 48 on December 31, 2006. Upon adoption of FIN 48, the Company had a tax reserve related to an Internal Revenue Service (“IRS”) exam for 2002 and 2003 equal to $2,774. Additionally, the Company had booked interest expense of $416 over the past two years for this reserve. The two issues before the IRS related to the Section 263A calculation and the deductibility of transaction costs related to the acquisition of Riddell. A resolution was agreed to during 2007. The settlement reduced the NOL carryforward, but was offset with a debit to the FIN 48 tax reserve for $534. The remaining portion of the FIN 48 reserve of $2,240 was reversed against Riddell goodwill since the reserve was established in purchase accounting with the Riddell purchase. No interest was due on the settlement, and therefore, the interest which had been previously accrued was reversed through the 2007 income tax expense. The Company has no other reserves for uncertain tax positions recorded as of December 29, 2007.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Changes in the tax reserve during the year ended December 29, 2007 is summarized as follows:
 
         
Balance at December 31, 2006
  $ 2,774  
Settlements
    (2,774 )
         
Balance at December 29, 2007
  $  
         
 
The Company is generally subject to tax examination for a period of three years after tax returns are filed. Therefore, the statute of limitations remains open for tax years 2004 and forward. However, when a company has net operating loss carryovers, those tax years remain open until three years after the net operating losses are utilized. Therefore, the tax years for Bell Sports, Inc. remain open back to 1995. The tax years for Riddell, Inc. remain open back to 2003.
 
Income tax expense (benefit) consisted of the following for December 29, 2007, December 30, 2006 and December 31, 2005:
 
                         
    2007     2006     2005  
 
Current tax expense (benefit):
                       
Federal
  $ (416 )   $     $ 628  
State
    641       800       514  
Foreign
    6,925       2,912       440  
                         
      7,150       3,712       1,582  
                         
Deferred tax expense (benefit):
                       
Federal
    3,875       (2,916 )     2,439  
State
    587       (1,082 )     (419 )
Foreign
    (180 )     (1,122 )     719  
                         
      4,282       (5,120 )     2,739  
                         
Income tax expense (benefit)
  $ 11,432     $ (1,408 )   $ 4,321  
                         
 
A reconciliation of income taxes computed at the United States federal statutory income tax rate (35%) to the provision for income taxes reflected in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 29, 2007, December 30, 2006 and December 31, 2005 is as follows:
 
                         
    2007     2006     2005  
 
Provision for income taxes at United States federal statutory rate of 35%
  $ 9,065     $ (2,541 )   $ 2,569  
State and local income taxes, net of federal income tax effect
    798       247       (61 )
Taxes on foreign income which differ from the United States statutory rate
    173       (160 )     39  
Non-deductible equity compensation expense
    996       1,084       1,616  
Tax effect of other permanent items
    400       329       112  
Other
          (367 )     46  
                         
    $ 11,432     $ (1,408 )   $ 4,321  
                         


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities. The significant components of deferred income tax assets and liabilities consist of the following at December 29, 2007 and December 30, 2006:
 
                 
    2007     2006  
 
Deferred income tax assets:
               
Receivable reserves
  $ 1,537     $ 1,601  
Inventory
    4,032       2,714  
Accrued expenses and reserves
    3,788       8,756  
Net operating loss carryforwards
    50,105       45,319  
Other
    1,022       2,097  
                 
Total deferred tax assets
    60,484       60,487  
Deferred income tax liabilities:
               
Property, plant and equipment
    144       197  
Intangible assets
    71,418       66,724  
Other
    685       510  
                 
Total deferred tax liabilities
    72,247       67,431  
Valuation allowance
    (6,513 )     (6,513 )
                 
Total net deferred income tax liability
  $ (18,276 )   $ (13,457 )
                 
 
At December 29, 2007, the Company had estimated net operating loss carryforwards available for U.S. federal income tax purposes of approximately $133,580. Based on Internal Revenue Code Section 382 relating to changes in ownership of the Company, utilization of the net operating loss carryforwards is limited to $115,034, which is the primary reason for the valuation allowance of $6,513. These net operating losses will begin to expire in 2012 through 2027.
 
Income (loss) before income taxes, consisted of the following:
 
                         
    2007     2006     2005  
 
Domestic
  $ 10,924     $ (16,515 )   $ 4,191  
Foreign
    14,977       9,255       3,212  
                         
Income (loss) before income taxes
  $ 25,901     $ (7,260 )   $ 7,403  
                         
 
The Company has cumulative undistributed earnings of non-U.S. subsidiaries of $53,789 for which U.S. taxes have not been provided. These earnings are intended to be permanently reinvested outside the U.S. If future events necessitate that these earnings should be repatriated to the U.S., an additional tax expense and related liability may be required. If such earnings were distributed, U.S. income taxes would be partially reduced by available credits paid to the jurisdictions in which the income was earned.
 
Cash paid for income taxes was $7,644, $6,444 and $849 for the years ended December 29, 2007, December 30, 2006 and December 31, 2005, respectively.
 
11.   Derivative Instruments and Hedging Activity
 
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” established accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be included on the balance sheet as an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met for cash flow or net investment hedges. If such hedge


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
accounting criteria are met, the change is deferred in stockholder’s equity as a component of accumulated other comprehensive income (loss). The deferred items are recognized in the period the derivative contract is settled. As of December 29, 2007, the Company had not designated any of its derivative instruments as hedges, and therefore, has recorded the changes in fair value in the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
The Company has a foreign subsidiary that enters into foreign currency exchange forward contracts to reduce its risk related to inventory purchases. At December 29, 2007, there were foreign currency forward contracts in effect for the purchase of U.S. $12,500 aggregated notional amounts, or approximately Cdn $12,231. These contracts are not designated as hedges, and therefore, under SFAS No. 133 they are recorded at fair value at each balance sheet date, with the resulting change charged or credited to cost of sales in the Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the foreign currency exchange forward contracts at December 29, 2007, represented a liability of approximately $630. This amount is recorded in accrued expenses in the accompanying Consolidated Balance Sheets. As of December 30, 2006, the Company had no foreign currency exchange forward contracts outstanding.
 
The Company was required by June 15, 2006, under its Credit Agreement, to have interest rate agreements in place such that not less than 50% of its outstanding term and senior subordinated indebtedness is fixed rate indebtedness. On June 6, 2006, the Company entered into an interest rate cap for $125,000 of its outstanding term indebtedness. For both fiscal years, as of December 29, 2007 and December 30, 2006, the Company had approximately 56% of its outstanding term and senior subordinated indebtedness in fixed rate indebtedness. Additional interest expense related to the interest rate cap was recorded in the year ended December 29, 2007 and December 30, 2006, in the amount of $106 and $61, respectively. The fair market value of the interest rate cap at December 29, 2007 and December 30, 2006 was zero and $66, respectively.
 
12.   Stock-Based Employee Compensation
 
On March 16, 2006, the Parent adopted its 2006 Equity Incentive Plan (the “2006 Plan”), which amended and restated its 2003 Equity Incentive Plan (the “2003 Plan”). The 2006 Plan provides for the issuance of Class B Common Units of the Parent (“Units”), which represent profit interests in the Parent. Accordingly, Class B unit holders are entitled to share in the distribution of profits of the Parent above a certain threshold, which is defined as the fair value of the Unit at the date of grant. The Units issued under the 2006 Plan vest based on both time and performance. Time vesting occurs over a four-year period measured from the date of the grant and performance vesting is based on achievement of the Company’s performance goals for 2009 and 2010. In addition, a portion of the Units, whether subject to time or performance vesting, become vested in the event of an initial public offering. If a change of control occurs and a holder of the Units is continuously employed by the Company until such change of control, then a portion of the unvested time based Units and performance Units will vest in various amounts depending on the internal rate of return achieved by certain investors in the Parent as a result of the change of control. The total Units available for awards are 38,381,984. The Units qualify as equity instruments.
 
Effective January 1, 2006, the Company adopted SFAS No. 123R “Share Based Payment” which was finalized in December 2004 and amended SFAS No. 123 “Accounting for Stock Based Compensation”, using the prospective transition method. Under SFAS No. 123R the Company uses the Black-Scholes Option Pricing Model to determine the fair value of the Units granted, similar to an equity SAR (Stock Appreciation Right). This model uses such factors as the market price of the underlying Units at date of issuance, floor of the Unit (dividend threshold) of $2.14 for Units issued March 16, 2006 through November 16, 2006 and subsequent to the November 17, 2006 dividend payment, $1.76 for Units issued from November 17, 2006 through December 29, 2007, the expected term of the Unit, which is approximately four years, utilizing the simplified method as set forth in Staff Accounting Bulletin (SAB) No. 107 “Shared Based Payment”.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In fiscal years 2007 and 2006, the weighted average assumptions used in the Black-Scholes Option Pricing Model were as follows:
 
         
    2007   2006
 
Risk-free interest rate
  5.2%   4.9%
Expected term
  4 years   4 years
Expected volatility(1)
  46.0%   46.0%
Dividend yield
  0.0%   0.0%
Forfeiture rate
  7.7%   7.7%
 
 
(1) Expected volatility is based upon a peer group of companies given no historical data for the Units.
 
Accordingly, the Company records compensation expense using the fair value of the Units granted after the adoption of SFAS No. 123R that are time vesting over the vesting service period on a straight-line basis including those Units that are subject to graded vesting. Compensation expense for the performance based vesting Units is recognized when it becomes probable that the performance conditions will be met. As of December 29, 2007, the Company has not recognized any compensation expense for the performance based vesting Units as it is not probable that the performance conditions will be met.
 
The fair value of the 32,198,435 Units granted under the 2006 Plan during 2006, was $16,389, comprising $9,833 for time vesting and $6,556 for performance vesting units. In connection with the acquisition of Easton, the Parent redeemed 4,987,176 vested units under the 2003 Plan as of the date of acquisition at a cost of $3,577. Additional compensation expense recognized during 2006 related to the redemption was $748. Additionally, the Parent cancelled 13,988,442 unvested units under the 2003 Plan and granted an equal number of Units under the 2006 Plan. Unrecognized compensation cost related to the modification of the unvested 2003 Plan units as of date of the modification was $2,584 and was computed in accordance with the modification provisions in SFAS 123(R).
 
Total compensation expense related to the equity incentive plan recorded during 2007 and 2006 were $2,845 and $3,097, respectively, and is included in selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
As of December 29, 2007, there was $12,555 of unrecognized compensation costs, net of actual and estimated forfeitures, related to the Units comprising of $6,517 related to time based vesting units and $6,038 related to the performance based vesting units. The unrecognized cost related to the time based vesting units is expected to be amortized over a weighted average service period of approximately two years. The unrecognized cost related to the performance based vesting units will be recognized when it becomes probable that the performance conditions will be met.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s Unit activity under the Plan is as follows:
 
                 
          Weighted Average
 
    Number of
    Grant Date
 
    Units     Fair Value  
 
Outstanding at December 31, 2005
    20,233,228     $ 1.36  
Redeemed
    (4,987,176 )   $ 1.41  
Cancelled
    (13,988,442 )   $ 1.35  
Granted
    32,198,435     $ 2.14  
Forfeited
    (2,568,309 )   $ 2.09  
                 
Outstanding at December 30, 2006
    30,887,736     $ 2.11  
Granted
    1,050,000     $ 1.76  
Forfeited
    (4,755,805 )   $ 2.12  
                 
Outstanding at December 29, 2007
    27,181,931     $ 2.10  
                 
Vested Units at December 30, 2006
    841,078     $ 1.50  
                 
Vested Units at December 29, 2007
    5,588,763     $ 2.01  
                 
 
Prior to the adoption of SFAS No. 123(R), the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by APB No. 25 and related interpretations and provided pro forma net income disclosures for employee stock grants made as if the minimum-value based method defined in SFAS No. 123 had been applied. Share-based compensation expense related to the Units granted under the 2003 Plan recorded in accordance with APB No. 25 was $4,617 for 2005, and all awards were treated as “variable” under APB No. 25.
 
The following table illustrates the effect on net income after taxes as if the Company had applied the minimum-value based method as defined in SFAS No. 123(R) to unit based compensation during the fiscal year ended December 31, 2005.
 
         
    2005  
 
Net income as reported
  $ 3,082  
Unit based compensation expense
    1,921  
Pro forma unit based compensation expense
    (338 )
         
Pro forma net income
  $ 4,665  
         
 
13.   Related Party Transactions
 
The Company, its subsidiaries, RBG and the Parent entered into management agreements with Fenway Partners, LLC (then Fenway Partners, Inc.) and Fenway Partners Resources, Inc., each an affiliate of Fenway Partners Capital Fund II, L.P., which is an affiliate of the Parent, pursuant to which these entities agreed to provide management and other advisory services. As of December 31, 2005, pursuant to these agreements, these entities were entitled to receive an aggregate annual management fee equal to the greater of $3,000 or 5% of the Company’s previous fiscal year’s Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”).
 
Pursuant to the management agreements, the Company expensed and paid these entities $750 and $3,000 for 2006 and 2005, respectively, which is included in management expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss). Prior to the consummation of the acquisition of Easton, the management agreements were amended to remove any obligation to pay an annual management fee. In return for such amendment, the Company agreed to pay Fenway Partners, LLC (and its designee) $7,500, which payment was


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
made immediately prior to the consummation of the acquisition of Easton. These expenses paid to Fenway Partners, LLC are also included in management expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
In addition, pursuant to such agreements, Fenway Partners, LLC, also received reimbursement of out of pocket expenses of approximately $2,228 in connection with expenses incurred by them related to the acquisition of Easton. These amounts are included in the acquisition costs.
 
Jas. D. Easton, Inc. is an affiliate of James L. Easton, a member of the board of managers of the Parent, and former owner of Easton. On February 1, 2006, the Company entered into a Stock Purchase Agreement with Jas. D. Easton, Inc., to acquire 100% of the outstanding capital stock of Easton, and the Company consummated the acquisition of Easton on March 16, 2006. Pursuant to the transaction, the Company paid the seller $385,000 in cash. In addition, a post-closing adjustment of $16,195 was paid in July 2006, based on the determination of closing working capital. The stock purchase agreement contains customary representations, warranties and covenants. In addition, the stock purchase agreement provides that Jas. D. Easton, Inc. will indemnify the Company for breaches of its representations, warranties and covenants, subject to certain baskets and caps. Simultaneous with the closing of the acquisition of Easton, Jas. D. Easton, Inc. purchased equity in the Parent pursuant to a subscription agreement in an aggregate amount of $25,000.
 
In connection with the acquisition of Easton, Easton and various affiliates of James L. Easton (including Jas. D. Easton, Inc.) entered into various technology license and trademark license agreements with respect to certain intellectual property owned or licensed by Easton, including the Easton brand name. Pursuant to these agreements, Easton has granted each of Jas D. Easton, Inc., James L. Easton Foundation, Easton Development, Inc. and Easton Sports Development Foundation a name license for use of the “Easton” name solely as part of their respective company names. In addition, Easton has granted each of Easton Technical Products, Inc. and Hoyt Archery, Inc. a license to certain trademarks, including the Easton brand solely in connection with specific products or services, none of which are currently competitive with the Company’s products or services. Easton has also granted each of these entities a license to certain technology solely in connection with specific products and fields. Easton has also entered into a patent license agreement with Easton Technical Products, Inc., which grants it a license to exploit the inventions disclosed in the patent solely within specific fields. Lastly, Easton entered into a trademark license agreement with Easton Technical Products, Inc., which grants Easton a license to use certain trademarks solely in connection with specific products or services.
 
The Company has entered into a right of first offer agreement with Jas. D. Easton, Inc. and Easton Technical Products, Inc. pursuant to which the Company is to receive the opportunity to purchase Easton Technical Products, Inc. prior to any third party buyer. The term of the right of first offer agreement extends until the earliest of (i) March 16, 2016, (ii) the date Easton Technical Products, Inc. no longer uses the name “Easton,” (iii) the effectiveness of any initial public offering by Easton Technical Products, Inc. and (iv) the consummation of any sale of such company or a controlling interest therein effectuated in accordance with the terms of the right of first offer agreement.
 
Affiliates of Jas. D. Easton, Inc. and James L. Easton own certain of the properties currently leased by Easton. During the fiscal years ended 2007 and 2006, Easton paid approximately $2,746 and $2,149, respectively, in rent pursuant to such affiliate leases.
 
On October 1, 2004, Bell entered into a consulting agreement with Terry Lee, a member of the board of managers of the Parent. Pursuant to the terms of the consulting agreement, Mr. Lee agreed to provide the Company and its affiliates with certain consulting services relating to Bell. In exchange for his services, Mr. Lee is entitled to annual compensation of $100. The term of Mr. Lee’s consulting agreement is for one year and will automatically extend for additional one-year terms until the Company elects not to extend the agreement.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Ontario Teachers’ Pension Plan Board, a member of the Parent, received reimbursement of out of pocket expenses of approximately $1,472 in conjunction with expenses incurred by them related to the acquisition of Easton. These reimbursements were included in the Easton acquisition costs.
 
14.   Supplemental Guarantor Condensed Financial Information
 
In September 2004, in connection with the acquisition of Bell, the Company (presented as issuer in the following tables) issued $140,000 of 8.375% senior subordinated notes due 2012. The senior subordinated notes are general unsecured obligations and are subordinated in right of payment to all existing or future senior indebtedness. The indenture governing the senior subordinated notes contains certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and engage in certain other activities. The senior subordinated notes are guaranteed by all of our domestic subsidiaries (the “Guarantors”). Each subsidiary guarantor is wholly owned, the guarantees are full and unconditional and the guarantees are joint and several. All other subsidiaries of the Company do not guarantee the senior subordinated notes (the “Non-Guarantors”).
 
The following condensed consolidating financial statements present the results of operations, financial position and cash flows of (i) the Issuer, (ii) the Guarantors, (iii) the Non-Guarantors, and (iv) eliminations to arrive at the information for the Company on a consolidated basis for 2007 and 2006. Separate financial statements and other disclosures concerning the Guarantors are not presented because management does not believe such information is material to investors. Therefore, each of the Guarantors is combined in the presentation below. Similar information for 2005 has not been presented as the non-guarantor subsidiaries of the Company in 2005 was minor in accordance with Paragraph (f) of Rule 3-10 of Regulation S-X issued by the Securities and Exchange Commission of the United States.


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Consolidating Balance Sheet
December 29, 2007
 
                                         
          Guarantor
    Non-Guarantor
             
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
ASSETS
Current assets:
                                       
Cash and cash equivalents
  $ 3,099     $ 1,820     $ 12,004     $     $ 16,923  
Accounts receivable, net
          175,637       24,743             200,380  
Inventories, net
          119,087       16,248             135,335  
Prepaid expenses
    964       8,510       300             9,774  
Deferred taxes
    534       6,248                   6,782  
Other current assets
          4,615       835             5,450  
                                         
Total current assets
    4,597       315,917       54,130             374,644  
                                         
Property, plant and equipment, net
    11,109       28,224       1,289             40,622  
Deferred financing fees, net
    15,633                         15,633  
Investments and intercompany receivables
    435,874       38,353       21,137       (495,364 )      
Intangible assets, net
          310,946       6,279             317,225  
Goodwill
    16,195       182,055       5,191             203,441  
Other assets
          4,919       6             4,925  
                                         
Total assets
  $ 483,408     $ 880,414     $ 88,032     $ (495,364 )   $ 956,490  
                                         
 
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
                                       
Current portion of long-term debt
  $ 3,350     $     $     $     $ 3,350  
Revolving credit facility
    5,500                         5,500  
Current portion of capital lease obligations
          21                   21  
Accounts payable
          57,362       3,224             60,586  
Accrued expenses
          33,388       8,950             42,338  
                                         
Total current liabilities
    8,850       90,771       12,174             111,795  
                                         
Long-term debt, less current portion
    466,625                         466,625  
Capital lease obligations, less current portion
          145                   145  
Deferred taxes
          21,256       3,802             25,058  
Other noncurrent liabilities
    1,140       5,437       5,303             11,880  
Long-term intercompany payables
          453,586       6,765       (460,351 )      
                                         
Total liabilities
    476,615       571,195       28,044       (460,351 )     615,503  
                                         
Total stockholder’s equity
    6,793       309,219       59,988       (35,013 )     340,987  
                                         
Total liabilities and stockholder’s equity
  $ 483,408     $ 880,414     $ 88,032     $ (495,364 )   $ 956,490  
                                         


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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Consolidating Balance Sheet
December 30, 2006
 
                                         
          Guarantor
    Non-Guarantor
             
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
ASSETS
Current assets:
                                       
Cash and cash equivalents
  $ 1,527     $ 2,685     $ 5,687     $     $ 9,899  
Accounts receivable, net
          164,428       17,806             182,234  
Inventories, net
          122,686       12,161             134,847  
Prepaid expenses
    2,301       7,811       337             10,449  
Deferred taxes
    5,205       5,019                   10,224  
Other current assets
          1,131       480             1,611  
                                         
Total current assets
    9,033       303,760       36,471             349,264  
                                         
Property, plant and equipment, net
    5,094       27,680       1,424             34,198  
Deferred financing fees, net
    19,271                         19,271  
Investments and intercompany receivables
    749,737       23,899       9,210       (782,846 )      
Intangible assets, net
          323,945       6,500             330,445  
Goodwill
    16,195       185,941       5,191             207,327  
Other assets
          7,555                   7,555  
                                         
Total assets
  $ 799,330     $ 872,780     $ 58,796     $ (782,846 )   $ 948,060  
                                         
 
LIABILITIES AND STOCKHOLDER’S EQUITY