##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 333-123927
 EASTON-BELL SPORTS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    20-1636283
(I.R.S. Employer
Identification No.)
 
 7855 Haskell Avenue, Suite 200
Van Nuys, California 91406
(Address of principal executive offices) (Zip Code)
(818) 781-1587
(Registrants telephone number, including area code)
 
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-accelerated filer þ
 o þ




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##### 



EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 INDEX
  
 PagePART I. FINANCIAL INFORMATION:Item 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statements of Operations and Comprehensive Income for the Fiscal Quarter
and Three Fiscal Quarters Ended September 30, 2006 (unaudited) and October 1, 2005 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Fiscal Quarters Ended September
30, 2006 (unaudited) and October 1, 2005 (unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATION:Item 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURES
    
    
    25Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 906




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,929
    
    
    $
    3,632Accounts receivable, net
    
    
    208,120
    
    
    
    87,459Inventories, net
    
    
    123,078
    
    
    
    54,950Deferred taxes
    
    
    9,932
    
    
    
    9,361Other current assets
    
    
    11,788
    
    
    
    9,414Total current assets
    
    
    361,847
    
    
    
    164,816Property, plant and equipment, net
    
    
    33,837
    
    
    
    18,945Intangible assets, net
    
    
    338,545
    
    
    
    176,544Goodwill
    
    
    198,575
    
    
    
    100,003Other assets
    
    
    28,328
    
    
    
    20,395Total assets
    
    $
    961,132
    
    
    $
    480,703LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt and capital lease obligations
    
    $
    3,397
    
    
    $
    1,164Revolving credit facility
    
    
    19,500
    
    
    
    Accounts payable
    
    
    43,829
    
    
    
    23,090Accrued expenses
    
    
    66,427
    
    
    
    38,828Total current liabilities
    
    
    133,153
    
    
    
    63,082Long-term debt, less current portion
    
    
    470,151
    
    
    
    247,733Deferred taxes
    
    
    17,300
    
    
    
    23,151Other noncurrent liabilities
    
    
    12,939
    
    
    
    12,803Total liabilities
    
    
    633,543
    
    
    
    346,769Stockholders Equity:Common stock; $0.01 par value, 100 shares authorized, 100
shares issued and outstanding at September 30, 2006 and
December 31, 2005, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    333,698
    
    
    
    144,226Accumulated deficit
    
    
    (7,977
    )
    
    
    (10,657
    )Accumulated other comprehensive income
    
    
    1,868
    
    
    
    365Total stockholders equity
    
    
    327,589
    
    
    
    133,934Total liabilities and stockholders equity
    
    $
    961,132
    
    
    $
    480,703
  1




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
  Fiscal Quarter Ended
    
    
    Three Fiscal Quarters EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    186,485
    
    
    $
    102,947
    
    
    $
    495,932
    
    
    $
    293,961Cost of sales
    
    
    118,059
    
    
    
    65,493
    
    
    
    328,082
    
    
    
    185,219Gross profit
    
    
    68,426
    
    
    
    37,454
    
    
    
    167,850
    
    
    
    108,742Selling, general and administrative
expenses (exclusive of management and
restructuring expenses and amortization
of intangibles)
    
    
    42,916
    
    
    
    23,742
    
    
    
    111,014
    
    
    
    70,445Management expenses
    
    
    
    
    
    
    623
    
    
    
    8,250
    
    
    
    2,123Restructuring expenses
    
    
    81
    
    
    
    26
    
    
    
    625
    
    
    
    1,233Amortization of intangibles
    
    
    3,410
    
    
    
    2,170
    
    
    
    9,162
    
    
    
    6,390Income from operations
    
    
    22,019
    
    
    
    10,893
    
    
    
    38,799
    
    
    
    28,551Interest expense, net
    
    
    10,617
    
    
    
    5,657
    
    
    
    33,323
    
    
    
    16,339Income before income taxes
    
    
    11,402
    
    
    
    5,236
    
    
    
    5,476
    
    
    
    12,212Income tax expense
    
    
    5,673
    
    
    
    2,806
    
    
    
    2,796
    
    
    
    6,138Net income
    
    
    5,729
    
    
    
    2,430
    
    
    
    2,680
    
    
    
    6,074Other comprehensive income:Foreign currency translation adjustment
    
    
    48
    
    
    
    291
    
    
    
    1,503
    
    
    
    168Comprehensive income
    
    $
    5,777
    
    
    $
    2,721
    
    
    $
    4,183
    
    
    $
    6,242
  2




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Fiscal Quarters EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,680
    
    
    $
    6,074Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    15,381
    
    
    
    10,318Amortization of deferred financing fees
    
    
    2,718
    
    
    
    1,415Early extinguishment of debt
    
    
    1,613
    
    
    
    Variable stock compensation expense
    
    
    2,289
    
    
    
    2,742Deferred income tax (benefit) provision
    
    
    (6,422
    )
    
    
    4,260Write-down of property, plant and equipment
    
    
    564
    
    
    
    127Changes in operating assets and liabilities, net of
effects from purchases of businesses:Accounts receivable, net
    
    
    (39,538
    )
    
    
    (27,514
    )Inventories
    
    
    10,625
    
    
    
    (4,260
    )Other current and noncurrent assets
    
    
    1,030
    
    
    
    2,358Accounts payable
    
    
    8,375
    
    
    
    1,042Accrued expenses
    
    
    1,031
    
    
    
    2,564Other current and noncurrent liabilities
    
    
    136
    
    
    
    (611
    )Net cash provided by (used in) operating activities
    
    
    482
    
    
    
    (1,485
    )Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (10,268
    )
    
    
    (3,826
    )Adjustment to goodwill
    
    
    
    
    
    
    (145
    )Purchase of businesses, net of cash acquired
    
    
    (405,852
    )
    
    
    Net cash used in investing activities
    
    
    (416,120
    )
    
    
    (3,971
    )Cash flows from financing activities:Proceeds from senior term loan
    
    
    335,000
    
    
    
    Proceeds from revolving credit facility
    
    
    85,004
    
    
    
    131,539Payments on senior term loan
    
    
    (110,300
    )
    
    
    (825
    )Payments on revolving credit facility
    
    
    (65,504
    )
    
    
    (124,539
    )Payments on capital lease obligations
    
    
    (49
    )
    
    
    (78
    )Repurchase of shares
    
    
    (4,270
    )
    
    
    Proceeds from capital contributions
    
    
    191,453
    
    
    
    605Payment of debt issuance costs
    
    
    (11,902
    )
    
    
    (419
    )Net cash provided by financing activities
    
    
    419,432
    
    
    
    6,283Effect of exchange rate changes on cash and cash equivalents
    
    
    1,503
    
    
    
    168Increase in cash and cash equivalents
    
    
    5,297
    
    
    
    995Cash and cash equivalents, beginning of period
    
    
    3,632
    
    
    
    1,429Cash and cash equivalents, end of period
    
    $
    8,929
    
    
    $
    2,424
  3




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 ( )
 1. Basis of Presentation
   2. Acquisition of Easton Sports
      4




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
  Business Combinations
  Net purchase price including cost of the transaction
    
    $
    405,852Add:Liabilities assumed (mainly accounts payable and accrued
expenses)
    
    
    38,933Less:Accounts receivable
    
    
    81,123Inventory
    
    
    78,753Other current assets
    
    
    3,434Property, plant and equipment
    
    
    11,407Other assets
    
    
    696Patents
    
    
    22,000Licensing agreements
    
    
    4,300Trademarks/Tradenames (indefinite-lived)
    
    
    128,300Non-compete agreement
    
    
    1,600Customer relationships
    
    
    14,600Excess of cost over net assets acquired (goodwill)
    
    $
    98,572
   Pro formaThree Fiscal
    
    Three Fiscal
    
    FiscalQuarters
    
    Quarters
    
    Quarterended
    
    ended
    
    endedSeptember 30,
    
    October 1,
    
    October 1,2006
    
    2005
    
    2005Net sales
    
    $
    551,307
    
    
    $
    471,999
    
    
    $
    156,156Net income
    
    
    8,476
    
    
    
    (119
    )
    
    
    3,264
 3. Restructuring Expenses
  5




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
 Recognition of Liabilities in Connection with a
Purchase Business Combination
 FacilityEmployee
    
    ClosureSeverance
    
    Costs
    
    TotalBalance of restructuring accrual as of
December 31, 2005
    
    $
    
    
    
    $
    
    
    
    $
    Provision
    
    
    2,100
    
    
    
    300
    
    
    
    2,400Balance of restructuring accrual as of July 1, 2006
    
    
    2,100
    
    
    
    300
    
    
    
    2,400Provision
    
    
    
    
    
    
    1,300
    
    
    
    1,300Balance of restructuring accrual as of September
30, 2006
    
    $
    2,100
    
    
    $
    1,600
    
    
    $
    3,700
  Accounting for Costs
Associated with Exit or Disposal Activities
 Write-downof Property,
    
    
    
    
    
    
    Employee
    
    
    FacilityPlant and
    
    
    Employee
    
    
    Retention
    
    
    ClosureEquipment
    
    
    Severance
    
    
    Payments
    
    
    Costs
    
    
    TotalBalance as of December 31, 2005
    
    $
    
    
    
    $
    69
    
    
    $
    15
    
    
    $
    
    
    
    $
    84Provision
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    395
    
    
    
    544Less: non-cash activity
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    (138
    )
    
    
    (287
    )Cash activity
    
    
    
    
    
    
    (63
    )
    
    
    (9
    )
    
    
    (257
    )
    
    
    (329
    )Balance as of July 1, 2006
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    12Provision
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    81Less: non-cash activity
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Cash activity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66
    )
    
    
    (66
    )Balance as of September 30, 2006
    
    $
    
    
    
    $
    6
    
    
    $
    6
    
    
    $
    
    
    
    $
    12
  6




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
 4. Goodwill and Other Intangible Assets
  September 30, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmounts
    
    
    Amortization
    
    
    Amounts
    
    
    AmortizationAmortizable intangible assets:Trademarks and tradenames
    
    $
    1,702
    
    
    $
    (779
    )
    
    $
    1,702
    
    
    $
    (594
    )Customer relationships
    
    
    63,880
    
    
    
    (13,370
    )
    
    
    49,280
    
    
    
    (9,262
    )Patents
    
    
    60,709
    
    
    
    (8,825
    )
    
    
    38,345
    
    
    
    (4,638
    )Licensing and other
    
    
    5,900
    
    
    
    (683
    )
    
    
    
    
    
    
    Total
    
    $
    132,191
    
    
    $
    (23,657
    )
    
    $
    89,327
    
    
    $
    (14,494
    )Indefinite-lived intangible assets:Trademarks
    
    $
    230,011
    
    
    
    
    
    
    $
    101,711
  Team
    
    
    ActionSports
    
    
    Sports
    
    
    ConsolidatedBalance as of September 30,
2006
    
    $
    140,542
    
    
    $
    58,033
    
    
    $
    198,575
 Goodwill and Other Intangible Assets
 5. Long-Term Debt
  September 30,
    
    
    December 31,2006
    
    
    2005Senior Secured Credit Facility:Term loan facility
    
    $
    333,325
    
    
    $
    108,625U. S. revolving credit facility
    
    
    19,500
    
    
    
    8.375% Senior subordinated notes due 2012
    
    
    140,000
    
    
    
    140,000Capital lease obligations
    
    
    223
    
    
    
    272Total long-term debt
    
    
    493,048
    
    
    
    248,897Less current maturities of long-term debt
and revolver
    
    
    (22,897
    )
    
    
    (1,164
    )Long-term debt, less current portion
    
    $
    470,151
    
    
    $
    247,733
   7




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
          8




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
 Debtors Accounting for a Modification or Exchange of Debt
Instruments
 6. Accrued Expenses
  September 30, 2006
    
    
    December 31, 2005Salaries, wages, commissions and bonuses
    
    $
    16,416
    
    
    $
    9,224Advertising
    
    
    7,814
    
    
    
    1,724Taxes
    
    
    5,393
    
    
    
    1,270Restructuring
    
    
    3,712
    
    
    
    84Defective products
    
    
    3,580
    
    
    
    3,566Rebates
    
    
    3,265
    
    
    
    2,129Warranty
    
    
    3,243
    
    
    
    283Product liability
    
    
    2,427
    
    
    
    2,057Royalties
    
    
    1,952
    
    
    
    1,586Interest
    
    
    1,151
    
    
    
    3,100Other
    
    
    17,474
    
    
    
    13,805Accrued expenses
    
    $
    66,427
    
    
    $
    38,828
 7. Inventories
   September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    27,770
    
    
    $
    10,470Work-in-process
    
    
    3,637
    
    
    
    463Finished goods
    
    
    91,671
    
    
    
    44,017Inventories, net
    
    $
    123,078
    
    
    $
    54,950
  8. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109,
 Share-Based Payment
 9




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
 9. Segment Reporting
   Team
    
    ActionFiscal Quarter Ended
    
    Sports
    
    Sports
    
    ConsolidatedSeptember 30, 2006Net sales
    
    $
    106,838
    
    
    $
    79,647
    
    
    $
    186,485Income from operations
    
    
    18,237
    
    
    
    11,957
    
    
    
    30,194Depreciation
    
    
    1,318
    
    
    
    973
    
    
    
    2,291Capital expenditures
    
    
    1,230
    
    
    
    1,885
    
    
    
    3,115October 1, 2005Net sales
    
    $
    42,051
    
    
    $
    60,896
    
    
    $
    102,947Income from operations
    
    
    8,057
    
    
    
    7,366
    
    
    
    15,423Depreciation
    
    
    448
    
    
    
    926
    
    
    
    1,374Capital expenditures
    
    
    624
    
    
    
    945
    
    
    
    1,569
 Team
    
    ActionThree Fiscal Quarters Ended
    
    Sports
    
    Sports
    
    ConsolidatedSeptember 30, 2006Net sales
    
    $
    275,391
    
    
    $
    220,541
    
    
    $
    495,932Income from operations
    
    
    36,534
    
    
    
    31,234
    
    
    
    67,768Depreciation
    
    
    3,366
    
    
    
    2,853
    
    
    
    6,219Capital expenditures
    
    
    2,394
    
    
    
    7,874
    
    
    
    10,268October 1, 2005Net sales
    
    $
    107,827
    
    
    $
    186,134
    
    
    $
    293,961Income from operations
    
    
    17,842
    
    
    
    23,373
    
    
    
    41,215Depreciation
    
    
    1,289
    
    
    
    2,639
    
    
    
    3,928Capital expenditures
    
    
    1,773
    
    
    
    2,053
    
    
    
    3,826
 Team
    
    ActionSports
    
    Sports
    
    ConsolidatedAssetsAs of September 30, 2006
    
    $
    562,604
    
    
    $
    398,528
    
    
    $
    961,132As of December 31, 2005
    
    
    158,778
    
    
    
    321,925
    
    
    
    480,703
 10




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
  Fiscal Quarter Ended
    
    
    Three Fiscal Quarters EndedSeptember 30, 2006
    
    
    October 1, 2005
    
    
    September 30, 2006
    
    
    October 1, 2005Segment income from operations
    
    $
    30,194
    
    
    $
    15,423
    
    
    $
    67,768
    
    
    $
    41,215Variable stock compensation expense
    
    
    (749
    )
    
    
    (1,351
    )
    
    
    (2,289
    )
    
    
    (2,742
    )Management expenses
    
    
    
    
    
    
    (623
    )
    
    
    (8,250
    )
    
    
    (2,123
    )Corporate expenses
    
    
    (3,935
    )
    
    
    (360
    )
    
    
    (8,643
    )
    
    
    (176
    )Restructuring expenses
    
    
    (81
    )
    
    
    (26
    )
    
    
    (625
    )
    
    
    (1,233
    )Amortization of intangibles
    
    
    (3,410
    )
    
    
    (2,170
    )
    
    
    (9,162
    )
    
    
    (6,390
    )Consolidated income from operations
    
    $
    22,019
    
    
    $
    10,893
    
    
    $
    38,799
    
    
    $
    28,551
 10. Product Liability and Other Contingencies
   11. Income Taxes
  12. Derivative Instruments and Hedging Activity
 Accounting for Derivative Instruments and Hedging Activities,
  11




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
   13. Stock-Based Employee Compensation
 Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation Transition
and Disclosure
   Fiscal Quarter
    
    Three FiscalEnded
    
    Quarters EndedSeptember 30, 2006
    
    September 30, 2006Unit based compensation expense
    
    $
    749
    
    
    $
    2,289
   12




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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
   Fiscal Quarter
    
    Three FiscalEnded
    
    Quarters EndedOctober 1, 2005
    
    October 1, 2005Net income, as reported
    
    $
    2,430
    
    
    $
    6,074SAR Unit based compensation expense
    
    
    1,351
    
    
    
    2,742Pro forma SAR Unit based
compensation expense
    
    
    (203
    )
    
    
    (610
    )Pro forma net income
    
    $
    3,578
    
    
    $
    8,206
  Weighted AverageNumber of
SAR Units
    
    Grant Date
 Fair ValueOutstanding at December 31, 2005
    
    
    20,233,228
    
    
    $
    1.3593Cancelled
    
    
    (13,988,442
    )
    
    $
    1.3531Granted
    
    
    14,888,442
    
    
    $
    2.1419Forfeited
    
    
    (211,400
    )
    
    $
    1.4717Redeemed
    
    
    (4,987,176
    )
    
    $
    1.4066Outstanding at March 16, 2006
    
    
    15,934,652
    
    
    $
    2.0796Granted
    
    
    15,290,615
    
    
    $
    2.1419Forfeited
    
    
    (997,295
    )
    
    $
    2.1419Outstanding at July 1, 2006
    
    
    30,227,972
    
    
    $
    2.1091Granted
    
    
    2,019,378
    
    
    $
    2.1419Forfeited
    
    
    (1,009,869
    )
    
    $
    2.1419Outstanding at September 30, 2006
    
    
    31,237,481
    
    
    $
    2.1101Exercisable at September 30, 2006
    
    
    841,078
    
    
    $
    1.5025
  Weighted AverageNumber of
    
    Grant DateSAR Units
    
    Fair ValueNon-vested at December 31, 2005
    
    
    14,913,405
    
    
    $
    1.3488Cancelled
    
    
    (13,988,442
    )
    
    $
    1.3531Granted
    
    
    14,888,442
    
    
    $
    2.1419Forfeited
    
    
    (211,400
    )
    
    $
    1.4717Non-vested at March 16, 2006
    
    
    15,602,005
    
    
    $
    2.1001Granted
    
    
    15,290,615
    
    
    $
    2.1419Forfeited
    
    
    (997,295
    )
    
    $
    2.1419Vested
    
    
    (422,594
    )
    
    $
    1.8084Non-vested at July 1, 2006
    
    
    29,472,731
    
    
    $
    2.1245Granted
    
    
    2,019,378
    
    
    $
    2.1419Forfeited
    
    
    (1,009,870
    )
    
    $
    2.1419Vested
    
    
    (85,836
    )
    
    $
    1.4717Non-vested at September 30, 2006
    
    
    30,396,403
    
    
    $
    2.1270
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
 14. Warranty Obligations
   Three Fiscal Quarters EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005Beginning of period
    
    $
    283
    
    
    $
    283Warranty
liability acquired through Easton acquisition
    
    
    2,764
    
    
    
    Warranty costs incurred during the period
    
    
    (2,829
    )
    
    
    (182
    )Warranty
costs recorded during the period
    
    
    3,025
    
    
    
    182End of period
    
    $
    3,243
    
    
    $
    283
 15. Related Party Transactions
     Easton Easton
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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (continued)
( )
      15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 GENERAL
 On March 16, 2006, pursuant to a stock purchase agreement, Riddell Bell Holdings, Inc.,
(Riddell Bell), acquired Easton Sports, Inc. and its subsidiaries, or Easton Sports. The
transactions relating to the acquisition are more fully described in Note 2 to the condensed
consolidated financial statements included elsewhere in this report. In connection with the
acquisition of Easton Sports, Riddell Bell changed its name to Easton-Bell Sports, Inc. In this
report, Easton-Bell Sports, Inc. and its subsidiaries are referred to as the Company.
      16




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##### Table of Contents



FORWARD-LOOKING STATEMENTS AND INFORMATION
 Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations  (continued)
   RESULTS OF OPERATIONS
 Net Sales
   Change Due toFiscal Quarter Ended
    
    
    Change
    
    
    AcquisitionSeptember 30,
    
    
    October 1,2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    $
    
    
    %Net sales for the quarter ended
    
    $
    186,485
    
    
    $
    102,947
    
    
    $
    83,538
    
    
    
    81.1
    %
    
    $
    62,836
    
    
    
    61.0
    %Net sales for the three quarters ended
    
    $
    495,932
    
    
    $
    293,961
    
    
    $
    201,971
    
    
    
    68.7
    %
    
    $
    164,266
    
    
    
    55.9
    %
 Fiscal Quarter EndedChange dueSeptember 30,
    
    
    % of
    
    
    October 1,
    
    
    % of
    
    
    to2006
    
    
    Net Sales
    
    
    2005
    
    
    Net Sales
    
    
    acquisitionGross profit
    
    $
    68,426
    
    
    
    36.7
    %
    
    $
    37,454
    
    
    
    36.4
    %
    
    $
    22,110Selling, general and
administrative expenses
    
    
    42,916
    
    
    
    23.0
    %
    
    
    23,742
    
    
    
    23.1
    %
    
    
    13,502Management expenses
    
    
    
    
    
    
    0.0
    %
    
    
    623
    
    
    
    0.6
    %
    
    
    Restructuring expenses
    
    
    81
    
    
    
    0.1
    %
    
    
    26
    
    
    
    0.0
    %
    
    
    Amortization of intangibles
    
    
    3,410
    
    
    
    1.8
    %
    
    
    2,170
    
    
    
    2.1
    %
    
    
    1,283Income from operations
    
    $
    22,019
    
    
    
    11.8
    %
    
    $
    10,893
    
    
    
    10.6
    %
    
    $
    7,325
 17




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  (continued)
 Three Fiscal Quarters EndedChange dueSeptember 30,
    
    
    % of
    
    
    October 1,
    
    
    % of
    
    
    to2006
    
    
    Net Sales
    
    
    2005
    
    
    Net Sales
    
    
    acquisitionGross profit
    
    $
    167,850
    
    
    
    33.8
    %
    
    $
    108,742
    
    
    
    37.0
    %
    
    $
    45,415Selling, general and administrative
expenses
    
    
    111,014
    
    
    
    22.4
    %
    
    
    70,445
    
    
    
    24.0
    %
    
    
    30,147Management expenses
    
    
    8,250
    
    
    
    1.7
    %
    
    
    2,123
    
    
    
    0.7
    %
    
    
    Restructuring and other infrequent expenses
    
    
    625
    
    
    
    0.1
    %
    
    
    1,233
    
    
    
    0.4
    %
    
    
    Amortization of intangibles
    
    
    9,162
    
    
    
    1.8
    %
    
    
    6,390
    
    
    
    2.2
    %
    
    
    2,780Income from operations
    
    $
    38,799
    
    
    
    7.8
    %
    
    $
    28,551
    
    
    
    9.7
    %
    
    $
    12,488
 Gross Profit
  Selling, General and Administrative Expenses
  Management expenses
  Restructuring expenses
  Amortization of Intangibles
  18




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Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations  (continued)
 Interest Expense
  Provision for Income Taxes
  RESTRUCTURING EXPENSES
 Recognition of Liabilities in Connection with a Purchase Business Combination
 FacilityEmployee
    
    
    ClosureSeverance
    
    
    Costs
    
    
    TotalBalance of restructuring accrual as of
December 31, 2005
    
    $
    
    
    
    $
    
    
    
    $
    Provision
    
    
    2,100
    
    
    
    300
    
    
    
    2,400Balance of restructuring accrual as of July 1, 2006
    
    
    2,100
    
    
    
    300
    
    
    
    2,400Provision
    
    
    
    
    
    
    1,300
    
    
    
    1,300Balance of restructuring accrual as of September
30, 2006
    
    $
    2,100
    
    
    $
    1,600
    
    
    $
    3,700
  Accounting for Costs
Associated with Exit or Disposal Activities
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  (continued)
 Write-downof Property,
    
    
    
    
    
    
    Employee
    
    
    FacilityPlant and
    
    
    Employee
    
    
    Retention
    
    
    ClosureEquipment
    
    
    Severance
    
    
    Payments
    
    
    Costs
    
    
    TotalBalance as of December 31, 2005
    
    $
    
    
    
    $
    69
    
    
    $
    15
    
    
    $
    
    
    
    $
    84Provision
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    395
    
    
    
    544Less: non-cash activity
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    (138
    )
    
    
    (287
    )Cash activity
    
    
    
    
    
    
    (63
    )
    
    
    (9
    )
    
    
    (257
    )
    
    
    (329
    )Balance as of July 1, 2006
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    12Provision
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    81Less: non-cash activity
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Cash activity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66
    )
    
    
    (66
    )Balance as of September 30, 2006
    
    $
    
    
    
    $
    6
    
    
    $
    6
    
    
    $
    
    
    
    $
    12
  LIQUIDITY AND CAPITAL RESOURCES
     20




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  (continued)
          21




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  (continued)
     CONTRACTUAL REQUIREMENTS
  Payments Due By Period2007 to
    
    
    2009 to
    
    
    2011 andTotal
    
    
    2006
    
    
    2008
    
    
    2010
    
    
    BeyondLong-term debt (1)
    
    $
    473,325
    
    
    $
    838
    
    
    $
    6,700
    
    
    $
    6,700
    
    
    $
    459,087Interest payments related to long-term debt (2)
    
    
    191,753
    
    
    
    8,599
    
    
    
    68,278
    
    
    
    67,366
    
    
    
    47,510Capital lease obligations
    
    
    223
    
    
    
    47
    
    
    
    50
    
    
    
    44
    
    
    
    82Operating lease obligations
    
    
    22,364
    
    
    
    1,579
    
    
    
    8,169
    
    
    
    6,430
    
    
    
    6,186Other
short-term and long-term obligationsU.S. revolving credit facility
    
    
    19,500
    
    
    
    19,500
    
    
    
    
    
    
    
    
    
    
    
    Sponsorship/royalty agreements
    
    
    11,622
    
    
    
    4,069
    
    
    
    4,935
    
    
    
    1,568
    
    
    
    1,050Total contractual cash obligations
    
    $
    718,787
    
    
    $
    34,632
    
    
    $
    88,132
    
    
    $
    82,108
    
    
    $
    513,915
 Amount of Commitment Expiration Per Period2007 to
    
    
    2009 to
    
    
    2011 andTotal
    
    
    2006
    
    
    2008
    
    
    2010
    
    
    BeyondStandby letters of credit and similar instruments
    
    $
    2,564
    
    
    $
    2,564
    
    
    $
    
    
    
    $
    
    
    
    $
    Total commercial commitments
and letters of credit
    
    $
    2,564
    
    
    $
    2,564
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Amounts include obligations pursuant to the Companys term loan facility and senior
subordinated notes that were outstanding on September 30, 2006.(2)
    
    Estimated interest payments are calculated assuming current interest rates over minimum
maturity periods specified in the debt agreements. Debt may be repaid sooner or later than
such minimum maturity periods. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  22




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  (continued)
   Derivative Instruments and Hedging Activity
  Warranty Liability
 
 Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
 Item 4: Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  23




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Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  The filings referenced forExhibit
    
    
    
    incorporation by referenceNumber
    
    Description of Exhibit
    
    are:31.1
    
    Certification of the Chief
Executive Officer pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith31.2
    
    Certification of the Chief
Financial Officer pursuant to
Section 302 of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith32.1
    
    Certification of the Chief
Executive Officer and Chief
Financial Officer pursuant to
the 18 U.S.C. Section 1350, as
adopted pursuant to Section
906 of the Sarbanes-Oxley Act
of 2002
    
    Filed herewith
 24




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SIGNATURES
  EASTON-BELL SPORTS, INC.
RegistrantDated: November 14, 2006
    /s/ Anthony M. PalmaAnthony M. PalmaChief Executive OfficerDated: November 14, 2006
    /s/ Mark TrippMark TrippChief Financial Officer
(Principal Financial Officer) 25