Document:

Exhibit 4.1

 

 

Bauer Performance Sports Ltd.

Annual Information Form

For the Fiscal Year

Ended May 31, 2013

 

Dated August 27, 2013

 

 

 

TABLE OF CONTENTS

 

	
EXPLANATORY   NOTES
    	
1
    
	
Forward-Looking Statements
    	
1
    
	
Market and Industry Data
    	
2
    
	
Trademarks, Business Names   and Service Marks
    	
2
    
	
Presentation of Financial   Information
    	
3
    
	
Non-IFRS and Non-GAAP   Measures
    	
3
    
	
 
    	
 
    
	
CORPORATE   STRUCTURE
    	
4
    
	
Incorporation and Office
    	
4
    
	
Intercorporate   Relationships
    	
4
    
	
 
    	
 
    
	
GENERAL   DEVELOPMENT OF THE BUSINESS
    	
4
    
	
History
    	
4
    
	
The Cascade Acquisition
    	
5
    
	
The Inaria Acquisition
    	
6
    
	
The Combat Acquisition
    	
6
    
	
 
    	
 
    
	
INDUSTRY   OVERVIEW
    	
7
    
	
Ice Hockey
    	
7
    
	
Roller Hockey
    	
8
    
	
Lacrosse
    	
8
    
	
Baseball and Softball
    	
9
    
	
Soccer
    	
9
    
	
 
    	
 
    
	
BUSINESS   OF THE COMPANY
    	
9
    
	
Our Company
    	
9
    
	
Our Competitive Strengths
    	
11
    
	
Our Performance Sports   Products Platform is Driving Growth
    	
17
    
	
Products
    	
18
    
	
Research and Development
    	
22
    
	
Customers
    	
24
    
	
Global Manufacturing,   Sourcing and Distribution
    	
25
    
	
Environment
    	
26
    
	
Intellectual Property
    	
26
    
	
Information Technology
    	
27
    
	
Competition
    	
28
    
	
Employees and Culture
    	
28
    
	
Seasonality
    	
28
    
	
 
    	
 
    
	
DIVIDEND   POLICY
    	
29
    
	
 
    	
 
    
	
DESCRIPTION   OF CAPITAL STRUCTURE
    	
29
    
	
General
    	
29
    
	
Equity Shares
    	
30
    
	
Conversion Rights
    	
30
    
	
Liquidation Entitlement
    	
30
    
	
Dividend Rights
    	
30
    
	
Voting Rights
    	
30
    
	
Variation of Rights
    	
30
    
	
Subdivision or Consolidation
    	
31
    
	
Sale of All or Substantially All of the Company’s Assets
    	
31
    
	
Take-Over Bid Protection
    	
31
    
	
 
    	
 
    
	
MARKET   FOR SECURITIES AND TRADING PRICE AND VOLUME
    	
31
    
	
 
    	
 
    
	
DIRECTORS   AND OFFICERS
    	
32
    
	
Directors
    	
32
    

 

ii

 

	
Directors and Executive   Officers
    	
32
    
	
Biographies
    	
33
    
	
Cease Trade Orders or   Bankruptcies
    	
36
    
	
Penalties or Sanctions
    	
37
    
	
Conflicts of Interest
    	
37
    
	
 
    	
 
    
	
AUDIT   COMMITTEE INFORMATION
    	
37
    
	
Charter of the Audit   Committee
    	
37
    
	
Composition of the Audit   Committee
    	
38
    
	
Relevant Education and   Experience of the Audit Committee Members
    	
38
    
	
External Auditor Service   Fee
    	
38
    
	
 
    	
 
    
	
RISK   FACTORS
    	
38
    
	
Risks Related to Our   Business
    	
38
    
	
Risks Related to   Macroeconomic Environment
    	
53
    
	
 
    	
 
    
	
LEGAL   PROCEEDINGS AND REGULATORY ACTIONS
    	
56
    
	
 
    	
 
    
	
INTEREST   OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
    	
56
    
	
 
    	
 
    
	
AUDITORS,   TRANSFER AGENT AND REGISTRAR
    	
57
    
	
 
    	
 
    
	
MATERIAL   CONTRACTS
    	
57
    
	
Nomination Rights Agreement
    	
57
    
	
Registration Rights   Agreement
    	
57
    
	
The Amended Credit   Facility
    	
58
    
	
The Vapor License   Agreement
    	
59
    
	
 
    	
 
    
	
INTERESTS   OF EXPERTS
    	
60
    
	
 
    	
 
    
	
ADDITIONAL   INFORMATION
    	
60
    
	
 
    	
 
    
	
APPENDIX   A GLOSSARY OF TERMS
    	
A-1
    
	
 
    	
 
    
	
APPENDIX   B CHARTER OF THE AUDIT COMMITTEE
    	
B-1
    

 

iii

 

EXPLANATORY NOTES

 

The information in this annual information form (the “Annual Information Form”) is stated as at August 27, 2013, unless otherwise indicated.

 

Unless otherwise noted or the context otherwise indicates, “Bauer Performance Sports”, the “Company”, “we”, “us” and “our” refer to Bauer Performance Sports Ltd. and its direct and indirect subsidiary entities and predecessors.

 

For an explanation of the capitalized terms and expressions and certain defined terms, please refer to the “Glossary of Terms” at Appendix “A” of this Annual Information Form.

 

Forward-Looking Statements

 

Certain statements in this Annual Information Form about our current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments constitute forward-looking statements. The words “may”, “will”, “would”, “should”, “could”, “expects”, “plans”, “intends”, “trends”, “indications”, “anticipates”, “believes”, “estimates”, “predicts”, “likely” or “potential” or the negative or other variations of these words or other comparable words or phrases, are intended to identify forward-looking statements. Discussions containing forward-looking statements may be found, among other places, under “General Development of the Business”, “Industry Overview”, “Business of The Company” and “Risk Factors”. Forward-looking statements are based on estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Certain assumptions with respect to the determination of the impairment of assets, claim liabilities, income taxes, employee future benefits, goodwill and intangibles are material factors made in preparing forward-looking information and management’s expectations. Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors, which are discussed in greater detail in the “Risk Factors” section of this Annual Information Form: inability to introduce new and innovative products, intense competition in the equipment and apparel industries, inability to introduce technical innovation, inability to protect worldwide intellectual property rights, trademarks and other proprietary rights, the inability to translate booking orders into realized sales, weather conditions or seasonal fluctuations in the demand for our products, a change in the mix or timing of orders placed by customers, a change in sales mix towards larger customers,  decrease in ice hockey, roller hockey and/or lacrosse participation rates, adverse publicity, reduced popularity of the NHL and other professional leagues for sports in which our products are used, inability to maintain and enhance brands, reliance on third-party suppliers and manufacturers, disruption of distribution chain or loss of significant customers or suppliers, consolidation of our customer base (and the resulting possibility of lower gross margins due to negotiated lower prices), cost of raw materials, shipping costs and other cost pressures, risks associated with doing business abroad, the inability to expand into international market segments, the inability to forecast demand for products, sell-through of our products at retail, inventory shrinkage or excess inventory, product liability claims and product recalls, compliance with standards of testing and athletic governing bodies, departure of senior executives or other key personnel, litigation, employment or union related matters, disruption of information technology systems, restrictive covenants in our Amended Credit Facility, anticipated levels of indebtedness, the inability to generate sufficient cash to service all the Company’s indebtedness, the inability to successfully integrate new acquisitions, such as the Cascade Acquisition, the Inaria Acquisition and the Combat Acquisition, undisclosed liabilities acquired pursuant to the recent acquisitions, the inability to continue making strategic acquisitions, the infringement of intellectual property rights of others, the inability to take action against others who infringe our intellectual property, public market for the securities, volatile market price for Common Shares, no current plans to pay cash dividends, holding company structure, assertion that the acquisition of the Bauer Business at the time of the IPO was an inversion transaction, conflicts of interests among investors, influence by the Kohlberg Funds and future sales of Common Shares by the Kohlberg Funds, fluctuations in the value of certain foreign currencies, including but not limited to the Canadian dollar, euro, Swedish krona, Chinese renminbi, Taiwan dollar and Thai baht in relation to the U.S. dollar, the inability to manage foreign derivative instruments, general economic and market conditions, current adverse economic conditions, changes in consumer preferences and the difficulty in anticipating or forecasting those changes, changes in government regulations, the inability of counterparties and customers to meet their financial obligations and natural disasters. These factors are not intended to represent a complete list of the factors that could affect us; however, these factors should be considered carefully. The purpose of the forward-looking statements is to provide the reader

 

1

 

with a description of management’s expectations regarding the Company’s financial performance and may not be appropriate for other purposes. Readers should not place undue reliance on forward-looking statements made herein. Furthermore, unless otherwise stated, the forward-looking statements contained in this Annual Information Form are made as of the date of this Annual Information Form, and we have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The forward-looking statements contained in this Annual Information Form are expressly qualified by this cautionary statement.

 

Market and Industry Data

 

We have obtained the market and industry data presented in this Annual Information Form from a combination of (i) internal company surveys and commissioned reports, (ii) third-party information, including from independent industry publications and reports, such as the Sports and Fitness Industry Association (“SFIA”), (iii) publicly available sport participation surveys from national sport organizations or governing bodies, including the Canadian Hockey Association (“Hockey Canada”), the International Ice Hockey Federation, USA Hockey, Inc., US Lacrosse, Inc. (“US Lacrosse”), USA Baseball and the International Federation of Association Football (“FIFA”) and (iv) the estimates of the Company’s management team. As there are limited sources that report on ice hockey, roller hockey, lacrosse, soccer, baseball and softball equipment and related apparel markets, much of the industry and market data presented in this Annual Information Form is based on internally generated management estimates by the Company, including estimates based on extrapolations from third-party surveys of ice hockey, roller hockey, lacrosse, soccer, baseball and softball equipment and related apparel markets, as well as publicly available sport participation surveys. While we believe our internal surveys, third-party information, publicly available sport participation surveys and estimates of our management are reliable, we have not verified them, nor have they been verified by any independent sources. While we are not aware of any misstatements regarding the market and industry data presented in this Annual Information Form, such data involves risks and uncertainties and is subject to change based on various factors, including those factors discussed under “Forward-Looking Statements” and “Risk Factors”. References to market share data and market size in this Annual Information Form are based on wholesale net revenues unless otherwise indicated.

 

To the extent market and industry data contained in this Annual Information Form is referenced as a “management estimate” or qualified by phrases such as “we believe” or comparable words or phrases, we have internally generated such data by using a variety of methodologies. With respect to unregistered ice hockey player participation, we have relied on a combination of available external sources and assumed registered-to-unregistered player ratios in the major ice hockey markets. With respect to market size and market share data, we have relied on our internal sales figures and have estimated the sales figures of our competitors using the following data: (i) sales data supplied by major suppliers who participate in voluntary surveys, (ii) cross-references to participation rates and estimates of equipment replacement rates by consumers, (iii) available public reports from competitors (such as Easton and Reebok), largely to confirm industry trends, and (iv) retail surveys. With respect to statistics relating to the use of BAUER hockey equipment by NHL players during a given NHL season, we have relied on on-ice and in-locker room equipment counts completed by our sales representatives that cover NHL teams. Certain market and industry data estimated by us are based on, or take into account, assumptions made by us in light of our experience of historical trends, current conditions, as well as other factors. Although we believe such assumptions to be appropriate and reasonable in the circumstances, there can be no assurance that such estimates and assumptions are entirely accurate or correct. The purpose of using internal estimates is to provide the reader with important information concerning the industries in which we compete and our relative performance and may not be appropriate for other purposes. Readers should not place undue reliance on internal estimates made herein. The internal estimates contained in this Annual Information Form are expressly qualified by this paragraph.

 

Trademarks, Business Names and Service Marks

 

This Annual Information Form includes trademarks, such as BAUER, SUPREME, NEXUS, MISSION, ITECH, MAVERIK, CASCADE, INARIA, and COMBAT which are protected under applicable intellectual property laws and are the property of Bauer Hockey Corp. and Bauer Hockey, Inc. or their respective subsidiaries, as applicable. Solely for convenience, our trademarks and business names referred to in this Annual Information Form may appear without the TM or ® symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and business names. All other trademarks used in this Annual Information Form are the property of their respective owners or have been licensed to us. See “Business of the Company — Intellectual Property”.

 

2

 

Presentation of Financial Information

 

All references to “Fiscal 2013” in this Annual Information Form are to the Company’s fiscal year ended May 31, 2013, to “Fiscal 2012” are to the Company’s fiscal year ended May 31, 2012, to “Fiscal 2011” are to the Company’s fiscal year ended May 31, 2011, to “Fiscal 2010” are to the Company’s fiscal year ended May 31, 2010, to “Fiscal 2009” are to the Company’s fiscal year ended May 31, 2009, and to “Fiscal 2008” are to the Company’s fiscal year ended May 31, 2008.

 

The Company presents its consolidated financial statements in United States dollars. In this Annual Information Form, references to “$”, “US$”, “dollars” or “U.S. dollars” are to United States dollars and references to “Cdn$” and “Canadian dollars” are to Canadian dollars. Amounts are stated in U.S. dollars unless otherwise indicated.

 

All of the financial data contained in this Annual Information Form relating to the Company have been prepared using International Financial Reporting Standards (“IFRS”), unless otherwise indicated.

 

Non-IFRS and Non-GAAP Measures

 

This Annual Information Form makes reference to certain non-IFRS measures in respect of Fiscal 2013, Fiscal 2012 and Fiscal 2011. These non-IFRS measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS, and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company’s results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analyses of the Company’s financial information reported under IFRS.

 

We use non-IFRS measures such as EBITDA, Adjusted EBITDA and Adjusted Gross Profit to provide investors with a supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. We also use non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess our ability to meet our future debt service, capital expenditure and working capital requirements. We refer readers to “Non-IFRS Financial Measures” section in our management’s discussion and analysis of financial condition and results of operations of the Company for Fiscal 2013 for the definition and reconciliation of EBITDA, Adjusted EBITDA and Adjusted Gross Profit used and presented by the Company to the most directly comparable IFRS measures.

 

We caution the reader that in respect of Fiscal 2010, we also make reference to EBITDA, Adjusted EBITDA and Adjusted Gross Profit. However, as used in respect of such periods, such measures are non-Canadian GAAP measures that are not recognized measures under Canadian GAAP and do not have a standardized meaning prescribed by Canadian GAAP. We refer the reader to the “Financial Measures and Key Performance Indicators” section in the management’s discussion and analysis of financial condition and results of operations of the Company for Fiscal 2011 for the definition and reconciliation of EBITDA, Adjusted EBITDA and Adjusted Gross Profit used and presented by the Company to the most directly comparable non-Canadian GAAP measures in respect of such periods presented. We also note that in respect of Fiscal 2009 and Fiscal 2008, we also make reference to EBITDA, Adjusted EBITDA and Adjusted Gross Profit. However, as used in respect of such periods, such measures are non-U.S. GAAP measures.

 

3

 

CORPORATE STRUCTURE

 

Incorporation and Office

 

The Company was incorporated under the BCBCA on December 2, 2010, and its name was subsequently changed to Bauer Performance Sports Ltd. Our registered office is located at 666 Burrard Street, Suite 1700, Vancouver, British Columbia, V6C 2X8. The Company’s headquarters and executive officers are currently located at 100 Domain Drive, Exeter, New Hampshire 03833, United States.

 

Intercorporate Relationships

 

The organization chart below indicates the intercorporate relationships of our Company and our wholly-owned material operating and certain other subsidiaries together with the jurisdiction of incorporation or constitution of each such subsidiary.

 

 

(1)         Bauer Performance Sports Uniforms Corp. acquired substantially all of the assets of Inaria on October 16, 2012.

 

(2)         BPS Diamond Sports Corp. and BPS Diamond Sports Inc. acquired substantially all of the Canadian assets and U.S. assets, respectively, of Combat Sports on May 6, 2013.

 

(3)         Bauer Performance Lacrosse Inc., formerly Sport Helmets, Inc., is the sole surviving entity following the reorganization of the Company’s lacrosse operating entities and holding bodies, including Cascade Helmets Holdings, Inc. and Maverik Lacrosse LLC, which was completed on December 31, 2012.

 

GENERAL DEVELOPMENT OF THE BUSINESS

 

History

 

Founded by the Bauer family in Kitchener, Ontario in 1927, Bauer Hockey has focused on design and innovation to produce high-performance sports equipment throughout its history. Bauer Hockey designed and manufactured the first ice skate with the blade attached to the boot and, in 1976, introduced the TUUK blade holder, a predecessor to the holder currently used by more than 83% of NHL players.

 

In April 2008, an investor group led by the Kohlberg Funds (the “Existing Holders”) acquired the Bauer Hockey Business from Nike. The Company completed an IPO in March 2011 to raise the capital necessary to

 

4

 

purchase the Bauer Hockey Business. Immediately after the completion of the IPO, the Company acquired 100% of the Bauer Hockey Business from the Existing Holders in exchange for a combination of Common Shares and Proportionate Voting Shares representing, at that time, a 65.6% equity and voting interest in the Company, plus Cdn$72,967,500 in cash being the net proceeds of the IPO and the partially exercised Over-Allotment Option received by the Company (exclusive of expenses of the IPO and the Over-Allotment Option).

 

In recent years, we have successfully made and integrated six strategic acquisitions into our performance sports product platform:

 

·                  completed the acquisition of Mission-ITECH in September 2008 (the “Mission-ITECH Acquisition”), which allowed us to attain the leading market share position in the roller hockey category (with MISSION branded product lines in combination with BAUER branded products), as well as a leading market share position in visors/shields and goalie equipment (with formerly ITECH branded product lines);

 

·                  completed the acquisition of certain intellectual property assets from Jock Plus Hockey Inc. in November 2009 (the “Jock Plus Hockey Intellectual Property Acquisition”), which strengthened our position in the performance apparel category;

 

·                  completed the acquisition of Maverik in June 2010 (the “Maverik Lacrosse Acquisition”), which provided us with an authentic, cutting-edge brand in the lacrosse equipment and related apparel markets;

 

·                  completed the acquisition of Cascade in June 2012 (the “Cascade Acquisition”), which expanded our presence in the lacrosse market and whose industry-leading helmet and headgear products are complementary to our existing offering of lacrosse equipment products;

 

·                  completed the acquisition of substantially all of the assets of Inaria in October 2012 (the “Inaria Acquisition”), which provided us with full team apparel capabilities, including the design, development and manufacturing of uniforms for ice hockey, roller hockey, lacrosse, soccer and other team sports; and

 

·                  completed the acquisition of substantially all of the assets of Combat Sports in May 2013 (the “Combat Acquisition”), which expands our high-performance platform into the new sports of baseball and softball, and provides us with intellectual property that will strengthen our R&D portfolio.

 

The Cascade Acquisition

 

On June 29, 2012, we completed the acquisition of Cascade. The Company entered into a purchase agreement with Cascade and its stockholders pursuant to which we purchased all of the outstanding shares of the capital stock of Cascade for an aggregate purchase price of $64 million in cash subject to adjustment. In respect of the Cascade Acquisition, the Company filed a Business Acquisition Report on August 7, 2012, a copy of which is available on SEDAR website at www.sedar.com.

 

In order to fund the Cascade Acquisition, the Company (i) completed a public offering of 3,691,500 Common Shares at a price of Cdn$7.80 per share, including the exercise in full of the over-allotment option, for gross proceeds of Cdn$28,793,700; (ii) completed a concurrent private placement of the equivalent of 642,000 Common Shares at the same price as those sold under the public offering, for gross and net proceeds of Cdn$5,007,600, which were purchased by the Kohlberg Funds (substantially all of the shares issued to the Kohlberg Funds were in the form of Proportionate Voting Shares), and (iii) entered into amendments to its existing credit facilities (the “Amended Credit Facility”). See “Material Contracts — The Amended Credit Facility”.

 

The Cascade Acquisition has significantly expanded our presence in the growing lacrosse market, through the addition of an industry-leading brand whose helmet and headgear products have been complementary to our existing offering of lacrosse equipment products. The Cascade Acquisition has allowed us to provide retailers with a broader range of performance sports equipment. In addition, the combined product innovation and research capabilities of Bauer Hockey and Cascade have positioned us to expand our lacrosse offering.

 

5

 

The Inaria Acquisition

 

On October 16, 2012, we completed the acquisition of Inaria. The Company entered into a purchase agreement with Inaria and its stockholders pursuant to which we purchased substantially all of the assets of Inaria for an aggregate purchase price of Cdn$7 million in cash. The Company used its existing debt facility to fund the acquisition.

 

Inaria, a Toronto-based company, was founded in 1999 and INARIA has become a growing brand in the team sports and active wear industry, providing a full-line of team apparel products, including pro-style jerseys, practice jerseys, socks, warm-up suits and training apparel for both youth sports programs and the most elite-level teams. Named after the Italian soccer phrase “in the area,” Inaria began its business with a focus on soccer uniforms and products and quickly established INARIA as a growing soccer apparel brand. The company’s expertise in developing quality products with competitive pricing and rapid turnaround time quickly propelled the brand into ice hockey and other sports.  Inaria’s co-founders have entered into employment agreements with the Company and remain actively involved in the Company’s uniforms business.  We believe the Inaria Acquisition has strengthened our position in team apparel, establishing Bauer Performance Sports as a “one-stop shop” in this growing segment of the market.

 

The Combat Acquisition

 

On May 6, 2013, we completed the acquisition of substantially all of the assets of Combat Sports for an aggregate purchase price of approximately Cdn$4 million in cash, subject to adjustment. The acquisition of Combat Sports was funded from cash on hand.

 

Combat Sports has been supplying composite and hybrid composite products for both its own COMBAT brand as well as for high-end brand name companies since 1998 in the baseball and softball bat, hockey stick and lacrosse shaft markets. The business has a reputation for its premier and innovative composite technology with the latest composite advancements in performance and durability serving players from the grassroots level to the elite professional levels. Combat Sports and several of its key employees have had a long history of expertise in composite materials, including developing innovative products for NASA, the U.S. Military and several leading manufacturers. By focusing resources in the areas of Combat Sports’ success — baseball, softball and advanced composite technologies — we expect to strengthen the COMBAT brand and grow Bauer Performance Sports’ overall portfolio of high-performing products.

 

6

 

INDUSTRY OVERVIEW

 

We design, develop, manufacture and sell performance sports equipment for ice hockey, roller hockey, lacrosse, baseball and softball, as well as related apparel and accessories.

 

Ice Hockey

 

Ice Hockey Participation Rates and Demographics

 

Ice hockey is a team sport played in more than 80 countries by more than an estimated six million people. While ice hockey is played around the world, the largest and most significant markets for ice hockey are Canada, the United States and a number of European countries, including the Nordic countries (principally Sweden and Finland), Central European countries (principally the Czech Republic, Germany, Switzerland, Austria and Slovakia) and Eastern European countries (particularly Russia).

 

Global registered hockey participation rates have increased slightly over the last 10 years, and according to a recent 2013 report by the SFIA, ice hockey participation in the U.S. experienced a 5.2% increase over the last five years, including a 10.9% increase from 2011 to 2012. We believe that the global industry is currently growing at an annual rate in the low-to-mid single digits as growth rates in Eastern Europe (particularly Russia) and women’s hockey have exceeded that of the registered segment as a whole.

 

Ice Hockey Equipment and Related Apparel Industry

 

The global ice hockey equipment and related apparel industry has significant barriers to entry and is stable in certain regions and growing in others, such as the U.S., and Russia and other Eastern European countries. Ice hockey equipment and related apparel sales are driven primarily by global ice hockey participation rates (registered and unregistered). Other drivers of equipment sales include demand creation efforts, the introduction of innovative products, a shorter product replacement cycle, general macroeconomic conditions and the level of consumer discretionary spending. Management estimates that the global ice hockey equipment market (which excludes related apparel, such as performance apparel, team jerseys and socks) totalled approximately $650 million in calendar 2012 and is expected to be flat during calendar 2013. Skates and sticks are the largest contributors to equipment sales, accounting for an estimated 62% of industry sales in calendar 2012.

 

Management estimates that over 85% of the ice hockey equipment market is attributable to three major competitors: Bauer Hockey, Reebok (which owns both the REEBOK and CCM brands) and Easton, each of which offers consumers a full range of products (skates, sticks and full protective equipment). The remaining equipment market is highly fragmented among many smaller equipment manufacturers offering specific products, catering to niche segments within the broader market. Management estimates that Bauer Hockey has the largest share of the market, which we believe is in excess of all other equipment manufacturers combined.

 

The following table shows our estimated ranking of the three major competitors referenced above, in total and by major product category:

 

Market Position of the Three Major Ice Hockey Equipment Manufacturers

 

	
Company
    	
 
    	
Total
   Market
    	
 
    	
Skates
    	
 
    	
Sticks
    	
 
    	
Helmets
    	
 
    	
Protective
    	
 
    	
Goalie
    	
 
    
	
Bauer   Hockey
    	
 
    	
#1
    	
 
    	
#1
    	
 
    	
#1
    	
 
    	
#1
    	
 
    	
#1
    	
 
    	
#1
    	
 
    
	
Reebok
    	
 
    	
#2
    	
 
    	
#2
    	
 
    	
#3
    	
 
    	
#2
    	
 
    	
#2
    	
 
    	
#2
    	
 
    
	
Easton
    	
 
    	
#3
    	
 
    	
#3
    	
 
    	
#2
    	
 
    	
#3
    	
 
    	
#3
    	
 
    	
n/a
    	
 
    

 

Management estimates that the global ice hockey-related apparel market for calendar 2012 (which includes such items as performance apparel, team jerseys and socks) was approximately $375 million in size (without accounting for the impact of the 2012/2013 NHL lockout), and is growing at an annual rate which we believe exceeds that of the ice hockey equipment market. The related apparel market is more fragmented than the equipment market and includes a variety of larger and smaller participants. We expect consolidation in this market to occur in the coming years, in a manner similar to what has occurred in the ice hockey equipment industry.

 

7

 

Roller Hockey

 

Roller Hockey Participation Rates and Demographics

 

Roller hockey is a team sport played principally in the United States, particularly in warmer regions such as California. According to SFIA, there were approximately 493,000 “frequent” roller hockey participants in the United States in 2012 who played at least 13 times during the year, a 22.1% increase over the prior year. In 2012, total participation was reported to be 1.24 million participants, a 10.5% increase in participation from the previous year.

 

Roller Hockey Equipment and Related Apparel Industry

 

The roller hockey equipment and related apparel industry shares similar characteristics to the ice hockey equipment and related apparel industry given the similarity of the sports. Management estimates that the roller hockey equipment market generated approximately $25 million in sales in calendar 2012.

 

Through our MISSION and BAUER brands, we believe we hold the number one and two market share positions in the roller hockey equipment market, and have a substantial lead over our primary competitors, including Reebok, Tour and a few small niche players who compete in sub-categories such as wheels and accessories.

 

Lacrosse

 

Lacrosse Participation Rates and Demographics

 

Lacrosse is a team sport played principally in the United States and Canada. The North American lacrosse equipment and related apparel market is a high growth, emerging sports equipment market underpinned by consistently increasing participation rates.  According to US Lacrosse, lacrosse has been one of the fastest growing team sports in the United States, with participation growing at an annual compound growth rate of 10.0% from 2001 to 2012, with over 720,000 registered players in the United States in 2012. In Canada, we estimate that there are currently 150,000 participants. The drivers of this growth include: (i) the establishment and popularity of the National Lacrosse League and Major League Lacrosse, (ii) the rapid expansion of high school and youth programs, (iii) emerging growth outside of key lacrosse markets in the Mid-Atlantic and Northeastern United States, (iv) enhanced funding and popularity of U.S. college lacrosse programs, and (v) increased visibility of the sport in media and advertising.

 

Approximately 93% of lacrosse participants in the United States are under the age of 18, with 54% of participants in the youth (15 and under) category and 39% of participants in the high school category. Similar to ice hockey, the high representation of youth in the sport provides the industry with a more frequent product replacement cycle as players grow out of their equipment. The following graphs illustrate the growth in U.S. lacrosse participation for the periods presented and the demographic breakdown of U.S. participation for 2012:

 

 

8

 

Lacrosse Equipment and Related Apparel Industry

 

The North American lacrosse equipment and related apparel market is a high growth, emerging sports equipment market underpinned by strong growth in participation rates.

 

In calendar 2012, the U.S. lacrosse equipment market was estimated to be approximately $100 million in size while the Canadian market was estimated at approximately $10 million in size. Management estimates that the lacrosse market will continue to grow in the range of high single digits to low double digits for the next several years. The lacrosse equipment market is made up of four primary equipment categories: sticks (shafts and heads), gloves, helmets and protective equipment. Representing approximately 45% of 2012 industry-wide U.S. sales, sticks currently make up the largest segment of the lacrosse equipment market.

 

The lacrosse equipment market is currently led by five major brands: WARRIOR and BRINE (which are owned by New Balance), STX, MAVERIK and CASCADE. Like our two major competitors, we offer a full line of lacrosse equipment products, but our CASCADE helmet leads the helmet category in the lacrosse industry. Through our MAVERIK and CASCADE brands, we estimate our lacrosse market share to be between 25% and 30%.

 

Baseball and Softball

 

Baseball is experiencing growth in participation globally and remains one of the most popular sports in the United States, second only to basketball, according to the SFIA. Fast-pitch softball, a sport that is a significant focus for the Combat Sports business of high-performing elite bats, grew by 9.4% from the 2011 to 2012 season. Management estimates that the total market size for baseball and softball in the United States is approximately $500 million, with about one-third of that consisting of bat sales.

 

Soccer

 

The most popular and widely-played sport in the world, global soccer participation is estimated to be approximately 265 million, according to FIFA. In 2011, similar reports estimated that there were nearly 1 million registered soccer players in Canada and more than 4.5 million registered players in the U.S. Management estimates the Canadian and U.S. soccer uniform market to be in excess of $300 million, including both registered and recreational players.

 

BUSINESS OF THE COMPANY

 

Our Company

 

We are the world’s leading designer, developer, manufacturer, and marketer of ice and roller hockey equipment. We have the most recognized and strongest brand in the ice hockey equipment industry, and hold the number one market share position in both the ice and roller hockey equipment industries. With an estimated 53% share of ice hockey equipment sales in Fiscal 2013, we have the leading and fastest growing share of the overall ice hockey equipment market, which we believe is in excess of all other brands combined. In roller hockey, we had an estimated 59% share of equipment sales in Fiscal 2013.

 

We have achieved this leadership position and growth profile in ice hockey by leveraging our world-class performance sports products platform and processes, and are using this platform to expand into new performance equipment and apparel categories and sports markets, which we have recently done successfully in the roller hockey, lacrosse, baseball and softball equipment markets.

 

The following graphs set forth our estimated overall market share of ice hockey equipment sales and our total net revenues for the periods presented:

 

9

 

 

(1)                                 Fiscal 2013, Fiscal 2012 and Fiscal 2011 include MAVERIK branded lacrosse equipment and related apparel.

 

(2)                                Fiscal 2013 includes CASCADE branded lacrosse equipment and related apparel, as well as Inaria’s team apparel business and COMBAT branded equipment.

 

(3)                                 Fiscal 2013, Fiscal 2012 and Fiscal 2011 figures are reported in IFRS.

 

(4)                                 Fiscal 2010 figures are reported in Canadian GAAP.

 

(5)                                 Fiscal 2009 and Fiscal 2008 figures are reported in U.S. GAAP.

 

As we have increased our market share in both ice and roller hockey, and entered new performance sports categories, our net revenues and Adjusted EBITDA have continued to grow. As illustrated by the graph above (to the right), over the past five fiscal years, our annual net revenues have grown from $219.5 million in Fiscal 2008 to $399.6 million during Fiscal 2013, representing a cumulative annual growth rate of 12.7%, and as illustrated by the graph below, our Adjusted EBITDA has grown from $22.9 million in Fiscal 2008 to $62.3 million in Fiscal 2013, representing a cumulative annual growth rate of 22.2%.

 

 

(1)                                 Fiscal 2013, Fiscal 2012 and Fiscal 2011 include MAVERIK branded lacrosse equipment and related apparel.

 

(2)                                Fiscal 2013 includes CASCADE branded lacrosse equipment and related apparel, as well as Inaria’s team apparel business and COMBAT branded equipment.

 

(3)                                 Fiscal 2013, Fiscal 2012 and Fiscal 2011 figures are reported in IFRS.

 

(4)                                 Fiscal 2010 figures are reported in Canadian GAAP.

 

(5)                                 Fiscal 2009 and Fiscal 2008 figures are reported in U.S. GAAP.

 

10

 

Ice hockey equipment is the cornerstone of our world-class performance sports product platform, which we have repeatedly used to grow our business into new performance equipment and apparel categories and sports markets. In recent years we have:

 

·                                          completed the Mission-ITECH Acquisition in September 2008;

 

·                                          completed the Jock Plus Hockey Intellectual Property Acquisition in November 2009;

 

·                                          completed the Maverik Lacrosse Acquisition in June 2010;

 

·                                          completed the Cascade Acquisition in June 2012;

 

·                                          completed the Inaria Acquisition in October 2012; and

 

·                                          completed the Combat Acquisition in May 2013.

 

For both ice and roller hockey, our equipment offering includes skates, sticks, under-protective equipment, gloves, pants, helmets, facial protection and goalie equipment. We sell our ice hockey products at various price points and develop them for three performance levels:

 

·                                          “Elite” — for professional and non-professional elite players, including players in the NHL and other professional leagues around the world who will pay a premium price for the best performing equipment;

 

·                                          “Performance” — for high-level players (typically between the ages of 12 to 22) who buy technically advanced equipment that provides them a competitive edge; and

 

·                                          “Recreational” — for recreational players of all ages who seek performance at value pricing.

 

For lacrosse, we offer a comprehensive line of equipment for all skill levels, including heads, shafts, protective equipment, gloves and helmets. The Combat Acquisition provides us with a broad line of baseball and softball equipment for all ages and skill levels, including baseball and softball bats, batting gloves and protective gear.

 

Our ice hockey, roller hockey, lacrosse, baseball and softball authentic brands and product offerings provide us with an opportunity to cross-sell and promote a comprehensive line of related apparel and accessories, including performance, team and lifestyle apparel. We believe we can grow our share in each of these categories in the coming years.

 

We believe we have the largest and most experienced sales force in the ice and roller hockey equipment industries and a very effective sales network in our lacrosse division. In addition, we have an established global distribution network in the major geographic markets where hockey is popular, including Canada, the United States, Europe and Russia.

 

As a result of the Inaria Acquisition, we have expanded our line of team apparel to include everything from jerseys and bags to warm-up suits and training apparel. With uniforms and expanded team apparel offerings, we are now able to offer a new and unique one-stop shopping opportunity for organizations ranging from youth associations to professional teams. By expanding into a full service provider, we deliver convenience and consistent branding to a traditionally fragmented market.

 

Our Competitive Strengths

 

We believe that the following competitive strengths position us well to succeed and grow in the future:

 

Most Recognized Brands in Ice and Roller Hockey; Powerful Brands in Lacrosse

 

BAUER is the most recognized brand in the ice hockey equipment industry and has been synonymous with the sport itself for more than 85 years. Generations of adult, junior, and youth hockey players strongly identify with

 

11

 

our iconic brand, an image fostered over years of providing top-quality products to recreational through professional players.

 

We believe that this strong brand recognition is the result of consistent brand communication, our “true to the game” authenticity, and of regularly bringing to market innovative top-quality equipment with superior performance. The strength of the BAUER brand lends credibility to our entire portfolio of authentic brands, including MISSION, MAVERIK, CASCADE and COMBAT, where each brand remains true to its sport. Our brand recognition creates significant barriers to entry in our market as many consumers believe that brands with heritage and authenticity in their sport understand their needs and will provide the best products to improve their game. Additionally, the strength of the BAUER brand leads more retailers to carry our ice hockey equipment products than any other brand and most retailers to carry a full range of our ice hockey equipment products.

 

In March 2013, we announced a partnership with the British Columbia Hockey League (“BCHL”), one of the top junior organizations in Canada. The exclusive three-year partnership makes Bauer Hockey the league’s official uniform, equipment and apparel provider. The BCHL boasts a tradition dating back to 1961 and this partnership includes 22 players and 10 front office staff on each of the 16 teams. Between the years 2000 and 2010, 69 players were drafted directly from the BCHL onto NHL teams, and the BCHL is the number one feeder league to college hockey programs in the United States. This partnership provides an opportunity to showcase BAUER products in this elite junior league.

 

Our MISSION brand is the leading brand in the roller hockey equipment industry, and our MAVERIK brand is an authentic, cutting-edge brand which we intend to grow into a market leader in the lacrosse equipment industry. With our CASCADE brand, we are the leading manufacturer and distributor of men’s and youth lacrosse helmets in North America. Cascade’s historic focus on product performance and player protection has led to strong grassroots and word-of-mouth marketing as well as numerous sponsorships. Cascade has been the exclusive helmet sponsor of Major League Lacrosse since 1999, and 14 of the last 18 NCAA Division I national championship teams have exclusively worn CASCADE helmets. We are the exclusive helmet provider for approximately 78% of all NCAA Division I collegiate lacrosse teams, and 45 of the U.S.’s top 50 high school teams.

 

In May 2013, we acquired Combat Sports, a leading designer of composite baseball and softball bats, hockey sticks and lacrosse shafts.  In addition to adding a strong brand and new sports to the Bauer Performance Sports platform, this strategic acquisition also provides us with valuable intellectual property that can be applied across our portfolio of high performance equipment.  We have already begun to explore combining relevant technologies across hockey and lacrosse into our BAUER and MAVERIK brands, and we are refocusing Combat’s resources in its areas of success — baseball, softball and advanced composite technologies.

 

Number One and Growing Market Share in the Ice and Roller Hockey Equipment Industries; Number One in the Lacrosse Helmet Market

 

We have the leading market share in the overall ice hockey equipment market, with an estimated 53% market share in Fiscal 2013, which we believe is in excess of all other equipment manufacturers combined. We believe that we hold the number one market share position in each of our ice and roller hockey equipment categories. For Fiscal 2013, we estimate that we had more than a 65% market share in skates and helmets, more than a 55% market share in roller hockey, and more than a 40% market share in every other equipment category.

 

We have driven market share growth by introducing new products with performance improvements each year in most of our equipment categories, alternating our three families of products for ice hockey, the VAPOR, SUPREME, and NEXUS lines. Through this strategy, we have grown sales by creating excitement and dialogue at the retail level with retailers and consumers, and have maintained a significant advantage over our competitors who introduce new products less frequently.

 

In the five major player equipment categories of skates, sticks, helmets, gloves and pants, BAUER is overwhelmingly the top brand demanded and worn by the world’s most elite players. During the 2012/2013 NHL season, nearly 90% of NHL players wore or used at least one piece of our ice hockey equipment. The chart below illustrates the breakdown of use of BAUER branded equipment by NHL players for each of the major equipment product categories during the 2012/2013 NHL season. With less than 25% of NHL players under formal endorsement contracts to exclusively wear BAUER branded equipment head-to-toe during this past season, we believe these statistics demonstrate the best in class nature of our products.

 

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With 2012/2013 Season Concluded, Bauer Maintains Top Position in All Categories

 

 

Source: Management Estimates

 

We now lead the lacrosse helmet market as well. CASCADE is the number one helmet brand in lacrosse, with the largest installed base of helmets across the entire lacrosse market. Our lacrosse business management team estimates CASCADE’s share of the lacrosse helmet market to be approximately 85%.

 

Industry Leading R&D and Product Innovation

 

Our objective is to improve player performance and safety at all levels of play through equipment and apparel innovation. Our passionate and committed team of more than 54 designers, developers, engineers and technicians, who work closely with our scientific and research partners, including McGill University, have a world-class reputation and lead the ice hockey equipment industry in continuously bringing to market innovative, often revolutionary, top-quality equipment with superior performance that is trusted by players of all skill levels.

 

New product launches are planned and initiated by a cross-functional category group who transform consumer and player insights into a category business plan. The execution of the category business plan is supported by a dedicated R&D facility located in St. Jerome, Québec, where we employ a rolling five-year innovation cycle for each hockey equipment product category, resulting in a steady stream of approximately 100 to 150 new hockey equipment product launches each year. In order to ensure the successful execution of new product launches, we fully integrate our manufacturing partners into our R&D program, maintain a strong focus and discipline on cost management, and heavily test prototypes throughout the innovation cycle, including lab tests and on-ice trials by players of every skill level while incorporating consumer and player insights throughout the product innovation cycle.

 

The Cascade Acquisition allowed us to incorporate Cascade’s M11 ice hockey helmet technology into Bauer Hockey’s existing ice hockey helmet designs. See description of “New BAUER Helmet Line” below. The M11 technology was developed in partnership with Hockey Hall of Famer Mark Messier. The M11 incorporates the innovative ProFit system which improves the 360 degree fit of the helmet on a player’s head, as well as patented Seven Technology, a proprietary impact attenuation system.

 

On average, from Fiscal 2009 to Fiscal 2013 we spent 3.6% of our annual revenues on R&D, which we believe is substantially more than the next ice hockey competitor. Our significant investment in product innovation enables us to provide superior performing products, which in turn, we believe, generates and sustains significant market share in each of our product categories.

 

13

 

Examples of our unique hockey product innovations over the last eight years include:

 

 

We have made several significant new product introductions during the past fiscal year, including:

 

·                   BAUER VAPOR SKATE LINE — Led by the revolutionary BAUER VAPOR APX2 skate, the new BAUER VAPOR line of skates provides a whole new level of performance, speed and comfort. The BAUER VAPOR APX2 skate features a new ‘trigger’ release in a TUUK LIGHTSPEED EDGE holder which allows players to change out dull or broken steel blades in seconds. This elite-level skate also features X-RIB construction utilizing CURV composite technology, an innovative new lacing system and an ultra-soft three-piece tongue to prevent lace bite.

 

·                  NEW BAUER HELMET LINE — The BAUER IMS 11.0, IMS 9.0 and IMS 7.0 were unveiled and represent the culmination of combined technologies from the Bauer Hockey and Cascade product development teams. The IMS 11.0 and IMS 7.0 feature Seven Technology and are designed to more effectively manage high and low direct energy transfers. The IMS 11.0 also features PORON XRD for additional impact management and enhanced comfort. The IMS 9.0 features Vertex and PORON XRD for greater protection against linear energy impacts and uses the same shell as the BAUER RE-AKT for consumers that prefer a lower profile look with more aggressive styling.

 

·                  REACTOR GOALIE PROTECTIVE — The newly re-invented REACTOR line of goal equipment brings back the tradition of quality and performance that made the original series a success more than a decade ago. Built from the inside out based on the needs of the most elite goalies, the new REACTOR series allows Bauer Hockey to service more goalies than ever before, by adding a new family of product to its already-successful line of SUPREME product. The SUPREME series supports a more traditional or defensive style of goaltending while the new REACTOR series responds to the demands of a more aggressive ‘battlefly’ style of goaltending requiring a softer, lighter, more responsive pad.

 

In roller hockey, we have successfully integrated existing MISSION technology into our product offerings, most notably the patented HI-LO chassis for roller hockey skates. Our St. Jerome R&D team has combined this

 

14

 

chassis, which uses two different size wheels on the skate to improve agility and control, with our existing skate boot design to pair the best technologies available in the roller hockey market.

 

Our lacrosse business also has a track record of product innovation. We have added personnel to drive innovation for our MAVERIK and CASCADE brands, leveraging our proprietary technologies and established R&D program to accelerate our product innovation cycle and revenue growth. MAVERIK and CASCADE branded products have been fully integrated into our performance sports platform. We have enhanced the features and functionality of MAVERIK and CASCADE products, reducing our manufacturing costs, supporting and expanding marketing programs, and extending our distribution reach.

 

The Combat Acquisition provides us with advanced composite technologies and strong intellectual property to further strengthen our industry-leading research and development capabilities across our platform of high performance sports equipment. We plan to explore and combine relevant composite technologies, where applicable, to strengthen our overall hockey stick and lacrosse offerings under the BAUER and MAVERIK brands.  Combat Sports and several of our key employees in baseball and softball have had a long history of expertise in composite materials, including developing innovative products for NASA, the U.S. Military and several leading manufacturers.

 

Significant Scale and Strong Manufacturing and Retail Relationships

 

Our scale and relationships have enabled us to improve our profitability over the last several years and to compete successfully. We have an established comprehensive manufacturing platform with our key suppliers, primarily with facilities in Canada, China, Thailand and Vietnam, where most of our hockey equipment and related apparel is produced exclusively for us at what we believe to be low costs. We have excellent long-term relationships with our manufacturing partners and vendors, whom we fully integrate into our R&D and product development programs.

 

We also have a highly diversified global network of retailers and distributors, comprised of approximately 829 retailers in Canada, 2,646 in the United States, 613 in Scandinavia and Finland, as well as approximately 61 distributors outside of these countries who sell to over 1,000 retailers in other international markets. Our size also allows us to leverage our marketing and sales expertise to support our retailers in unique ways, such as in-store display units, retail merchandising alliances, order purchasing and inventory management systems, grassroots product demos and education, and digital and social media initiatives.

 

The Maverik Acquisition and the Cascade Acquisition, combined with Bauer Hockey’s existing retail platform, has already achieved acquisition-related synergies. The Company now cross-sells its MAVERIK branded equipment and CASCADE branded helmets, which are complementary product offerings, to an increased customer base. The Cascade Acquisition has allowed the Company to provide retailers with a broader range of performance sports equipment. In addition, many lacrosse players own multiple helmets due to the convention of purchasing customized helmets that match their various team uniforms. This convention is currently uncommon in the hockey market, as most hockey players only own one or two generic colored helmets, regardless of the number of teams they play on throughout the year, but is seen as a potential growth opportunity.  We believe that the addition of Cascade’s Liverpool production facility and quick turnaround capabilities can be utilized to offer hockey retailers and teams at all levels customized products, which will serve the increasing market demand for custom and team hockey helmets.

 

Our strategic acquisition of Inaria allows us to enter a new sport, soccer, and becomes a one-stop-shop for our retail partners with our new capability to provide customized team uniforms and apparel.  Our uniforms business has an established foundation in this area for soccer, but we are expanding this team apparel offering across our high performance sports platform, including hockey, baseball, softball and lacrosse.  With a growing number of associations in all sports demanding branded team apparel, Inaria’s ability to offer full finishing and embellishment services at its headquarters in Toronto helps our retail partners deliver a fully customized service to its customers.

 

Combat Sports manufactures high performance baseball and softball bats that feature many proprietary and patented materials and designs.  The company utilizes an innovative manufacturing process that incorporates liquid resin technologies during production, which results in added product durability as well as cost efficiencies.  Combat Sports has maintained valuable relationships with its key retail partners, including Dick’s Sporting Goods, Sports Authority, Champs, and Modell’s.

 

15

 

Strong Cash Flow Generation

 

Our Adjusted EBITDA, together with our relatively low level of capital expenditures and attractive tax position, allow us to generate cash flows to invest in R&D, pursue acquisitions and other growth initiatives, and reduce our indebtedness.

 

In Fiscal 2013, the Company generated an Adjusted Gross Profit Margin of 38.3% and an Adjusted EBITDA Margin of 15.6% as compared to an Adjusted Gross Profit Margin of 38.7% and an Adjusted EBITDA Margin of 13.7%, respectively, in Fiscal 2012. In Fiscal 2011, we generated an Adjusted Gross Profit Margin of 40.2% and an Adjusted EBITDA Margin of 14.2%. See “Explanatory Note - Non-IFRS and Non-GAAP Measures”.

 

Our ordinary course operations require minimal capital expenditures given that we manufacture most of our products through our manufacturing partners. Our capital expenditure requirements have averaged 1.6% of net revenues for the past three fiscal years ended May 31, 2013.  Going forward, to support our growth and key business initiatives, we anticipate moderately higher levels of capital expenditures and investment.

 

We also benefit from an attractive tax position with, as of May 31, 2013, approximately $4.7 million of non-capital loss carry-forwards in Canada and approximately $64.5 million of available tax deductions in Canada and the United States relating to intangible assets.

 

Experienced and Committed Team with a Track Record of Innovation and Growth

 

We are led by an experienced and committed management team with a proven track record of successfully introducing and marketing innovative products, integrating strategic acquisitions, and implementing successful growth strategies. Led by Kevin Davis, our President and CEO, who has been with the Company for more than 10 years, our senior management team has an average of over 15 years experience in the hockey, sporting goods and consumer product industries, including with Nike, Procter & Gamble, Unilever and the Boston Bruins. On a company-wide basis, our dedicated and passionate employees have been with us for an average of approximately 7.5 years, which we believe represents a strong commitment to our Company and an enthusiasm for team sports.

 

In recent years, our management team has developed and is executing a growth strategy focused on substantial product innovation and R&D. Over the last few years, our team has also executed key strategic initiatives to distinguish ourselves from our competitors, including:

 

·                                          Introduction of a Two Season Product Launch Schedule — We were the first in the hockey equipment industry to create a schedule of two annual product launches, the first being the “Back-To-Hockey” season which runs from April to September and the second being the “Holiday” season which runs from October to March. Our two season product launch schedule has since become the industry standard.

 

·                                          Category Management Approach — We were the first in the hockey equipment industry to organize cross-functional teams dedicated to specific product categories (e.g. skates). This category dedication has enabled us to better target the needs of consumers and retailers and respond more quickly to the specific market dynamics within each product category. We believe this approach will continue to drive growth in each of our product categories.

 

·                                          BauerWorld — An annual, multi-day customer event where we showcase our new hockey equipment and apparel products, and conduct retailer education seminars. Our BauerWorld 2013 (held in October 2012) hosted approximately 575 attendees from over 25 countries. BauerWorld helps support sales by demonstrating our technological innovations and commitment to our retailer base. BauerWorld is the only tradeshow of its kind that is exclusive to a single hockey equipment manufacturer.

 

·                                          CustomerOne — A platform of competency training, processes and tools that jointly maximize the partnership between Bauer Hockey and its customers. The initiative includes regular retail management education, web-based order facilitation, and online inventory management tools, including the ability to place and check orders and inventories twenty-four hours a day, seven days

 

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per week. Today, approximately 48% of our hockey orders are received on-line through our CustomerOne web portal.

 

·                                          Integrating Strategic Acquisitions into our Platform — In recent years, we have successfully integrated six strategic acquisitions into our platform: the Mission-ITECH Acquisition, the Jock Plus Hockey Intellectual Property Acquisition, the Maverik Lacrosse Acquisition and the Cascade Acquisition, and we are now integrating the Inaria Acquisition and the Combat Acquisition. We have brought together the most talented members of each group to form a superior combined management team across the pertinent performance sports equipment and related apparel industries.

 

Our Performance Sports Products Platform is Driving Growth

 

Our competitive strengths have driven our success in the ice hockey equipment market. These strengths are core elements of what we believe are a world-class performance sports products platform that is unique to our industry. We believe we can successfully apply this platform to other performance sports categories and markets.

 

Our platform consists of:

 

·                                          strong and authentic brands;

 

·                                          industry leading R&D and innovation;

 

·                                          deep knowledge of consumers and players;

 

·                                          defensible, proprietary technologies and patents;

 

·                                          effective global marketing;

 

·                                          extensive global retail and distributor networks; and

 

·                                          global, cost-efficient manufacturing operations driven by scale and strategic partnerships.

 

This platform is supported by our experienced, passionate and dynamic performance sports products team that has been successful in identifying and integrating complementary brands and technology assets which, with the benefit of our platform, have contributed to accelerated market share growth and improved margins.

 

In the last five years, we have:

 

·                                          Completed the Mission-ITECH Acquisition in September 2008, which allowed us to attain the leading market share position in the roller hockey category (with MISSION branded product lines in combination with BAUER branded products), as well as a leading market share position in visor/shields and goalie equipment (with formerly ITECH branded product lines). Our platform also enabled us to reduce costs for those products significantly.

 

·                                          Completed the Jock Plus Hockey Intellectual Property Acquisition in November 2009, which strengthened our position in the performance apparel category. This intellectual property, combined with our performance product development expertise, strong marketing, and extensive distribution channels, has resulted in a 665.0% sales increase in the performance apparel category from Fiscal 2009 to Fiscal 2013.

 

·                                          Completed the Maverik Lacrosse Acquisition in June 2010, which provided us an authentic, cutting-edge brand in the lacrosse equipment and related apparel market. We believe that MAVERIK is poised to become a market leader when it fully realizes the benefits of our platform. From the completion of the Maverik Lacrosse Acquisition through the end of Fiscal 2013, Maverik’s net revenues increased at an annual growth rate of approximately 30%.

 

17

 

·                                          Completed the Cascade Acquisition in June 2012, which expanded our presence in the lacrosse market and whose industry-leading helmets and headgear products are complementary to our existing offering of lacrosse equipment products.

 

·                                          Completed the Inaria Acquisition in October 2012, which provided us with full team apparel capabilities, including the design, development and manufacturing of uniforms for ice hockey, roller hockey, lacrosse, soccer and other team sports.

 

·                                          Completed the Combat Acquisition in May 2013, which expands our high-performance platform into the sports of baseball and softball, and provides us with intellectual property that will strengthen our R&D portfolio.

 

We intend to make further strategic acquisitions of complementary sports equipment and/or related apparel companies that are, or have the potential to become, market leaders in their relevant category, whether in hockey, lacrosse, baseball and softball or other performance sports. We believe that our existing platform and scale enables us to materially enhance the success of an acquisition by leveraging our industry-leading technical expertise, low-cost manufacturing, marketing resources and distribution relationships.

 

Products

 

We offer a complete line of head-to-toe performance-driven equipment for players in every major ice and roller hockey market in the world. Our equipment offering includes skates, sticks, protective equipment, helmets and goalie equipment for both ice and roller hockey. Our ice hockey products are sold at various price points and are developed for and targeted to three performance levels:

 

·                                          “Elite” — for professional and non-professional elite players including players in the NHL and other professional leagues around the world who will pay a premium price for the best performing equipment;

 

·                                          “Performance” — for high-level players (typically between the ages of 12 to 22) who buy technically advanced equipment that provides a competitive edge; and

 

·                                          “Recreational” — for recreational players of all ages who seek comfort and value.

 

With our MAVERIK and CASCADE brands, we offer a comprehensive line of lacrosse equipment for all ages and levels of skill. With the COMBAT brand, we now offer a broad line of baseball and softball equipment for all ages and levels of skill.

 

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The following table provides a breakdown of our major product categories for each of our performance sports:

 

	
Product Type
    	
 
    	
Primary Characteristics
   and Performance Features
    	
 
    	
Market
   Position
    
	
ICE   HOCKEY
    
	
     Skates

 

 
    	
 
    	
·                  Multiple   patented boot construction methodologies highlighted by our   elite-level 3D-lasting boot construction that optimizes player   performance based on skating style and fit characteristics.

 

·                  TUUK LIGHTSPEED   EDGE holder technology provides the player with increased turning radius and   the ability to remove and insert a new runner in seconds.

 

·                  Approximately   71% of NHL players wore BAUER skates during the 2012/2013 NHL season. 
    	
 
    	
#1
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
     Sticks

 

 
    	
 
    	
·                  Three families   of sticks (VAPOR, SUPREME and NEXUS) that utilize different technologies to   offer players distinct shapes, flex points, blade constructions, and shaft   textures — all designed to optimize performance for each individual   player.

 

·                  The elite sticks   utilize many patented and exclusive technologies making what we do best in   class and almost impossible to copy.  Some of these technologies are   utilized in our performance and recreational products as well.

 

·                  The new PRODIGY   family of sticks is designed with the first time hockey player and first time   hockey family in mind focusing on making the experience as enjoyable as   possible. Three heights with their own specific flexes, and end plug   that replicates a taped stick end and simple graphic instructions on the   blade and handle to show how to tape a stick should they not know how.

 

·                  MYBAUER.com   offers individual players the opportunity to order a custom stick from a   broader menu of colors, curves, flexes and a custom “name bar”.
    	
 
    	
#1
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
     Protective

 

 
    	
 
    	
·                  Three families   of gloves that deliver unique fits to meet player preferences.

 

·                  Three families   of shoulder pads, elbow pads and shin pads and two families of pants that   utilize different technologies to deliver distinctly different levels of   mobility and protection.
    	
 
    	
#1
    

 

19

 

	
     Helmets

 

 
    	
 
    	
·                  12   fully-certified helmets, utilizing over seven different impact absorbing   liner materials and multiple tool-free fit adjustment mechanisms to deliver   optimal protection through fit characteristics and lab-tested impact   absorption.

 

·                  Advanced   protection is combined with a streamlined design, aggressive styling and   improved ventilation for elite protection and performance.

 

·                  Utilizing   patented Seven TechnologyTM impact attenuation liner system featuring PORON®   XRDTM to more effectively manage energy transfer, along with the ProFit2TM   system which is a 15 point micro adjustment for a customized fit, makes the   IMS 11.0 helmet another pinnacle Bauer Hockey offering.
    	
 
    	
#1
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
     Goalie

 

 
    	
 
    	
·                  We have two   distinct series of goal protective gear (leg pads, gloves &   blockers) that meet the needs of goalies from the pond to the NHL.  Built into all BAUER protective gear is an   industry leading amount of customization and adjustability.

 

·                  BAUER is the   Official Mask of the NHL and the #1 mask at every level around the world.   With three styles of masks we are able to offer the fit, function and   protection for every goalie.

 

·                  BAUER is the   market leader in goal skates. We have two families of goal skates that offer   goalies the latest in weight and technology or classic fit and performance.

 

·                  BAUER is the   only composite goal stick used in the NHL. The SUPREME and REACTOR families   offer two different shapes to provide goalies with their desired performance.   
    	
 
    	
#1
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
ROLLER   HOCKEY
    
	
     Roller Hockey

 

 
    	
 
    	
·                  Roller hockey   specific design and technology featuring ventilated toe caps, quarters and   tongue to keep players feet cool on the court.

 

·                  Patented HI-LO   Chassis technology optimizes agility and overall performance.

 
    	
 
    	
#1
    

 

20

 

	
LACROSSE
    
	
     Heads and shafts

 

 
    	
 
    	
·                  Heads that cater   to all player levels and regulatory requirements. Our newest head, the   METRIK, will be made in the U.S.    Designed and engineered for maximum stiffness and durability.  Made with a LEVEL 3 Bottom Rail and a DUAL   DESIGN SCOOP for the perfect blend of power and accuracy.

 

·                  Top quality   materials highlight our advanced and expert-level shafts. Titanium, scandium   and 9000 series aluminum provide one of the most durable and lightweight   sticks on the market. Tactile grip provides superior control and feel.
    	
 
    	
N/A
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
     Protective and gloves

 

 
    	
 
    	
·                  Maximum   protection, comfort and flex are available across all of our protective   lines. Designed with DILLO flex technology, our Expert and Advanced level   protective products allow for compact and lightweight pads and gloves that   bend with the player.

 

·                  Newly developed   Anaform Technology utilizes a unique molding process that allows for   ultra-lightweight protection that is curved to the contour of the human body.   This technology is utilized in our new 2014 arm pad and shoulder pad lines.

 

·                  Expert,   Advanced, Intermediate and Beginner gloves are all designed for comfort,   performance and durability. Utilizing seamless palms, DILLO flex technology   and lightweight materials, our gloves provide the player with proper fit and   protection.
    	
 
    	
N/A
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
Helmets

 

 
    	
 
    	
·                  CASCADE’s   lacrosse helmet offering is comprised of five models of men’s and youth   lacrosse helmets, which can be collectively customized with over 750,000   different colour combinations.

 

·                  The R helmet   marks the most advanced impact management system Cascade has ever   created.  The patented SevenTechTM liner   combined with PoronXRDTM Foam addresses both high and low energy impacts.
    	
 
    	
#1
    

 

21

 

	
BASEBALL   AND SOFTBALL
    
	
 

 
    	
 
    	
·                  Exclusive Precision Molding Technology uses computer-controlled   tooling to define both outer and inner barrel diameters with precision   control and accuracy. This leads to an ultra-consistent product every single   time.

 

·                  Seamless Construction Technology is the process by which thousands   of continuous strands of fiber run “seamlessly” from knob to end cap on the   bat. This leads to increased durability and supreme performance over a wider   area of the bat, one of the contributing factors in Combat having on average   a 15% larger “sweet spot” then its closest competitor.

 

·                  One Piece bats are ideal for the players who want to “feel” the bat   working as well as the stronger player with higher swing speed who requires   the stiffness that a One Piece bat provides.
    	
 
    	
N/A
    

 

Research and Development

 

The BAUER brand was founded on and exemplifies the principles of performance, innovation and quality. We constantly strive to improve product performance and reduce costs through the use of biomechanical research, high performance materials, efficient manufacturing processes and valuable consumer insights. We believe that the application of next-generation manufacturing technology solidifies the Company’s position as the industry leader in ice and roller hockey equipment and is being applied to drive the MAVERIK and CASCADE brands in lacrosse and the COMBAT brands in baseball and softball.

 

We have a disciplined, rolling, multi-year product development program or road-map through which we bring new products to market in an organized and efficient manner. Across all of our ice and roller hockey equipment categories, we typically launch approximately 100 to 150 new products each year. To support the successful execution of our new product launches, we fully integrate our manufacturing partners into our R&D program, incorporate advanced materials into our product design to create lighter, more durable products, maintain a strong focus and discipline on cost management, and heavily test our prototypes throughout the development phase, including with lab tests and on-ice trials by elite and high-level players. We believe that this collaborative process yields better ice and roller hockey equipment and will yield similar benefits for our lacrosse, baseball and softball businesses.

 

Our five-year innovation cycle begins with product concepts and valuable consumer insights. Over the course of the design and development cycle, we complete prototyping, materials sourcing, manufacturing, and on-ice testing, and typically reach the final production stage in year five. Bauer Hockey’s five-year product innovation agenda can be depicted as follows:

 

22

 

 

We utilize a variety of strategic partnerships to enhance our R&D activities, including a long-standing, exclusive research program with McGill University in conjunction with the Natural Science and Engineering Research Council of Canada. We conduct research and gather and analyze a variety of physical data by, for example, studying biomechanics such as the pressure points in the foot of a skater or the way a player influences a stick’s bend during a slapshot. This research allows us to evaluate the mechanical function and technical specifications of all of our equipment offerings, particularly with respect to performance and safety, which contributes to our goal of continuously improving the performance of our equipment. We believe that these partnerships provide us with invaluable data and insight to assist us in developing next-generation products.

 

In order to protect our innovations, we have a substantial library of intellectual property assets. The Bauer Performance Sports portfolio includes 418 patents (including design patents) and 320 trademarks, and we have 73 additional patents pending today. We believe that our portfolio of intellectual property, which we vigorously protect, is a strategic competitive advantage.

 

With more than 85 years of experience in developing hockey equipment, Bauer Hockey has a long history of designing and manufacturing innovative helmets, with a core emphasis on player protection. This commitment to player safety was further displayed in May 2012 with the introduction of the BAUER RE-AKT helmet - the first hockey helmet designed to specifically manage the multiple types of hits in the game, including rotational-force impacts, which have been scientifically proven to cause significant head injuries. Featuring multiple proprietary technologies that were developed over two years of product research and testing, the BAUER RE-AKT helmet is uniquely designed to withstand low-energy impacts and high-energy impacts, as well as rotational impacts. In October 2012, Bauer Hockey introduced the new BAUER IMS 11.0 and IMS 9.0, featuring the new Seven Technology. This helmet line is the culmination of combined technologies from Bauer Hockey and Cascade product development teams, and the helmets are designed to more effectively manage high and low direct energy transfers. The BAUER IMS 11.0 also features PORON XRD for additional impact management and enhanced comfort. The IMS 9.0 features Vertex and PORON XRD for greater protection against linear energy impacts and uses the same shell as the BAUER RE-AKT.

 

We work closely with athletes at all levels to provide insights that help us develop new equipment, including some of the world’s top professionals.  We have exclusive partnerships with NHL athletes such as Patrick Kane, Alexander Ovechkin, Steven Stamkos and Henrik Lundqvist who wear BAUER equipment exclusively and also work with us to provide insight and guidance to our industry leading research and development team as we develop the most advanced hockey equipment in the industry.

 

In October 2012, Bauer Hockey launched a multi-faceted global initiative, “Grow the Game”, with a goal of adding 1 million new players to the game by 2022.  Along with Hall of Famer Mark Messier, who joined Bauer

 

23

 

following the Cascade Acquisition, Bauer Hockey is partnering with Hockey Canada and other governing bodies on this effort to better understand why non-hockey families choose not to play hockey and to develop pilot programs aimed at breaking down these barriers.  The initial program will begin in Canada and future phases will expand into the United States and other regions of the world.

 

With the Combat Acquisition, we plan to explore and combine relevant composite technologies, where applicable, to strengthen our overall hockey stick and lacrosse offerings under the BAUER and MAVERIK brands, respectively. The acquisition provides us with advanced composite technologies and strong intellectual property to further strengthen our industry-leading research and development capabilities across our platform of high performance sports equipment and to expand that platform into the new sports of baseball and softball.

 

Customers

 

In Fiscal 2013, 34% of our total sales (including all performance sports) were in Canada, 40% in the United States, and 26% the rest of the world.  Our four largest customers together accounted for approximately 29% of the Company’s sales in Fiscal 2013, with one customer accounting for 11% of our sales.

 

Fiscal 2013 Net Revenues by Region

 

 

Bauer Hockey has established a global sales and distribution network to service a broad and diverse customer base comprised of more than 4,149 retailers and distributors in the major geographic markets where hockey is popular - Canada, the United States, Western Europe, the Nordic countries, and Russia and other Eastern European countries. Bauer Hockey sells directly to our customers in Canada, the United States, and the Nordic countries. In Fiscal 2013, approximately 84% of our ice hockey equipment sales were to these markets.  In these jurisdictions, our customers are typically independently-owned specialty hockey retail stores and large sporting goods retailers.

 

Bauer Hockey sells through distributors outside North America and the Nordic countries. In Fiscal 2013, approximately 16% of our ice hockey equipment sales were to distributors representing over 1,000 retail outlets globally, providing us access to the world’s largest hockey markets outside North America and the Nordic countries. We believe that larger, more established equipment manufacturers like Bauer Hockey are able to more effectively serve the spectrum of retail channels globally, through established relationships and developed distribution capabilities.

 

Our lacrosse business exclusively sells its products through dealers and retailers, with minimal direct sales to end-consumers. In Fiscal 2013, approximately 85% of our lacrosse revenues were generated from lacrosse specialty and independent dealers, who then sell through to individuals, teams and institutions. The remaining 15% of our lacrosse revenues were from big box retailers and sporting goods retail chains, primarily on an exclusive basis. Through our grassroots and product-focused marketing approach, we have developed a diverse customer base, with no customer representing more than 13% of total Fiscal 2013 sales.

 

Combat Sports’ sales and distribution network focuses primarily on North America. Combat Sports’ customers are made up of online stores, big box retailers, sporting goods chains and baseball specialty dealers.

 

24

 

Baseball revenues are also generated via direct sales to end-consumers through team buy-in programs. Combat Sports’ products are geared towards the high-end baseball and softball market which is currently served by the various retailers described above. This range allows for a wide variety of customers.

 

Inaria sells its products directly to teams and associations. In Fiscal 2013, over 60% of revenues were generated in Canada. The primary soccer product being sold is a “player kit” that includes a jersey, a short and a matching sock for each member of the team or association. Each player kit is sized and personalized with team identifiers and numbering. Revenue is also generated from supplemental products such as off-field apparel, balls, bags and coaching accessories.

 

Global Manufacturing, Sourcing and Distribution

 

Sourcing and Manufacturing

 

Bauer Hockey manufactures the majority of its hockey equipment with an exclusive vendor base. Over 90% of our overseas production is located in China and Thailand. The remainder of our hockey products are manufactured either at non-exclusive facilities or at our in-house manufacturing facility in St. Jerome, Québec. Quality control for our products manufactured in Asia is maintained from St. Jerome. We also have an office in Taichung, Taiwan, where we have a dedicated staff responsible for liaising with internal resources located in Thailand and China and with our vendors regarding production.

 

Bauer Hockey’s suppliers and manufacturers are contractually bound by strict security and privacy provisions to ensure the protection of our proprietary trade secrets. We have agreements with our manufacturing partners that renew automatically every two years, and many of our manufacturing relationships are greater than 10 years in length and, in some cases, over 30 years. In the event there are performance issues with our manufacturers, we retain the right to terminate any of our agreements with no more than 30 days’ notice. In our core product categories, we dual-source many products to mitigate any risk of supply disruptions. In addition, we employ strategies with our vendors to reduce the variability of material price increases over certain time periods.

 

We believe that we have one of the lowest manufacturing costs amongst our hockey equipment competitors based on our manufacturing scale and infrastructure, coupled with our distribution network and R&D processes. We strive to obtain the lowest costs for materials and manufacturing of our products. In doing so, we seek alternative sources of supply and manufacturing capacity in existing and new markets.

 

Our lacrosse business operates a single 72,000 square-foot manufacturing facility in Liverpool, New York, with multiple production lines. As most of our lacrosse business’ component suppliers and vendors have facilities located within 300 miles of this facility, we are able to manufacture and ship individualized products within a 48-hour turnaround time from order confirmation to shipping on custom helmet orders.  Our lacrosse business provides its specialty dealers and retailers with strong customer service and product customization capabilities, which are particularly important for the many school and travel lacrosse teams that customize the color schemes of their helmets as part of the team uniform. These unique attributes have enabled our lacrosse business to develop long-term relationships with its retailers while also building strong industry-wide brand recognition.

 

Our uniforms business sources raw material and work in process primarily from suppliers in Asia and finishes production at a facility in Toronto.  Our Combat Sports business manufactures substantially all of its finished goods at the Ottawa manufacturing facility.

 

Distribution

 

Our ice and roller hockey products are sold in over 40 countries through a distribution network of more than 3,700 retailers and distributors worldwide. We distribute our products to retailers and other distributors through our facility in Mississauga, Ontario, as well as through third-party logistics providers in Aurora, Illinois and Boras, Sweden.

 

Our lacrosse products and whitewater helmets are sold in 10 different countries through a distribution network of more than 600 retailers and distributors worldwide.  We manufacture and deliver all of our lacrosse helmet products to retailers and other distributors through our facility in Liverpool, New York and our lacrosse equipment products through our facility in Aurora, Illinois.

 

25

 

Inaria soccer products are sold directly to teams, clubs and associations across North America.  All products are embellished and ship from our 40,000 sq. ft. facility located in Toronto, Ontario.

 

Combat Sports’ products are sold through a distribution network of more than 1,700 retailers and distributors in North America and Europe. We distribute our products to retailers and other distributors through our facilities in Ottawa, Ontario and Kent, Washington. We also offer direct to consumer distribution through the Shopatron ecommerce program, which allows consumers to directly access Combat Sports’ website and make purchase orders that are filled by the closest participating dealer. This program allows consumers to have the confidence of buying from a manufacturer and allows us to utilize our dealer network to fill orders.

 

Facilities

 

Our sales and distribution offices are located worldwide as shown in the table below.

 

	
Location
    	
 
    	
Type
    	
 
    	
Facility Size
   (Sq. Ft.)
    	
 
    	
Leased/
   Owned
    	
 
    	
Lease Expiry Date
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Exeter, New Hampshire
    	
 
    	
Global Headquarters
    	
 
    	
54,825
    	
 
    	
Leased
    	
 
    	
April 30, 2023
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
St. Jerome, Québec
    	
 
    	
R&D and   Manufacturing
    	
 
    	
174,600
    	
 
    	
Leased
    	
 
    	
September 5, 2014
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Mississauga, Ontario
    	
 
    	
Sales, Marketing, and   Distribution
    	
 
    	
333,888
    	
 
    	
Leased
    	
 
    	
September 30,   2016
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Vantaa, Finland
    	
 
    	
Sales
    	
 
    	
1,620
    	
 
    	
Leased
    	
 
    	
June 30, 2015
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gothenburg, Sweden
    	
 
    	
Sales, Administration,   and Marketing
    	
 
    	
6,765
    	
 
    	
Leased
    	
 
    	
September 30,   2014
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Rosenheim, Germany
    	
 
    	
Sales and Marketing
    	
 
    	
3,175
    	
 
    	
Leased
    	
 
    	
May 15, 2014
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Taichung, Taiwan
    	
 
    	
Asian Sourcing   Organization
    	
 
    	
2,300
    	
 
    	
Leased
    	
 
    	
May 15, 2015
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Irvine, California
    	
 
    	
Roller Hockey (Sales   and Marketing)
    	
 
    	
3,915
    	
 
    	
Leased
    	
 
    	
December 31, 2014
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
New York, New York
    	
 
    	
Lacrosse (Sales and   Marketing)
    	
 
    	
6,000
    	
 
    	
Leased
    	
 
    	
March 31, 2016
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Liverpool, New York
    	
 
    	
Lacrosse and Hockey   (All Functions)
    	
 
    	
72,000
    	
 
    	
Leased
    	
 
    	
May 31, 2016
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Toronto, Ontario
    	
 
    	
Apparel
    	
 
    	
40,000
    	
 
    	
Leased
    	
 
    	
January 6, 2017
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Kent, Washington
    	
 
    	
Baseball and Softball
    	
 
    	
13,599
    	
 
    	
Leased
    	
 
    	
October 31, 2014
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Ottawa Ontario
    	
 
    	
Baseball and Softball
    	
 
    	
5,000
    	
 
    	
Leased
    	
 
    	
October 31, 2013
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Ottawa Ontario
    	
 
    	
Baseball and Softball
    	
 
    	
12,540
    	
 
    	
Leased
    	
 
    	
October 31, 2013
    	
 
    

 

Environment

 

We are not aware of any material environmental problems with respect to any of our operations or facilities. Existing applicable environmental laws and requirements have not had any adverse financial or operational effects on our capital expenditures, earnings or competitive position and we do not anticipate that continuing compliance with such laws and requirements will have a material adverse effect upon our expenditures, earnings or competitive position in future years.

 

Intellectual Property

 

We have an extensive portfolio of intellectual property which creates a strategic competitive advantage and can be applied to new performance equipment sports categories. Our portfolio includes 418 patents (including design patents) and 320 trademarks, and we have over 73 additional patents pending today. We protect our technologies, products and brands under the patent, copyright and trademark laws of those countries in which we do business.

 

26

 

Our extensive intellectual property portfolio is highlighted by the following assets that provide product performance for players and help protect key features of our innovative products:

 

·                                          The construction of a skate boot — multiple patents that (i) define the use of a plastic insert in the boot, (ii) define a one-piece construction, and (iii) define the method of lasting the skate. Ongoing evolutions and patent protection continue to provide significant barriers to entry for existing competitors and all newcomers.

 

·                                          TUUK skate blade holder — the leading skate blade holder trademark registrations have been and continue to be vigorously and successfully defended. While the product evolutions provide an unmatched feel and performance, the trademark registrations have also restricted competitors from developing a product that could even be visually mistaken for the TUUK skate blade holder.

 

·                                          Base Layer Shirt with Integrated Neck Protection — as momentum builds for mandatory use of neck protection across more countries and levels of play, these patents provide the exclusive ability to permanently attach standardized cut-proof neck protection to a baselayer undershirt.

 

·                                          HI-LO chassis for roller hockey — the unparalleled standard for performance in roller hockey, the patents provide the ability to use two back wheels that are larger than the two front wheels.

 

·                                          All research stemming from the McGill University studies.

 

Our intellectual property portfolio is highlighted by the following assets that provide product performance for players and help protect key features of our innovative products:

 

·                                          High performance composite baseball bats - multiple patents that (i) define the use of various fibers and angles in a composite bat laminate (ii) define a set of physical properties that allow a bat to achieve a high performance with minimal vibration, and (iii) defines a novel layer of three-dimensional reinforcement that imparts greater durability.

 

·                                          A family of inserts to impart various desired characteristics on a family of modular bats - a patent that defines a set of differentiated inserts that can be used inside a common frame to impart specific properties for particular bats, such as a wider sweet spot, higher durability, or lighter weight.

 

·                                          Combat Sports has significant experience embodied in many trade secrets related to manufacturing advanced composite sporting goods and other products using our proprietary seamless construction and precision molding process. This knowledge enables many advanced composite products to be manufactured with greater quality and efficiency, and provides a significant competitive advantage over existing and potential competitors.

 

In addition, we own a significant number of trademarks including BAUER, SUPREME, NEXUS, MISSION, ITECH, MAVERIK, CASCADE, INARIA, and COMBAT. Other significant trademarks include COOPER, JOCK PLUS and TUUK, as well as LANGE, MICRON, DAOUST, MEGA, LASER, and FLAK.

 

At the time of the sale of the Bauer Hockey Business by Nike, Nike granted to us an exclusive, worldwide, royalty-free, perpetual limited license to use the VAPOR brand in connection with the manufacture and sale of certain products, subject to the terms and conditions set out in the Vapor License Agreement. See “Material Contracts — The Vapor License Agreement”. Pursuant to a co-existence agreement, Nike assigned to us its ownership of the SUPREME brand with respect to hockey and skating equipment and related apparel.

 

Information Technology

 

We use our information systems to manage our customer orders, deliveries and manufacturing processes. We primarily operate a global SAP infrastructure. We have a globally integrated business-to-business system for our sales representatives and retailers, CustomerOne, which facilitates approximately 48% of our hockey-related orders. Along with other business systems, these tools provide business process support and intelligence across our entire

 

27

 

integrated business process, from concept to consumer. In order to protect our ability to conduct business, several risk mitigation techniques are used across our hardware and network equipment, and telecommunications.

 

Competition

 

The market for the Company’s products is highly competitive. We compete in ice and roller hockey, lacrosse, baseball and softball on the basis of brand image and recognition, innovation, performance, price, quality, style and distribution. Our principal competitors in the ice and roller hockey equipment industry are Easton and Reebok (which includes the REEBOK and CCM brands). We also compete with other hockey equipment manufacturers who focus on certain equipment categories such as gloves, skates, sticks or goalie equipment. These competitors include, but are not limited to, Warrior, Graf, Vaughn, and Sher-Wood/TPS. In lacrosse, our principal competitors include but are not limited to New Balance (which owns the WARRIOR and BRINE brands), STX, Reebok/Adidas, and Gait, who compete with us in most lacrosse products including shafts, heads, protective equipment and helmets. In baseball and softball, we compete with a number of international brands which include, but are not limited to, Easton-Bell Sports, Rawlings Sporting Goods, Worth Sports, Wilson Sporting Goods, Hillerich & Bradsby and Mizuno Corp.

 

In each of the related apparel markets, including performance, team and lifestyle categories, we compete against other global sporting goods and/or apparel manufacturers, including Nike and Under Armour, in addition to most of the companies described above in the respective equipment industries.

 

Employees and Culture

 

We have an innovative and energetic culture. Our entire Bauer Performance Sports team is passionate about our brands, our businesses, ice and roller hockey, lacrosse, baseball and softball and sports in general. Most of our employees are involved in hockey, lacrosse, or baseball and softball outside of work in one manner or another. Our employees’ commitment and dedication to our company is supported by their significant length of service. Our employees have been with the Company an average of approximately 7.5 years.

 

As of May 31, 2013, we had 597 employees, of which 313 were employed in Canada, 226 in the United States and 58 in other countries. Of these 597 employees, 257 were engaged in manufacturing and supply chain operations, 102 in marketing and sales, 77 in R&D, 52 in customer service and 109 in administration, finance, accounting, information systems, legal, and human resources.

 

No employees in the United States are represented by any labour union or covered by a collective bargaining agreement. In Canada, certain of our employees are represented by unions. In Mississauga, Ontario, approximately 54 of our employees belong to the Glass, Molders, Pottery, Plastics and Allied Workers International Union and are subject to a three-year collective bargaining agreement which expires in July 2014.  In St. Jerome, Québec, 28 of our full time employees are members of the United Steelworkers Union of America and are subject to a five-year collective bargaining agreement expiring in November 30, 2017.  We have not experienced any labour-related work stoppages and we believe that our relationship with our employees is good.

 

Seasonality

 

Our business demonstrates substantial seasonality. We currently launch new hockey products over two seasons each fiscal year - the April to September period which we classify as the “Back-To-Hockey” season and the October to March period which we classify as the “Holiday” season. Generally, our highest sales volumes occur during the peak of the “Back-to-Hockey” season during the first quarter of our fiscal year, from June to August. The majority of our sales volumes for our “Holiday” season occur during the second quarter of our fiscal year.

 

·                                          We typically launch core hockey products (excluding composite ice hockey sticks) in the “Back-to-Hockey” season, from April through September.

 

·                                          Composite ice hockey stick products (among other products such as seasonal apparel and roller hockey equipment) have typically been launched during the “Holiday” season, in October through March, although Bauer Hockey is transitioning to a schedule which will result in sticks being launched both in the “Back-to-Hockey” and “Holiday” seasons.

 

28

 

·                                          In ice hockey, we have three families of products — VAPOR, SUPREME and NEXUS. In certain seasons, we will launch new products under more than one family (for example, in our 2012 “Back-to-Hockey” season, we launched new products under the SUPREME and NEXUS brands while in our 2013 “Back-to-Hockey” season we launched new products under the VAPOR brand only). The launch timing of our products may change in future periods.

 

·                                          Roller hockey products are typically launched at retail during the “Holiday” season, from October through March.

 

·                                          The launch of MAVERIK and CASCADE lacrosse products overlaps substantially with the “Holiday” season, from November through April.

 

·                                          The launch of our team apparel products overlaps substantially with the “Back-to-Hockey” season, from April to September.

 

·                                          The launch of COMBAT products overlaps substantially with the “Holiday” season, from November through April.

 

The following table reflects the seasonality of net revenues for each of the quarters in the three most recent fiscal years:

 

	
 
    	
 
    	
Percent of Fiscal Net Revenues
    	
 
    
	
Fiscal Year
    	
 
    	
Three Month
   Period Ended
   August 31
    	
 
    	
Three Month
   Period Ended
   November 30
    	
 
    	
Three Month
   Period Ended
   February 28
    	
 
    	
Three Month
   Period Ended
   May 31
    	
 
    
	
2013 
    	
 
    	
37.1
    	
%
    	
27.4
    	
%
    	
13.8
    	
%
    	
21.7
    	
%
    
	
2012 
    	
 
    	
38.0
    	
%
    	
26.8
    	
%
    	
13.8
    	
%
    	
21.4
    	
%
    
	
2011 
    	
 
    	
36.0
    	
%
    	
25.9
    	
%
    	
15.8
    	
%
    	
22.3
    	
%
    

 

DIVIDEND POLICY

 

The Company has never declared or paid any cash dividends on its Equity Shares. The Company currently intends to use its earnings to finance the expansion of its business and to reduce indebtedness. Any future determination to pay dividends on Equity Shares will be at the discretion of the Board of Directors and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial condition, contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the Board of Directors may deem relevant. See also “Description of Capital Structure —Dividend Rights”, “Risk Factors — Risks Related to Our Business — We do not currently intend to pay dividends on our Equity Shares” and “Risk Factors — Risks Related to Our Business —  We are a holding company”.

 

DESCRIPTION OF CAPITAL STRUCTURE

 

The following description of our share capital summarizes certain provisions of our Articles. These summaries do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of our Articles.

 

General

 

The Company’s authorized share capital consists of an unlimited number of Common Shares and an unlimited number of Proportionate Voting Shares. As of the date hereof, the Company has 24,543,514 issued and outstanding Common Shares and 10,652 issued and outstanding Proportionate Voting Shares, or an equivalent of

 

29

 

35,195,514 Common Shares (assuming the conversion of all Proportionate Voting Shares into Common Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share).

 

Equity Shares

 

Except as described herein, the Common Shares and the Proportionate Voting Shares have the same rights, are equal in all respects, and are treated as if they were shares of a single class.

 

Conversion Rights

 

Common Shares may at any time, at the option of the holder, be converted into Proportionate Voting Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share. Each issued and outstanding Proportionate Voting Share may at any time, at the option of the holder, be converted into 1,000 Common Shares. Except as provided for below, no fractional Equity Shares will be issued on any conversion of another class of Equity Share. See “— Take-Over Bid Protection” below.

 

Immediately at the time that none of the initial holders of Proportionate Voting Shares and their affiliates beneficially owns, controls or directs, directly or indirectly, any Proportionate Voting Shares: (i) all issued and outstanding Proportionate Voting Shares will automatically convert into Common Shares on a one to 1,000 basis; (ii) the right of holders of Common Shares to convert their Common Shares into Proportionate Voting Shares under the Articles will be terminated; (iii) all authorized and unissued Proportionate Voting Shares shall automatically convert into authorized and unissued Common Shares on a one to 1,000 basis; and (iv) the Board of Directors shall not thereafter be entitled under the Articles to issue any Proportionate Voting Shares.

 

Liquidation Entitlement

 

In the event of the liquidation, dissolution or winding-up of the Company or any other distribution of its assets among the holders of the Company’s Common Shares and Proportionate Voting Shares (“Shareholders”) for the purpose of winding-up its affairs, whether voluntarily or involuntarily, Shareholders are entitled to participate in the remaining property and assets of the Company available for distribution to Shareholders on the following basis, and otherwise without preference or distinction among or between such Equity Shares: each Proportionate Voting Share will be entitled to 1,000 times the amount distributed per Common Share. See “— Conversion Rights” above.

 

Dividend Rights

 

Each Equity Share is entitled to dividends if, as and when declared by the Board of Directors, on the following basis, and otherwise without preference or distinction among or between such Equity Shares: each Proportionate Voting Share will be entitled to 1,000 times the amount paid or distributed per Common Share. See “— Conversion Rights” above.

 

Voting Rights

 

The Common Shares carry one vote per share for all matters coming before Shareholders and the Proportionate Voting Shares carry 1,000 votes per share for all matters coming before Shareholders.

 

Unless a different majority is required by law or the Articles, resolutions to be approved by Shareholders require approval by a simple majority of the total number of votes of all Equity Shares cast at a meeting of Shareholders at which a quorum is present, with holders of Common Shares entitled to one vote per share and holders of Proportionate Voting Shares entitled to 1,000 votes per share.

 

Shareholders are entitled to receive notice of any meeting of Shareholders of the Company, and to attend and vote at those meetings, except those meetings at which holders of a specific class of shares are entitled to vote separately as a class under the BCBCA.

 

Variation of Rights

 

The rights, privileges, conditions and restrictions attaching to any Equity Shares may be modified if the amendment is authorized by not less than 662/3% of the total number of votes cast at a meeting of Shareholders duly

 

30

 

held for that purpose. However, if the holders of Proportionate Voting Shares, as a class, or the holders of Common Shares, as a class, are to be affected in a manner materially different from such other class of Equity Shares, the amendment must, in addition, be authorized by not less than 662/3% of the total number of votes cast at a meeting of the holders of the class of Equity Shares which is affected differently.

 

Subdivision or Consolidation

 

No subdivision or consolidation of the Common Shares or Proportionate Voting Shares may be carried out unless, at the same time, the Common Shares or Proportionate Voting Shares, as the case may be, are subdivided or consolidated in the same manner and on the same basis, so as to preserve the relative rights of the holders of each class of Equity Shares.

 

Sale of All or Substantially All of the Company’s Assets

 

Pursuant to the Articles, the Company may not sell, lease or otherwise dispose of all or substantially all of its undertaking, other than in the ordinary course of business, unless authorized by not less than 662/3% of the total number of votes cast at a meeting of the Shareholders, voting as a single class.

 

Take-Over Bid Protection

 

In addition to the conversion rights described above, if an offer (the “Offer”) is being made for Proportionate Voting Shares where:

 

(a)                                 by reason of applicable securities legislation or stock exchange requirements, the Offer must be made to all holders of the class of Proportionate Voting Shares; and

 

(b)                                 no equivalent Offer is made for the Common Shares,

 

the holders of Common Shares have the right, at their option, to convert their Common Shares into Proportionate Voting Shares for the purpose of allowing the holders of the Common Shares to tender to that Offer.

 

In the event that holders of Common Shares are entitled to convert their Common Shares into Proportionate Voting Shares in connection with an Offer pursuant to (b) above, holders of an aggregate of Common Shares of less than 1,000 (“Odd Lot”) will be entitled to convert all but not less than all of such Odd Lot of Common Shares into a fraction of one Proportionate Voting Share, at a conversion ratio equivalent to 1,000 to one, provided that such conversion into a fractional Proportionate Voting Share will be solely for the purpose of tendering the fractional Proportionate Voting Share to the Offer and that any fraction of a Proportionate Voting Share that is tendered to the Offer but that is not, for any reason, taken up and paid for by the offeror will automatically be reconverted into the Common Shares that existed prior to such conversion.

 

MARKET FOR SECURITIES AND TRADING PRICE AND VOLUME

 

The Common Shares are listed for trading on the TSX under the symbol “BAU”. The Proportionate Voting Shares are not listed for trading on any exchange. The following table sets out the monthly range of trading prices of Common Shares at the close of market (TSX), as well as the total monthly trading volumes and average daily trading volumes of Common Shares for each month in Fiscal 2013:

 

	
Period
    	
 
    	
Price per
   Common Share
   Monthly High
   (Cdn$ per share)
    	
 
    	
Price per
   Common Share
   Monthly Low
   (Cdn$ per share)
    	
 
    	
Average Daily
   Trading Volume
   by Month
    (in shares)
    	
 
    	
Total Monthly
   Trading Volume
   (in shares)
    	
 
    
	
2013
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
May 
    	
 
    	
$
    	
11.75
    	
 
    	
$
    	
10.90
    	
 
    	
40,155
    	
 
    	
883,420
    	
 
    
	
April 
    	
 
    	
$
    	
11.89
    	
 
    	
$
    	
10.52
    	
 
    	
89,995
    	
 
    	
1,976,892
    	
 
    
	
March 
    	
 
    	
$
    	
12.41
    	
 
    	
$
    	
11.71
    	
 
    	
108,937
    	
 
    	
2,178,749
    	
 
    
	
February 
    	
 
    	
$
    	
12.20
    	
 
    	
$
    	
11.70
    	
 
    	
107,787
    	
 
    	
2,049,950
    	
 
    
	
January 
    	
 
    	
$
    	
12.04
    	
 
    	
$
    	
10.55
    	
 
    	
139,033
    	
 
    	
3,058,717
    	
 
    
	
2012
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
December 
    	
 
    	
$
    	
11.30
    	
 
    	
$
    	
10.25
    	
 
    	
56,483
    	
 
    	
1,073,183
    	
 
    
	
November 
    	
 
    	
$
    	
11.11
    	
 
    	
$
    	
10.30
    	
 
    	
23,266
    	
 
    	
511,861
    	
 
    
	
October 
    	
 
    	
$
    	
11.29
    	
 
    	
$
    	
10.40
    	
 
    	
88,984
    	
 
    	
1,957,640
    	
 
    

 

31

 

	
Period
    	
 
    	
Price per
   Common Share
   Monthly High
   (Cdn$ per share)
    	
 
    	
Price per
   Common Share
   Monthly Low
   (Cdn$ per share)
    	
 
    	
Average Daily
   Trading Volume
   by Month
    (in shares)
    	
 
    	
Total Monthly
   Trading Volume
   (in shares)
    	
 
    
	
September 
    	
 
    	
$
    	
10.73
    	
 
    	
$
    	
9.25
    	
 
    	
151,967
    	
 
    	
2,887,382
    	
 
    
	
August 
    	
 
    	
$
    	
9.90
    	
 
    	
$
    	
9.30
    	
 
    	
39,612
    	
 
    	
871,455
    	
 
    
	
July 
    	
 
    	
$
    	
9.95
    	
 
    	
$
    	
8.48
    	
 
    	
40,385
    	
 
    	
848,085
    	
 
    
	
June 
    	
 
    	
$
    	
8.30
    	
 
    	
$
    	
8.00
    	
 
    	
72,297
    	
 
    	
1,518,244
    	
 
    

 

DIRECTORS AND OFFICERS

 

Directors

 

The following table sets out, for each of our directors and executive officers, the person’s name, province or state and country of residence, positions with us or our operating subsidiaries, as applicable, principal occupation during the five preceding years and, if a director, the date on which the person became a director. Our directors are expected to hold office until our next meeting of Shareholders. Our directors are elected annually and, unless re-elected, retire from office at the end of the next annual general meeting of Shareholders. As a group, the directors and executive officers beneficially own, or control or direct, directly or indirectly, 271,239 Common Shares, representing less than one percent of the equity and voting interest in the Company on a non-diluted basis.

 

Directors and Executive Officers

 

	
Name and Province or
   State and Country of Residence
    	
 
    	
Position(s)/Title
    	
 
    	
Since
    	
 
    	
Principal Occupation
   for Past Five Years
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
CHRIS ANDERSON(1)(2) 
    New York, USA
    	
 
    	
Director
    	
 
    	
2008
    	
 
    	
Partner, Kohlberg.
    	
 
    
	
KEVIN DAVIS
    New Hampshire, USA
    	
 
    	
Director, President and CEO
    	
 
    	
2008
    	
 
    	
CEO, Bauer
    	
 
    
	
RICHARD W. FRANK
    Wisconsin, USA
    	
 
    	
Director
    	
 
    	
2008
    	
 
    	
Operating Partner, Kohlberg; CEO, Invisible   Technologies Inc
    	
.
    
	
SAMUEL P. FRIEDER(1)
    New York, USA
    	
 
    	
Director
    	
 
    	
2008
    	
 
    	
Managing Partner, Kohlberg.
    	
 
    
	
SHANT MARDIROSSIAN
    New York, USA
    	
 
    	
Director
    	
 
    	
2008
    	
 
    	
Partner and COO, Kohlberg.
    	
 
    
	
BERNARD MCDONELL(2)(3)
    Ontario, Canada
    	
 
    	
Director (Chairman)
    	
 
    	
2011
    	
 
    	
Lead Director, First Capital Realty Ltd.; Vice-Chair and President,   Provigo Inc.; Director, Investus Real Estate Inc.; Vice Chairman   and CEO, Capital Wapiti Inc.
    	
 
    
	
BOB NICHOLSON(1)(3)
    British Columbia, Canada
    	
 
    	
Director
    	
 
    	
2011
    	
 
    	
President and CEO of Hockey Canada.
    	
 
    
	
GORDON H. WOODWARD
    New York, USA
    	
 
    	
Director
    	
 
    	
2011
    	
 
    	
Partner and CIO, Kohlberg.
    	
 
    
	
C. MICHAEL JACOBI(2)(3)
    Connecticut, USA
    	
 
    	
Director
    	
 
    	
2012
    	
 
    	
President, Stable House 1, LLC.
    	
 
    
	
ANGELA BASS
    New Hampshire, USA
    	
 
    	
Vice President, Global Human Resources
    	
 
    	
N/A
    	
 
    	
VP, Bauer; DSVP Human Resources, Collective Brands   Performance + Lifestyle
    	
 
    
	
PAUL DACHSTEINER
    New Hampshire, USA
    	
 
    	
Vice President, Information Systems
    	
 
    	
N/A
    	
 
    	
VP, Bauer.
    	
 
    
	
PAUL GIBSON
    New Hampshire, USA
    	
 
    	
Executive Vice President, Product Creation and Supply Chain
    	
 
    	
N/A
    	
 
    	
EVP, Bauer; SVP, Product Creation, Bauer.
    	
 
    
	
TROY MOHNS
    New Hampshire, USA
    	
 
    	
Vice President, Lacrosse and New Business
    	
 
    	
N/A
    	
 
    	
VP, Bauer; VP of Business Development, Bauer.
    	
 
    
	
AMIR ROSENTHAL
    New Hampshire, USA
    	
 
    	
Chief Financial Officer and Executive Vice President of Finance and   Administration
    	
 
    	
N/A
    	
 
    	
CFO, Bauer; VP, CFO, General Counsel and Secretary, Katy   Industries, Inc
    	
.
    
	
MATT SMITH
    New Hampshire, USA
    	
 
    	
Vice President, Global Marketing
    	
 
    	
N/A
    	
 
    	
VP, Bauer; Marketing Director, NA Female Shaving,   Gillette/Procter & Gamble; Brand Development Manager, Unilever Home   and Personal Care.
    	
 
    
	
MICHAEL J. WALL
    Massachusetts, USA
    	
 
    	
Vice President, General Counsel and Corporate Secretary
    	
 
    	
N/A
    	
 
    	
VP and GC, Bauer.
    	
 
    

 

(1)                                  Member of the Compensation Committee.

 

(2)                                  Member of the Corporate Governance and Nominating Committee.

 

(3)                                  Member of the Audit Committee.

 

32

 

Biographies

 

The following are brief profiles of the executive officers and directors of the Company, including a description of each individual’s principal occupation within the past five years.

 

Non-Executive Directors

 

Christopher W. Anderson, Director

 

Christopher Anderson has been a member of the Company’s Board of Directors since April 2008. Mr. Anderson is a Partner of Kohlberg, which he joined in 1998. He is a member of the board of directors for Aurora Casket Company, L.L.C., Chronos Life Group, Katy Industries, Inc., Phillips-Medisize Corporation and Risk Strategies Company. Mr. Anderson received a Bachelor of Arts from Princeton University.

 

Richard W. Frank, Director

 

Richard Frank has been a member of the Company’s Board of Directors since April 2008. Mr. Frank is an Operating Partner of Kohlberg, which he has been affiliated with since 2003. Prior to joining Kohlberg, he served as an operating executive with Allied Capital, and was formerly the Chairman and Chief Executive Officer of Evenflo, a baby products company. Earlier, he was President of Bayer AG’s $800 million U.S. Consumer Health Care business and held marketing roles at Helene Curtis and Procter & Gamble. Mr. Frank previously served as the Chief Executive Officer of Invisible Technologies, a Kohlberg portfolio company manufacturing dog training products under the Innotek and Invisible Fence brand names. He is currently the Chairman of SVP Holdings Ltd. Mr. Frank received a Bachelor of Science from Yale University and a Master of Business Administration from the University of Chicago. He served as a captain in the U.S. Air Force and is a decorated Vietnam veteran.

 

Samuel P. Frieder, Director

 

Samuel Frieder has been a member of the Company’s Board of Directors since April 2008. Mr. Frieder is the Managing Partner of Kohlberg, which he joined in 1989. He is a member of the board of directors of Nellson Nutraceutical, L.L.C., Aurora Casket Company, L.L.C., BioScrip, Inc., Chronos Life Group, Concrete Technologies Worldwide, Inc., e+ CancerCare, Katy Industries, Inc., Kellermeyer Bergensons Services, Nielsen & Bainbridge, Inc., Packaging Dynamics Corporation, Phillips-Medisize Corporation, Pittsburgh Glass Works L.L.C., Risk Strategies Company, Sabre Industries, Inc., SouthernCare, Stanadyne Corporation, SVP Holdings, Ltd., and Trico Products, Inc. Mr. Frieder received a Bachelor of Arts from Harvard College.

 

Shant Mardirossian, Director

 

Shant Mardirossian has been a member of the Company’s Board of Directors since April 2008. Mr. Mardirossian is a Partner and the Chief Operating Officer of Kohlberg, which he joined in 1996. He is a member of the board of directors for Katy Industries, Inc., Nielsen & Bainbridge, Inc. and Risk Strategies Company. Mr. Mardirossian received a Bachelor of Business Administration and a Master of Business Administration from Pace University. He is a Certified Public Accountant.

 

Bernard McDonell, Director (Chairman)

 

Bernard McDonell joined the Company’s Board of Directors on March 10, 2011. Mr. McDonell is currently the Lead Director for First Capital Realty Ltd. (TSX).  He serves on the executive, audit and corporate governance committees for First Capital Realty Ltd.  He was President of Provigo Inc., a food retailer owned by Loblaw Companies Inc. from 1999 to 2006. Mr. McDonell has also served as a Director of Investus Real Estate Inc. (TSX-V), and as Vice Chairman and CEO of Capital Wapiti Inc. (TSX-V), an industrial real estate company.  Mr. McDonell received a Bachelor of Commerce from Concordia University.

 

Bob Nicholson, Director

 

Bob Nicholson joined the Company’s Board of Directors on March 10, 2011. Mr. Nicholson has been President and Chief Executive Officer of Hockey Canada since 1998. Hockey Canada is the national sport governing body for hockey in Canada and overseas. With a staff of over 100 employees and a budget in excess of $50 million,

 

33

 

it manages all Olympics, World Championships and Grassroots Hockey within Canada. As part of his responsibilities, Mr. Nicholson is involved in both the financial and operational side of the organization. Mr. Nicholson also oversees corporate sales and marketing, licensing, insurance and regulations, hockey development programs both nationally and internationally, high performance programs and communications. He also manages and oversees all operations for competitions that Canada participates in internationally. In 2004, Mr. Nicholson was inducted into the B.C. Hockey Hall of Fame. From 1992 to 1998, Mr. Nicholson was a senior vice-president of the Canadian Hockey Association. Mr. Nicholson attended Providence College in Providence, Rhode Island.

 

Gordon H. Woodward, Director

 

Gordon Woodward joined the Company’s Board of Directors on March 10, 2011. Mr. Woodward is a Partner and the Chief Investment Officer of Kohlberg, which he joined in 1996. He is a member of the board of directors of Nellson Nutraceutical, L.L.C., Aurora Casket Company, L.L.C., BioScrip, Inc., Chronos Life Group, e+CancerCare, Kellermeyer Bergensons Services, Nielsen & Bainbridge, Inc., Packaging Dynamics Corporation, Phillips-Medisize Corporation, Pittsburgh Glass Works, L.L.C., Risk Strategies Company, Sabre Industries, Inc., SouthernCare, Stanadyne Corporation and Standard Parking Corporation. Mr. Woodward received a Bachelor of Arts from Harvard College.

 

C. Michael Jacobi, Director

 

Michael Jacobi joined the Company’s Board of Directors on October 17, 2012. Mr. Jacobi is the president of Stable House 1, LLC, a private company engaged in real estate development. He is also currently Chairman of the board of directors and a member of the compensation committee of Sturm, Ruger & Company, a member of the board of directors and audit committee chairman of Webster Financial Corporation, a member of the board of directors and audit committee chairman of Corrections Corp of America and is a member of the board of directors and audit committee of KCAP Financial Inc. From 2001 to 2005, Mr. Jacobi served as President, Chief Executive Officer and a director of Katy Industries, Inc., a public company (NYSE) engaged in the design, manufacture and distribution of maintenance and electrical products. He also served as President and Chief Executive Officer of Timex Corporation from 1993 to 1999 and as a member of the board of directors from 1992 to 2000. Prior to 1993, Mr. Jacobi served Timex in senior positions in marketing, sales, finance and manufacturing. Mr. Jacobi received a B.S. from the University of Connecticut and is a Certified Public Accountant.

 

Executive Officers Who Also Serve as Directors

 

Kevin Davis, President, Chief Executive Officer and Director

 

Kevin Davis is the President and CEO of the Company and has acted in this capacity since 2008. Mr. Davis joined the Company in 2002 and has held positions of increasing responsibility over that time, most recently as the Chief Operating Officer from 2006-2008 and CFO from 2004-2006. Prior to joining the Company, Mr. Davis held senior finance positions in the medical device industry for Pathway Medical Technologies and Boston Scientific Corporation and in consumer products with The Gillette Company.

 

Mr. Davis has Bachelor of Science degrees from the University of Massachusetts and earned Certified Public Accountant (CPA) and Certified Management Accountant (CMA) designations while employed at Ernst & Young.

 

Executive Officers Who Do Not Serve as Directors

 

Angela Bass, Vice President of Global Human Resources

 

Angela Bass is the Vice President of Global Human Resources of the Company.  Ms. Bass has held this position since returning to the Company in January 2012. Prior to her return, Ms. Bass served as Senior Vice President of Human Resources for the Performance + Lifestyle Group (PLG), a division of Collective Brands, Inc.  As a member of the senior leadership team with responsibility for leading all aspects of the human resources function for the division, Ms. Bass led organizational initiatives across all brands and functions with a focus on talent acquisition, talent management and development, and shared services integration activities.  Prior to joining PLG, she held the position of Vice President, Human Resources, for the J. Jill Group and Vice President, Global 

 

34

 

Human Resources, for Sport Brands International.  Ms. Bass joined the Bauer Hockey team in 2002 as a transfer from Nike, and held the role of Director, Global Human Resources. She joined Nike in 1996 and held various human resources roles of increasing responsibility.

 

Ms. Bass has a Bachelor of Science degree in Social Sciences from Portland State University and holds a Senior Professional in Human Resources certification.

 

Paul Dachsteiner, Vice President of Information Services

 

Paul Dachsteiner is the Vice President of Information Services of the Company. Mr. Dachsteiner began in this role in 2001 with Nike Bauer. Between 2001 and 2006, Mr. Dachsteiner worked closely with Nike to leverage shared services and deliver best-in-class services while reducing operating costs. In 2006, Mr. Dachsteiner left the organization for two years and took on the role as Chief Information Officer at the Nike affiliate Cole Haan. During that time, Mr. Dachsteiner built shared services models between Nike and Cole Haan. In addition, he supported their global retail stores while leading the transition of their point of sale systems and new store openings. In 2008, Mr. Dachsteiner returned to Bauer Hockey as the Vice President of Information Services where he helped transition the company from an operating subsidiary of Nike to a stand-alone company. In 2010, Bauer Hockey introduced the first automatic replenishment program to the hockey industry.

 

Mr. Dachsteiner has a Bachelor of Science degree in Management Information Systems from New Hampshire College.

 

Paul Gibson, Executive Vice President of Product Creation and Supply Chain

 

Paul Gibson is the Executive Vice President, Product Creation and Supply Chain. Mr. Gibson has held this position since 2008. Mr. Gibson is responsible for leading the Company’s Research, Design and Development, Supply Chain, and Mergers and Acquisitions organizations. From 2006 to 2010, Mr. Gibson was also responsible for Category Management. From 2001 to 2006, he held the position of Vice President, Global Manufacturing and Sourcing which included at various times responsibility for Research, Design and Development, Logistics and Distribution, Supply Planning, Quality, and Nike Bauer’s Taiwan Production and Development Operations. From 2006 to 2008, Mr. Gibson was the Senior Vice President of Product Creation. During his prior roles with Nike Bauer spanning over 10 years, he held positions in manufacturing, sourcing and supply chain. Paul has extensive relationships with suppliers throughout Asia and led the transition from internal manufacturing at Bauer Hockey to outsourcing products in Asia including setting up BAUER’s Asia Production and Development Operations located in Taichung, Taiwan.

 

Troy Mohns, Vice President of Lacrosse and New Business

 

Troy Mohns has held the position of Vice President, Category Management since January 2010. In his previous role as Vice President, Business Development, Mr. Mohns led the acquisition and integration of the Company’s fourth largest competitor and managed the separation from Nike including the creation of the current BAUER brand image and positioning. During his prior role with Nike Bauer spanning a period of 12 years, Mr. Mohns held roles in regional management, brand marketing, product marketing and strategic planning. He continues in an advisory role on mergers and acquisitions and other strategic opportunities.

 

Mr. Mohns has a Bachelor of Arts degree in Economics from Colgate University. Mr. Mohns was also a varsity hockey player for four years and was drafted by the Los Angeles Kings after his freshman year.

 

Amir Rosenthal, Chief Financial Officer and Executive Vice President of Finance and Administration

 

Amir Rosenthal is the Chief Financial Officer and Executive Vice President of Finance and Administration. Mr. Rosenthal has acted in the capacity as Chief Financial Officer since 2008. From 2001 to 2008, Mr. Rosenthal was the Vice President, Chief Financial Officer, General Counsel and Secretary of Katy Industries, Inc. From 1989 to 2001, Mr. Rosenthal held various positions at Timex Group Limited, including Treasurer, Senior Counsel, and Counsel. Mr. Rosenthal was also Chairman of Timex Watches Limited (New Delhi, India). Mr. Rosenthal began his career with LeBoeuf, Lamb, Leiby and MacRae as an associate attorney in 1986. Mr. Rosenthal is a Director of Sturm, Ruger & Co., Inc., a NYSE-listed company that manufactures high-quality firearms for the commercial sporting market.

 

35

 

Mr. Rosenthal has a Bachelor of Arts degree from Dartmouth College, a Doctorate of Jurisprudence from New York University School of Law, and a Master of Science in Finance from Rensselaer Polytechnic Institute.

 

Matt Smith, Vice President of Global Marketing

 

Matt Smith is the Vice President of Global Marketing. Prior to joining Bauer Hockey in 2008, Mr. Smith spent 12 years building brand and creating marketing plans at E&J Gallo Winery, Unilever Home and Personal Care, and Gillette/Procter & Gamble. In his most recent role at Procter & Gamble, Mr. Smith was responsible for running the North American Female Shaving business and growing the Venus brand. Mr. Smith has also worked in a marketing role for the National Football League (1996-1997) and Uno Restaurants.

 

Mr. Smith has a Bachelor of Arts degree in Business from the University of New Hampshire and a Masters in Business Administration from Vanderbilt University.

 

Michael J. Wall, Vice President, General Counsel and Corporate Secretary

 

Michael J. Wall is Vice President, General Counsel and Corporate Secretary of the Company. Mr. Wall has held this position since 2008. Prior to joining Bauer Hockey, he held the position of Chief Legal Officer of the TD Garden and the Boston Bruins. During his 13 years with the Garden and the Boston Bruins organizations, he was the sole in-house attorney, providing legal support, advice and counsel to the executive management of the TD Garden, the Boston Bruins, Massachusetts Sportservice (the concessionaire for the TD Garden), New England Sportservice (the concessionaire for the Comcast Center) and H.A. Sportservice (the concessionaire for the Agganis Arena at Boston University). He served as a member of the board of directors of the NHL Pension Society during this time and continues to serve on the board of directors of The Boston Bruins Charitable Foundation. Before joining the TD Garden and Boston Bruins executive teams in 1995, he was an attorney with two law firms in Boston at Hinckley, Allen & Snyder and at Goodwin Procter.

 

Mr. Wall has a Bachelor of Arts degree from The College of the Holy Cross and a Doctorate of Jurisprudence from Boston College Law School.

 

Cease Trade Orders or Bankruptcies

 

Other than as described below, none of our directors or executive officers:

 

(a)                                 is, as at the date of this Annual Information Form, or has been, within 10 years before the date of this Annual Information Form, a director, CEO or CFO of any company (including us) that,

 

(i)                                     was subject to an order that was issued while the director or executive officer was acting in the capacity as director, CEO or CFO; or

 

(ii)           was subject to an order that was issued after the director or executive officer ceased to be a director, CEO or CFO and which resulted from an event that occurred while that person was acting in the capacity as a director, CEO or CFO;

 

(b)                                 and no shareholder holding a sufficient number of securities to affect materially the control of our Company is, as at the date of this Annual Information Form, or has been within 10 years before the date of this Annual Information Form, a director or executive officer of any company (including us) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or

 

(c)                                  and no shareholder holding a sufficient number of securities to affect materially the control of our Company has, within the 10 years before the date of this Annual Information Form, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a

 

36

 

receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder.

 

For the purposes of the paragraphs above, “order” means: (i) a cease trade order; (ii) an order similar to a cease trade order; or (iii) an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than 30 consecutive days.

 

Mr. Samuel Frieder was a director of: (i) Southwest Supermarkets, LLC when it, and Southwest Holdings, LLC filed for bankruptcy protection under Chapter 11 of the US Code in the US Bankruptcy Court for the District of Arizona in November 2001 (the bankruptcy was converted into a Chapter 7 proceeding in September 2004), (ii) Camber Companies, LLC, when it completed an orderly liquidation of its assets during 2004, and (iii) Holley Performance Products, Inc. when the board of directors approved a plan in December 2007 to file a voluntary petition for reorganization under Chapter 11 of the US Code in the U.S. Bankruptcy Court for the District of Delaware (the plan was subsequently filed in February 2008 and approved in March 2008) and the corporation emerged from bankruptcy in June 2010.

 

Mr. Shant Mardirossian and Mr. Frieder were both directors of (i) Lab Ventures, Inc., and (ii) International Cancer Screening Labs (“International Labs”), a subsidiary of Lab Ventures, Inc. In December 2001, Lab Ventures, Inc., in conjunction with its subsidiary, filed a petition for bankruptcy under Chapter 7 of the US Code in the US Bankruptcy Court for the Western District of Texas, San Antonio Division. The final liquidation of Lab Ventures, Inc. was completed in March 2003 and International Labs’ final liquidation was subsequently completed in February 2005.

 

Penalties or Sanctions

 

No director or executive officer of the Company or Shareholder holding sufficient securities of the Company to affect materially the control of the Company has:

 

(a)                                 been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or

 

(b)                                 been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor making an investment decision.

 

Conflicts of Interest

 

To the best of our knowledge, there are no known existing or potential conflicts of interest among us and our directors, officers or other members of management as a result of their outside business interests except that certain of our directors and officers serve as directors and officers of other companies, and therefore it is possible that a conflict may arise between their duties to us and their duties as a director or officer of such other companies. See “Directors and Officers — Directors and Executive Officers” and “Interest of Management and Others in Material Transactions”.

 

AUDIT COMMITTEE INFORMATION

 

Charter of the Audit Committee

 

The Board of Directors has adopted a written charter (the “Charter of the Audit Committee”) for the audit committee of the Company (the “Audit Committee”), which sets out the Audit Committee’s responsibility in reviewing the financial statements of the Company and public disclosure documents containing financial information and reporting on such review to the Board of Directors, ensuring that adequate procedures are in place for the review of the Company’s public disclosure documents that contain financial information, overseeing the work and review the independence of the external auditors and reviewing, evaluating and approving the internal control procedures that are implemented and maintained by management. A copy of the Charter of the Audit Committee is attached to this Annual Information Form as Appendix “B”.

 

37

 

Composition of the Audit Committee

 

As of the date hereof, the Audit Committee is composed of three members, as follows: Bernard McDonell (Chairman), C. Michael Jacobi and Bob Nicholson. Each member of the Audit Committee is financially literate, within the meaning of National Instrument 52-110 — Audit Committees (“NI 52-110”) and all members are independent.

 

Relevant Education and Experience of the Audit Committee Members

 

Each of the Audit Committee members has an understanding of the accounting principles used to prepare financial statements and varied experience as to the general application of such accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting. See “Directors and Officers — Biographies”.

 

External Auditor Service Fee

 

The Company has been billed the following fees for services rendered in respect of the audits by KPMG LLP for Fiscal 2013 and Fiscal 2012.

 

	
(in thousands)
    	
 
    	
Aggregate fees
   paid for Fiscal
   2013 and Fiscal
   2012
    	
 
    	
Fiscal 2013
    	
 
    	
Fiscal 2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Audit Fees(1) 
    	
 
    	
$
    	
1,296
    	
 
    	
$
    	
523
    	
 
    	
$
    	
773
    	
 
    
	
Audit-Related Fees(2) 
    	
 
    	
$
    	
580
    	
 
    	
$
    	
561
    	
 
    	
$
    	
19
    	
 
    
	
Tax Fees(3) 
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
All Other Fees(4) 
    	
 
    	
$
    	
541
    	
 
    	
$
    	
266
    	
 
    	
$
    	
275
    	
 
    
	
Total Fees Paid 
    	
 
    	
$
    	
2,417
    	
 
    	
$
    	
1,350
    	
 
    	
$
    	
1,067
    	
 
    

 

(1)                                 “Audit Fees” include fees necessary to perform the annual audit of the consolidated financial statements and the review of the Company’s interim financial statements.

 

(2)                                 “Audit-Related Fees” include fees for assurance and related services by the external auditor that are reasonably related to the performance of the audit or review of the Company’s financial statements other than those included in “Audit Fees”.

 

(3)                                 “Tax Fees” include fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax advice and tax planning.

 

(4)                                 “All Other Fees” include fees for products and services provided by the auditor other than those included above.

 

RISK FACTORS

 

You should carefully consider the risks described below, which are qualified in their entirety by reference to, and must be read in conjunction with, the detailed information appearing elsewhere in this Annual Information Form, and all other information contained in this Annual Information Form. The risks and uncertainties described below are those we currently believe to be material, but they are not the only ones we face. If any of the following risks, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows and consequently the price of the Common Shares could be materially and adversely affected.

 

Risks Related to Our Business

 

Sales of our products may be adversely affected if we cannot effectively introduce new and innovative products

 

The sporting equipment industry is subject to constantly and rapidly changing consumer demands based, in part, on performance benefits. Our success depends, in part, on our ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and quality of our brands. We believe the historical success of our business has been attributable, in part, to the introduction of products, which represent an improvement in performance over products then available in the market. Our future success and growth

 

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will depend, in part, upon our continued ability to develop and introduce innovative products. Successful product design, however, can be displaced by other product designs introduced by competitors which shift market preferences in their favour. If we do not introduce successful new products or our competitors introduce products that are superior to ours, our customers may purchase products from our competitors, which will result in a decrease in our net revenues and an increase in our inventory levels, and could adversely affect our business and financial condition.

 

In addition, our success is also dependent on our ability to prevent competitors from copying our innovative products. We may not be able to obtain intellectual property protection for an innovative product and, even if we do, we cannot assure that we would be successful in challenging a competitor’s attempt to copy that product. Conversely, our competitors may obtain intellectual property protection for superior products that would preclude us from offering the same or similar features. If a competitor’s proprietary product feature became the industry standard, our customers may purchase products from our competitors, which will result in a decrease in our net revenues and an increase in our inventory levels, and could adversely affect our business and financial condition.

 

Our financial results will be affected by market conditions in the sporting equipment and related apparel industry, which is intensely competitive and has certain segments with low barriers to entry

 

The sporting equipment industry is highly competitive. Competitive factors that affect our market position within the sporting equipment industries in which we compete include the style, quality, technical aspects and pricing of our products and the strength and authenticity of our brands. There are minimal barriers to entry into certain segments of the sporting equipment and related apparel industry. For example, there are low barriers to entry in the related apparel market, including certain performance, team and lifestyle segments. The general availability of offshore manufacturing capacity allows for rapid expansion by competitors and new entrants. Our competitors may overproduce, or face financial or liquidity difficulties, which may lead them to release their products at lower prices into the market or offer discounts to clear their inventory, resulting in decreased demand for our products. We face competition from well-known sporting goods companies, such as Reebok and Easton in the ice hockey industry, each of which has strong brand recognition inside and outside of hockey. In lacrosse, our principal competitors include STX and New Balance (which owns the BRINE and WARRIOR brands), each of which has significant market share (other than in the helmet category). In baseball and softball, we compete with a number of international brands which include but are not limited to, Easton-Bell Sports, Rawlings Sporting Goods, Worth Sports, Wilson Sporting Goods, Hillerich & Bradsby and Mizuno Corp. We also compete with smaller companies who specialize in marketing to our core customers. Our inability to effectively compete in the sporting equipment and related apparel market could adversely affect our business and financial condition.

 

We rely on technical innovation and high quality products to compete in the market for our products

 

Although design and performance of our products is a key factor for consumer acceptance of our products, technical innovation and quality control in the design and manufacture of sporting equipment and related apparel is also essential to the commercial success of our products. R&D plays a key role in technical innovation. We include specialists in the fields of biomechanics, engineering, industrial design and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, and other experts to develop and test cutting-edge performance products. While we strive to produce quality products that enhance athletic performance and maximize comfort, if we fail to introduce technical innovation in our products the consumer demand for our products could decline. If we experience problems with the quality of our products, we may incur substantial expense to remedy the problems and our reputation and brands may be harmed which could adversely impact our business and financial condition. See also “We are subject to product liability, warranty, and recall claims and our insurance coverage may not cover such claims.”

 

In addition, there can be no assurance that our third-party suppliers and manufacturers will continue to manufacture products that are consistent with our quality standards and that comply with all applicable laws and regulations. We have occasionally received, and may in the future receive, shipments of products that fail to conform to our quality control standards. In that event, unless we are able to obtain replacement products in a timely manner, we risk the loss of net revenues resulting from the inability to sell those products and could incur related increased administrative and shipping costs, and there also could be a negative impact to our brands which could adversely impact our business and financial condition.

 

39

 

Our success is dependent on our ability to protect our worldwide intellectual property rights and if we are unable to enforce and protect our intellectual property rights, our competitive position may be harmed

 

We rely on a combination of patent, trademark, and trade secret laws in our core geographic markets and other jurisdictions and on contractual restrictions, such as confidentiality agreements, to protect certain aspects of our business. We also enter into confidentiality and invention assignment agreements with our employees and consultants. However, while we have selectively pursued patent and trademark protection in our core geographic markets, in some countries we have not perfected important patent and trademark rights. Our success depends in part on our ability to protect our trademarks and patents from unauthorized use by others. If substantial unauthorized use of our intellectual property rights occurs, we may incur significant financial costs in prosecuting actions for infringement of our rights, as well as the loss of efforts by engineers and managers who must devote attention to these matters. We cannot be sure that our patents and trademarks, or other protections such as confidentiality, will be adequate to prevent imitation of our products and technology by others. We may be unable to prevent third parties from using our intellectual property without our authorization, particularly in countries where we have not perfected our proprietary rights, where the laws or law enforcement practices do not protect our proprietary rights as fully as in Canada or the United States, or where intellectual property protection is otherwise limited or unavailable. In some foreign countries where intellectual property laws or law enforcement practices do not protect our proprietary rights as fully as in Canada and the United States, third-party manufacturers may be able to manufacture and sell imitation products and diminish the value of our brands. If we fail to obtain patent and trademark protection, maintain our existing patent and trademark rights, or prevent substantial unauthorized use of our technology and brands, we risk the loss of our intellectual property rights and competitive advantages we have developed, causing us to lose net revenues and harm our business. Accordingly, we devote substantial resources to the establishment and protection of our trademarks and patents and continue to evaluate the registration of additional trademarks and patents, as appropriate. We cannot guarantee that any of our pending applications will be approved by the applicable governmental authorities. Moreover, even if the applications will be approved, third parties may seek to oppose or otherwise challenge these registrations.

 

We cannot assure that any third-party patents and trademarks for which we have obtained licenses are adequately protected to prevent imitation by others. If those third-party owners fail to obtain or maintain adequate patent and trademark protection or prevent substantial unauthorized use of the licensed intellectual property, we risk the loss of our rights under the third-party intellectual property and competitive advantages we have developed based on those rights.

 

We cannot assure that our actions taken to establish and protect our technology and brands will be adequate to prevent others from seeking to block sales of our products or to obtain monetary damages, based on alleged violation of their patents, trademarks or other proprietary rights. In addition, our competitors have obtained and may continue to obtain patents on certain features of their products, which may prevent us from offering such features on our products, may subject us to patent litigation, and in turn, could result in a competitive disadvantage to us. Moreover, third parties may independently develop technology or other intellectual property that is comparable with or similar to our own, and we may not be able to prevent their use of it.

 

Our best known brands include BAUER, VAPOR, SUPREME, NEXUS, MISSION, ITECH, MAVERIK, CASCADE, INARIA and COMBAT. We believe that these trademarked and licensed brands, as applicable, are a core asset of our business and are of great value to us. If we lose the use of a product name, our efforts spent building that brand will be lost and we will have to rebuild a brand for that product, which we may or may not be able to do.

 

VAPOR, one of our key brands, is not owned, and VAPOR and SUPREME are subject to use by third parties on products outside of hockey and skating.

 

Our rights to the VAPOR brand are licensed from Nike, and Nike continues to own the mark and the goodwill associated therewith. We are required to comply with certain conditions regarding our use of the VAPOR mark, and are not permitted to use it on apparel or equipment primarily manufactured for participants in athletic activities other than hockey or skating. If we materially breach certain provisions of the Vapor License Agreement and do not or are unable to remedy such breach following notice by Nike, the Vapor License Agreement could be terminated, which would have an adverse effect on our business and financial condition.

 

40

 

Nike has rights to use the VAPOR mark and the SUPREME mark on equipment and apparel outside of the hockey and skating markets. If Nike’s, or its licensees’, use of the VAPOR or SUPREME marks is associated with negative publicity, it may have an adverse effect on our business and financial condition.

 

We may not be successful in converting booking orders into realized sales

 

Our revenues are generated from (i) booking orders, which are typically received several months in advance of the actual delivery date or range of delivery dates, (ii) repeat orders, which are for at-once delivery, and (iii) other orders. Reported booking orders include firm orders for which we are given specific delivery dates and planning orders for which we are given a range of delivery dates. Planning orders represent a small, but growing part of our total booking orders.  In recent years, the conversion rate of planning orders, or the percentage of planning orders which are ultimately shipped, is not materially different than the conversion rate of firm orders.  There can be no assurances that this trend will continue for upcoming seasons. Disclosure regarding our booking orders is intended to provide visibility into the demand for our products by our customers.

 

We receive a substantial amount of our “Back-to-Hockey” season booking orders by the end of April (for sales from April through September) and we receive a substantial amount of our “Holiday” season booking orders by the end of October (for sales from October through March). The seasonality of our business and the manner in which we solicit orders could create quarterly variations in the percentage of our revenues that are comprised of booking orders. Historically, booking orders constitute most of our orders in our first and fourth fiscal quarters, but constitute approximately one-half of our orders in our second fiscal quarter and approximately one-third of our orders in our third fiscal quarter. Although our booking orders give us some visibility into our future financial performance, there may not be a direct relationship between our booking orders and our future financial performance given several factors, among which are: (i) the timing of order placement compared to historical patterns, (ii) our ability to service demand for our product, (iii) the willingness of our customers to commit to purchasing our product, and (iv) the actual sell-through of our products at retail driving changes in repeat orders.  As a result, there can be no assurances that our booking orders will translate into realized sales. Failure to convert booking orders into realized sales could adversely affect our business and financial condition.

 

Our business is affected by seasonality, which could result in fluctuations in our operating results and the trading price of our Common Shares

 

We experience substantial fluctuations in aggregate sales volume during the year. Historically, revenues in the first fiscal quarter have exceeded those in the second and fourth fiscal quarters and revenues in the third fiscal quarter are lower than the other quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of equipment and related apparel. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. We may also make strategic decisions to deliver and invoice product at certain dates in order to lower costs or improve supply chain efficiencies. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas and currency exchange rate fluctuations, could adversely affect our business and financial condition. Our operating margins are also sensitive to a number of factors, including those that are beyond our control, as well as shifts in product sales mix, geographic sales trends, and currency exchange rate fluctuations, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period.

 

Our success depends in large part on the continued popularity of ice hockey, roller hockey, lacrosse, baseball and softball as recreational sports and the popularity of the NHL and other professional leagues for sports in which our products are used

 

We generate a significant portion of our revenue from the sale of ice hockey equipment and related apparel. The other portion of our revenue flow is generated from the sale of roller hockey, lacrosse, baseball and softball equipment and related apparel. The demand for our ice hockey equipment and related apparel is directly related to the popularity of the sport of ice hockey, the number of professional and amateur ice hockey participants, and the amount of ice hockey being played by these participants. If ice hockey participation decreases, sales of our ice hockey equipment and related apparel could be adversely affected.

 

41

 

The popularity of the NHL, as well as other professional ice hockey leagues in North America, Europe and the rest of the world, also affect the sales of our ice hockey equipment and related apparel. Our brands receive significant “on-ice” exposure as a result of our endorsements with, or purchases by, NHL players and other professional athletes. We depend on this “on-ice” exposure of our brands to increase brand recognition and reinforce the quality and high performance of our products. The Company maintains an important and valuable relationship with the NHL, the world’s premier professional hockey league, and any work stoppages or significant reduction in television coverage of NHL games or any other significant decreases in either attendance at NHL games or viewership of NHL games will reduce the visibility of our brands and could adversely affect our sales of hockey equipment and related apparel. The NHL entered into a lockout during a portion of the 2012-2013 NHL regular season, and during that time the Company was unable to sell BAUER products to NHL teams or continue our NHL-related marketing efforts, reducing the visibility of BAUER products. There was a resolution to the NHL lockout on January 12, 2013. While a loss of revenue has been realized as a result of the NHL lockout (largely offset by reduced and avoided costs associated with athlete endorsements and other NHL-related contracts during the lockout period), there is no assurance that there will not be a long term decrease in the popularity of the NHL or other professional hockey leagues or in the “on-ice” exposure of BAUER products, which may adversely affect player participation rates and our sales of ice hockey equipment and related apparel.

 

Likewise, our sales of roller hockey, lacrosse, baseball and softball equipment and related apparel depends on the popularity of these sports, professional and amateur participation and brand exposure from league play which if negatively impacted could adversely affect our business and financial condition.

 

The value of our brands and sales of our products could be diminished if we, the athletes who use our products or the sports in which our products are used, are associated with negative publicity

 

We sponsor a variety of athletes and feature those athletes in our advertising and marketing materials, and many athletes and teams use our products, including those teams or leagues for which we are an official supplier. Actions taken by athletes, teams or leagues associated with our products that harm the reputations of those athletes, teams or leagues could also harm our brand image and result in a material decrease in our net revenues, net income, and cash flows which could have a material adverse effect on our financial condition and liquidity. We may also select athletes who are unable to perform at expected levels or who are not sufficiently marketable, which could also have an adverse effect on our business. If we are unable in the future to secure prominent athletes and arrange athlete endorsements of our products on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms of marketing and promotion, which may not prove to be as effective or may result in additional costs. Also, union strikes or lock-outs affecting professional play could negatively impact the popularity of the sport, which could have a material adverse effect on our net revenues from products used in that sport. Furthermore, negative publicity resulting from severe injuries or death occurring in the sports in which our products are used could negatively affect our reputation and result in restrictions, recalls or bans on the use of our products and if the popularity of ice hockey or lacrosse (or other sports for which we design, manufacture and sell equipment and related apparel) among players and fans were to decrease due to these risks or the associated negative publicity, sales of our products could decrease and it could have a negative impact on our net revenues, profitability and operating results, and we could become exposed to additional claims and litigation relating to the use of our products and our reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity about our products, which could adversely impact our business and financial condition.

 

Our business depends on strong brands, and if we are not able to maintain and enhance our brands we may be unable to sell our products, which would harm our business and cause the results of our operations to suffer

 

We believe that the brand image we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing the BAUER, VAPOR, SUPREME, NEXUS, MISSION, ITECH, MAVERIK, CASCADE, INARIA and COMBAT brands is critical to maintaining and expanding our customer base. Maintaining and enhancing our brands may require us to make substantial investments in areas such as R&D, community relations and employee training, and these investments may not be successful. A primary component of our strategy involves expanding into other geographic markets, particularly within Russia and other Eastern European countries (for ice hockey) and in Canada (for lacrosse). As we expand into new geographic markets, consumers in these markets may not accept our brand image and may not be willing to pay a premium to purchase our sporting equipment as compared to the locally established branded equipment. We anticipate that as our business expands into new markets, maintaining and enhancing our brands may become increasingly difficult

 

42

 

and expensive. If we are unable to maintain or enhance our brands image, it could adversely affect our business and financial condition.

 

Many of our products or components of our products are provided by a limited number of third-party suppliers and manufacturers and, because we have limited control over these parties, we may not be able to obtain quality products on a timely basis or in sufficient quantities

 

We rely on a limited number of suppliers and manufacturers for many of our products and for many of the components in our products. During Fiscal 2013, approximately 90% of our raw materials for the products we manufacture were sourced from international suppliers. In addition, a substantial portion of our products are manufactured by third-party manufacturers. During Fiscal 2013, nine international manufacturers produced approximately 90% of our purchased finished goods. We do generally maintain long-term agreements with our third-party suppliers and manufacturers, and we compete with other businesses for raw materials, production capacity and capacity within applicable import quotas.

 

If we experience significantly increased demand, or if, for any reason, we need to replace an existing manufacturer or supplier, there can be no assurance that additional supplies of raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any new supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, should we decide to transition existing manufacturing between third-party manufacturers, the risk of such a problem could increase. Even if we are able to expand existing or find new manufacturing sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. Any material delays, interruption or increased costs in the supply of raw materials or manufacture of our products could have an adverse effect on our ability to meet customer demand for our products and result in lower revenues and net income both in the short and long-term.

 

Problems with our distribution system could harm our ability to meet customer expectations, manage inventory, complete sales, and achieve objectives for operating efficiencies

 

We rely on our distribution facility in Mississauga, Ontario, and on third-party logistics providers in Boras, Sweden and Aurora, Illinois for substantially all of our hockey product distribution. We broadened our arrangement with the Aurora, Illinois third-party vendor to encompass the distribution of all U.S. ice hockey equipment, and may further broaden our arrangements with both third-party vendors for additional products, but there can be no assurance that we will be able to enter into an agreement with these third parties on acceptable terms. We rely on our facility in Liverpool, New York for substantially all of our lacrosse helmet and whitewater product distribution.  Our facility includes computer processes and software which means the operation is complicated and may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, electronic or power interruptions or other system failures. In addition, because substantially all of our lacrosse helmet products are distributed from this one location, our operations could also be interrupted by labor difficulties, or by floods, fires or other natural disasters near our facility. We maintain business interruption insurance, but it may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system, such as the long-term loss of customers or an erosion of our brand image. In addition, our distribution capacity is dependent on the timely performance of services by third parties, such as UPS and Federal Express. If we encounter problems with our distribution system, our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be harmed, which could adversely affect our business and financial condition. Our distribution facilities include computer controlled and automated equipment, which means their operations are complicated and may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, electronic or power interruptions or other system failures. In addition, because substantially all of our products are distributed from a few locations, our operations could also be interrupted by labour difficulties, or by floods, fires or other natural disasters near our distribution centers. We maintain business interruption insurance, but it may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system, such as the long-term loss of customers or an erosion of our brand image. In addition, our distribution capacity is dependent on the timely performance of services by third parties, including the shipping of our products to and from the Aurora, Illinois and Boras, Sweden distribution facilities. If we encounter problems with our distribution system, our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be harmed, which could adversely affect our business and financial condition.

 

43

 

The loss of one or more key customers could result in a material loss of revenues

 

Our customers do not have any contractual obligations to purchase our products on a multi-season or multi-year basis. For Fiscal 2013, our top 10 customers collectively accounted for approximately 39% of our net revenues, with one customer accounting for 11% of our net revenues. We face the risk that one or more of our key customers may not increase their business with us as much as we expect, may suffer from an economic downturn, may significantly decrease their business with us, may negotiate lower prices or may terminate their relationship with us altogether. The failure to increase our sales to these customers would have a negative impact on our growth prospects and any decrease or loss of these key customers’ business or lower gross margins as a result of negotiated lower prices could adversely affect our business and financial condition. In addition, our customers in the retail industry continue to experience consolidation, contractions and some may face financial difficulties from time to time. A large portion of our sales are to specialty sporting retailers. Of these, many of our smaller retailers and some larger retailers are not strongly capitalized. Adverse conditions in the sporting goods retail industry can adversely impact the ability of retailers to purchase our products, or could lead retailers to request credit terms that would adversely affect our cash flow and involve significant risks of non-payment. As a result, we may experience a loss of customers or the un-collectability of accounts receivable in excess of amounts against which we have reserved, which could adversely affect our business and financial condition.

 

The cost of raw materials could affect our operating results

 

The materials used by us, our suppliers and our manufacturers involve raw materials, including carbon-fiber, aluminum, steel, resin and other petroleum-based products. Significant price fluctuations or shortages in petroleum or other raw materials, including the costs to transport such materials or finished products, the uncertainty of Asian currencies’ fluctuations against the U.S. dollar, increases in labour rates, and/or the introduction of new and expensive raw materials, could have a material adverse effect on our cost of goods sold, operations and financial condition.

 

We are subject to numerous risks associated with doing business abroad, any one of which, if realized, could adversely affect our business or financial condition

 

Our business is subject to the risks generally associated with doing business abroad. We cannot predict the effect of various factors in the countries in which we sell our products or where our suppliers are located, including, among others: (i) economic trends in international markets; (ii) legal and regulatory changes and the burdens and costs of our compliance with a variety of laws, including trade restrictions and tariffs; (iii) difficulties in enforcing intellectual property rights; (iv) increases in transportation costs or delays; (v) work stoppages and labour strikes; (vi) increase and volatility in labour input costs; (vii) fluctuations in exchange rates; (viii) political unrest, terrorism and economic instability; and (ix) limitations on repatriation of earnings. If any of these or other factors were to render the conduct of our business in a particular country undesirable or impractical, our business and financial condition could be adversely affected. Should our current third-party manufacturers become incapable of meeting our manufacturing or supply requirements in a timely manner or cease doing business with us for any reason, our business and financial condition could be adversely affected.

 

Any violation of our policies or any applicable laws and regulations by our suppliers or manufacturers could interrupt or otherwise disrupt our sourcing, adversely affect our reputation or damage our brand image. While we do not control these suppliers, manufacturers or licensees or their labour practices, negative publicity regarding the production methods of any of our suppliers, manufacturers or licensees could adversely affect our reputation and sales and force us to locate alternative suppliers, manufacturing sources or licensees, which could adversely affect our business and financial condition.

 

We may not be successful in our efforts to expand into international market segments

 

We intend to expand into additional international markets, particularly Russia and other Eastern European countries (for ice hockey) and in Canada (for lacrosse), in order to grow our business. These expansion plans will require significant management attention and resources and may be unsuccessful. We have limited experience adapting our products to conform to local cultures, standards and policies, particularly in non-Western markets. In addition, to achieve satisfactory performance for consumers in international locations, it may be necessary to locate physical facilities, such as regional offices, in the foreign market. We may not be successful in expanding into any additional international markets or in generating revenues from foreign operations.

 

44

 

In addition to risks described elsewhere in this Annual Information Form, our international sales and operations are subject to a number of risks, including:

 

·                  economic and political conditions, including inflation, fluctuation in interest rates and currency exchange rates;

 

·                  government regulation and restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs), nationalization, measures protecting cultural industries, expropriation and restrictions on foreign ownership and/or corruption or criminal activity;

 

·                  restrictions on sales or distribution of certain products and uncertainty regarding liability for products, services and content, local laws, lack of legal precedent, and enforcement of intellectual property rights;

 

·                  business licensing or certification requirements;

 

·                  lower levels of consumer spending and fewer opportunities for growth compared to our existing markets; and

 

·                  geopolitical events, including unstable governments and legal systems, war, civil unrest, and terrorism.

 

Adverse developments in any of these areas could adversely affect our business and financial condition.

 

Our results of operations may suffer if we are not able to adequately forecast demand for our products

 

To reduce purchasing costs and ensure supply, we place orders with our suppliers in advance of the time period we expect to deliver our products. However, a large portion of our products are sold into consumer markets that are difficult to accurately forecast. If we fail to accurately forecast demand for our products, we may experience excess inventory levels or inventory shortages. Factors that could affect our ability to accurately forecast demand for our products include, among others:

 

·                  changes in consumer demand for our products or the products of our competitors;

 

·                  new product introductions by our competitors;

 

·                  failure to accurately forecast consumer acceptance of our products;

 

·                  inability to realize revenues from booking orders;

 

·                  adverse weather conditions;

 

·                  unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders placed by retailers;

 

·                  weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products;

 

·                  terrorism or acts of war, or the threat thereof, which could adversely affect consumer confidence and spending or interrupt production and distribution of products and raw materials;

 

·                  abnormal weather pattern or extreme weather conditions including hurricanes, floods, etc., which may disrupt economic activity; and

 

·                  general economic conditions.

 

Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could significantly harm our operating results and impair the value of our

 

45

 

brands. Inventory shortages may result in unfulfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost net revenues, any of which could adversely affect our business and financial condition.

 

We are subject to product liability, warranty and recall claims, and our insurance coverage may not cover such claims

 

The Company manufactures, produces and sells its own products as well as products produced by third-party manufacturers. Some of these products may expose the Company to warranty claims and product liability claims in the event of products manufactured or designed by us actually or allegedly fail to perform as expected, or the use of those products results, or is alleged to result, in personal injury, death or property damage. Further, the Company or one or more of its suppliers might not adhere to product safety requirements or quality control standards, and products may be shipped to retail partners before the issue is identified. In the event this occurs, the Company may have to recall its products to address performance, compliance, or other safety-related issues. The financial costs it may incur in connection with these recalls typically would include the cost of the product being replaced or repaired and associated labor and administrative costs and, if applicable, governmental fines and/or penalties.

 

For example, in 2010 Bauer Hockey conducted a recall of approximately 130,000 youth hockey sticks in North America after we found that the paint on these sticks contained lead in excess of the regulatory limits established in Canada and the United States for children’s products. The manufacturer of these sticks assumed full responsibility for the costs incurred by the Company in connection with this recall, but there can be no assurance that the costs of any future recalls will not be borne, at least in part, by the Company.

 

Product recalls can harm our reputation and cause us to lose customers, particularly if those recalls cause consumers to question the safety or reliability of our products. Substantial costs incurred or lost sales caused by future product recalls could materially adversely affect our business. Conversely, not issuing a recall or not issuing a recall on a timely basis can harm our reputation and cause us to lose customers for the same reasons as expressed above. Product recalls, withdrawals, repairs or replacements may also increase the amount of competition that the Company faces.

 

We vigorously defend or attempt to settle all 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 currently believe is adequate. Our insurance policies provide coverage against claims resulting from alleged injuries arising from our products sustained during the respective policy periods, subject to policy terms and conditions. The primary portion of the Company’s product liability coverage is written under a policy expiring on September 1, 2013 with a primary limit of $5,000,000, and with a self-insured retention of $50,000 for all products, including helmets and soft goods. The Company has umbrella coverage with a limit of $20,000,000 above the primary layer. The umbrella coverage expires on September 1, 2013. We also have excess liability coverage, expiring on September 1, 2013, with a limit of $25,000,000 above the umbrella layer, providing a total of $50,000,000 of liability insurance. Management believes the insurance will be renewed on substantially similar terms upon its expiry but there can be no assurance that this coverage will be renewed or otherwise remain available in the future, that our insurers will be financially viable when payment of a claim is required, that the cost of such insurance will not increase, or that this insurance will ultimately prove to be adequate under our various policies. Furthermore, future rate increases might make insurance uneconomical for us to maintain. These potential insurance problems or any adverse outcome in any liability suit could create increased expenses which could harm our business. We are unable to predict the nature of product liability claims that may be made against us in the future with respect to injuries, diseases or other illnesses resulting from the use of our products or the materials incorporated in our products.

 

With regard to warranty claims, our actual product warranty obligation could materially differ from historical rates which would oblige us to revise our estimated warranty liability accordingly. Also, certain products sold by us, such as composite ice hockey sticks, have a higher warranty expense than other products. Adverse determinations of material product liability and warranty claims made against us could have an adverse effect on our business and financial condition (including gross profit) and could harm the reputation of our brands.

 

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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 Canadian Standards Association (“CSA”) and the Hockey Equipment Certification Council (HECC), as well as by athletic organizations and governing bodies, including the NHL and NCAA. For certain products, we rely on our in-house testing equipment to ensure that such products comply with these standards. There can be no assurance 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 or at times that adversely affect our brands and the sales of our products. Any failure to comply with applicable standards could have an adverse effect on our business and financial condition. In addition, certain regulatory and testing bodies, including the CSA, test and certify our products pursuant to contractual agreements which may be terminated with or without cause by the regulatory and testing bodies on short notice. Any such termination may be within or beyond our control, and if we could no longer sell our products with the relevant certification, it could have an adverse effect on our business and financial condition.

 

Some of our lacrosse products are made to meet requirements by governing bodies and athletic organizations such as the NCAA, NFHS and US Lacrosse. Specifically, lacrosse helmets and facemasks must meet the National Operating Committee on Standards for Athletic Equipment (NOCSAE) standard.  Lacrosse balls also must meet the NOCSAE standard. Lacrosse goggles are made to meet an ASTM standard for lacrosse eyewear.

 

Sales of our baseball and softball products will be adversely affected if we cannot satisfy the standards established by athletic organizations and governing bodies.  Our products are designed to satisfy the standards established by a number of athletic organizations and governing bodies, including the NCAA, Little League International and USA Baseball. These standards can be changed on short notice and in ways that are disruptive to manufacturers such as us.

 

For certain products, we rely on our in-house testing equipment to ensure that such products comply with these standards. There can be no assurance 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 or at times that adversely affect our brands and the sales of our products. Any failure to comply with applicable standards could have an adverse effect on our business and financial condition.

 

In addition, certain athletic organizations and governing bodies test and certify our products pursuant to contractual agreements which may be terminated with or without cause by the athletic organizations and governing bodies on short notice. Any such termination may be within or beyond our control, and if we could no longer sell our products with the relevant certification, or if we are forced to recall products already sold, it could have an adverse effect on our business and financial condition.

 

If we lose the services of our CEO or other member of our team who possess specialized market knowledge and technical skills, it could reduce our ability to compete, to manage our operations effectively, or to develop new products and services

 

Many of our team members have extensive experience in our industry and with our business, products, and customers. Since we are managed by a small group of senior executive officers, the loss of the technical knowledge, management expertise and knowledge of our operations of one or more members of our team, including Kevin Davis, our President and CEO, could result in a diversion of management resources, as the remaining members of management would need to cover the duties of any senior executive who leaves us and would need to spend time usually reserved for managing our business to search for, hire and train new members of management. The loss of some or all of our team could negatively affect our ability to develop and pursue our business strategy, and/or our ability to integrate recent acquisitions, which could adversely affect our business and financial condition. In addition, the market for key personnel in the industry in which we compete is highly competitive, and we may not be able to attract and retain key personnel with the skills and expertise necessary to manage our business. We do not maintain “key executive” life insurance.

 

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Litigation may adversely affect our business and financial results

 

Our business is subject to the risk of litigation by employees, customers, consumers, suppliers, competitors, Shareholders, government agencies, or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend future litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business and financial condition.

 

Employment-related matters, such as unionization, may affect our profitability or reputation

 

As of May 31, 2013, approximately 82 of our 597 employees were unionized. Although we have good labour relations with these unionized employees, we have little control over union activities and could face difficulties in the future. Our collective bargaining agreement with a union in Mississauga, Ontario, covering approximately 54 employees, expires on July 6, 2014. Our collective bargaining agreement with a union in St. Jerome, Québec, covering approximately 28 employees, expires on November 30, 2017. Labour organizing activities could result in additional employees becoming unionized. We cannot assure you that we will be able to negotiate new collective bargaining agreements on similar or more favourable terms or that we will not experience work stoppages or other labour problems in the future at our unionized and non-union facilities. We could experience a disruption of our operations or higher ongoing labour costs, which could adversely affect our business and financial condition.

 

In addition, labour disputes at our suppliers or manufacturers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions during our peak importing or manufacturing seasons, and could have an adverse effect on our business, potentially resulting in cancelled orders by customers, unanticipated inventory accumulation or shortages, and reduced net revenues and net income.

 

Further, any negative publicity associated with actions by any of our employees, whether during the course of employment or otherwise, could negatively affect our reputation, which could adversely affect our business and financial condition.

 

If we experience significant disruptions in our information technology systems, our business and financial results may be adversely affected

 

We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, customer order processing, purchasing and inventory management. Our software solutions are intended to enable management to better and more efficiently conduct our operations and gather, analyze, and assess information across all business segments and geographic locations. However, difficulties with the hardware and software platform could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain, and otherwise adequately service our customers, which would have an adverse effect on our business and financial results. In the event we experience significant disruptions with our information technology system, we may not be able to fix our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our business and financial condition. Costs associated with potential interruptions to our information systems could be significant.

 

The ability to operate our business will be limited by restrictive covenants contained in our Amended Credit Facility

 

Our Amended Credit Facility contains restrictive financial and other covenants which affect and, in some cases, significantly limit or prohibit, among other things, the manner in which we may structure or operate our business, including by reducing our liquidity, limiting our ability to incur indebtedness, create liens, sell assets, pay

 

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dividends, make capital expenditures, be subject to a change of control, and engage in acquisitions, mergers or restructurings. Future financings and other major agreements may also be subject to similar covenants which limit our operating and financial flexibility, which could materially and adversely affect our business and financial condition.

 

A failure by us to comply with our contractual obligations (including restrictive, financial and other covenants) or to pay our indebtedness and fixed costs could result in a variety of material adverse consequences, including the acceleration of our indebtedness, and the exercise of remedies by our creditors, and such defaults could trigger additional defaults under other indebtedness or agreements. In such a situation, it is unlikely that we would be able to repay the accelerated indebtedness or fulfill our obligations under certain contracts, or otherwise cover our fixed costs. Also, the lenders under the financing arrangements could foreclose upon all or substantially all of our assets which secure our obligations.

 

Our anticipated level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our debt obligations

 

Our total debt as of May 31, 2013 was $171.7 million.  This amount included $3.9 million of financing costs which we are amortizing over the life of the credit facility and finance lease obligations of $0.1 million. The remainder of the debt balance was comprised of $67.7 million of revolving debt and $107.9 million of a term loan due in 2016.  We are required to amortize our term loan by $7.5 million per year with the balance due in a lump sum in 2016. See “Material Contracts — The Amended Credit Facility”.  In addition, we are required to have no more than $50 million outstanding under the revolving loan for a period of 30 consecutive days between February 1 and March 31 of each year. Our degree of leverage could have important consequences, including the following:

 

·                   a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and other financial obligations and will not be available for other purposes, including funding our operations and capital expenditures for projects such as a new warehouse or distribution center, new store openings, and future business opportunities;

 

·                  the debt service requirements of our other indebtedness and lease expense could make it more difficult for us to make payments on our debt;

 

·                  our ability to obtain additional financing for working capital and general corporate or other purposes may be limited;

 

·                  certain of our borrowings under the Amended Credit Facility, is at variable rates of interest, exposing us to the risk of increased interest rates;

 

·                  our debt level may limit our flexibility in planning for, or reacting to, changes in our business and in our industry in general, placing us at a competitive disadvantage compared to our competitors that have less debt;

 

·                  our leverage may make us vulnerable to a downturn in general economic conditions and adverse industry conditions; and

 

·                  changes in interest rates could materially and adversely affect our cash flows and results from operations. Our financing includes long-term debt and an Amended Revolving Loan that bears interest based on floating market rates. Changes in these rates result in fluctuation in the required cash flow to service this debt and could adversely affect our business and financial condition.

 

Our business could suffer if we are unsuccessful in making, integrating, and maintaining acquisitions and investments, including integrating the recent Cascade Acquisition, Inaria Acquisition and Combat Acquisition.

 

One of our growth strategies is to continue to pursue strategic acquisitions of new or complementary businesses, products or technologies. There can be no assurance that we would be able to expand our efforts and operations in a cost-effective, accretive or timely manner or that any such efforts would increase overall market

 

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acceptance. Further, given our current level of market share in the hockey equipment segment, any acquisitions or investments may be subject to regulatory approval, and there can be no assurance that such approval would be received, whether in a timely manner or if at all.

 

Furthermore, any new businesses or products acquired by us that were not favourably received by consumers could damage our reputation or our existing brands. The lack of market acceptance of such businesses or products or our inability to generate satisfactory revenues from such businesses or products to offset their cost could have an adverse effect on our business and financial condition.

 

We have acquired and invested in a number of companies and we may acquire or invest in or enter into joint ventures with additional companies. These transactions, including the Cascade Acquisition, Inaria Acquisition and Combat Acquisition, create risks such as:

 

·                  disruption of our ongoing business, including loss of management focus on existing businesses;

 

·                  problems retaining key personnel;

 

·                  additional operating losses and expenses of the businesses we acquired or in which we invested;

 

·                  the potential impairment of tangible assets, intangible assets and goodwill acquired in the acquisitions;

 

·                  the potential impairment of customer and other relationships of a company we acquired or in which we invested or our own customers as a result of any integration of operations;

 

·                  the difficulty of incorporating acquired businesses and unanticipated expenses related to such integration;

 

·                  the difficulty of integrating a new company’s accounting, financial reporting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

 

·                  the difficulty of implementing at a company we acquire the controls, procedures and policies appropriate for a public company;

 

·                  potential unknown liabilities associated with a company we acquire or in which we invest; and

 

·                  for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries.

 

Our performance sports categories have been conducted as separate and distinct businesses, each with its own management team and operations. While we believe that the operations of the Company and our recently acquired companies can be successfully integrated, there can be no assurance that this will be the case. We could face impediments in our ability to implement our integration strategy. In addition, there can be no assurance that unforeseen costs and expenses or other factors will not offset, in whole or in part, the expected benefits of our integration and operating plans. Further, the integration may require substantial attention from, and place substantial demands upon, our senior management, as well as requiring the cooperation of our employees and those employees of the acquired businesses. Moreover, there can be no assurance that our customers and suppliers will look upon the acquisitions favourably. Failure to successfully integrate the operations of the Company and any of the acquired businesses could adversely affect our business and financial condition.

 

As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets, any of which could reduce our profitability and harm our business. In addition, valuations supporting our acquisitions and strategic investments could change rapidly given the current global economic climate and the inherent uncertainty involved in such matters. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our business and financial condition.

 

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Acquisitions and investment also increase the complexity of our business and places significant strain on our management, personnel, operations, supply chain, financial resources, and internal financial control and reporting functions. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and adversely affect our business and financial condition.

 

Undisclosed liabilities acquired pursuant to the Cascade Acquisition, Inaria Acquisition and Combat Acquisition

 

Although we have conducted what we believe to be a prudent and thorough level of investigation in connection with each of the Cascade Acquisition, Inaria Acquisition and Combat Acquisition, an unavoidable level of risk remains regarding any undisclosed or unknown liabilities of, or issues concerning the acquired businesses. Following each of the acquisitions, we may discover that we have acquired substantial undisclosed liabilities. In addition, we may be unable to retain the acquired businesses’ respective customers or employees following the acquisitions or third parties may attempt to infringe the acquired businesses’ intellectual property or claim that their products infringe such third party’s intellectual property. Only certain of these events may entitle us to claim indemnification from the sellers under the pertinent purchase agreements. In addition, even if indemnification is available it may not offset such liabilities. The existence of undisclosed liabilities, our inability to retain customers or employees, our inability to protect intellectual property or defend claims for infringement, or the inability to claim indemnification from each of the sellers of the acquired businesses could adversely affect our business and financial condition.

 

Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products

 

From time to time, third parties have challenged our patents, trademark rights and branding practices, or asserted intellectual property rights that relate to our products and product features. We may be required to defend such claims in the future, which, whether or not meritorious, could result in substantial costs and diversion of resources and could negatively affect our results of operations or competitive position. Should we be found liable for infringement of the intellectual property rights of others, we may be required to enter into licensing agreements (if available on acceptable terms or at all), pay damages, or cease making certain of our products. We may also need to redesign or rename some of our products to avoid future infringement liability. Moreover, our involvement in litigation against third parties based on infringement of our intellectual property rights presents some risk that our intellectual property rights could be challenged and invalidated. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling certain of our products, which could adversely affect our business and financial condition.

 

Volatile market price for Common Shares

 

The market price for Common Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control, including the following:

 

·                                          actual or anticipated fluctuations in the Company’s quarterly results of operations;

 

·                                          changes in estimates of our future results of operations by us or securities research analysts;

 

·                                          changes in the economic performance or market valuations of other companies that investors deem comparable to the Company;

 

·                                          addition or departure of the Company’s executive officers and other key personnel;

 

·                                          release or other transfer restrictions on outstanding Common Shares;

 

·                                          sales or perceived sales of additional Common Shares;

 

·                                          significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors;

 

·                                          news reports relating to trends, concerns or competitive developments, regulatory changes and other related issues in the Company’s industry or target markets; and

 

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·                                          conversion or sale of the Proportionate Voting Shares.

 

Financial markets continue to experience significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have, in many cases, been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. As well, certain institutional investors may base their investment decisions on consideration of the Company’s environmental, governance and social practices and performance against such institutions’ respective investment guidelines and criteria, and failure to meet such criteria may result in a limited or no investment in the Common Shares by those institutions, which could adversely affect the trading price of the Common Shares. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s business and financial condition could be adversely impacted and the trading price of the Common Shares may be adversely affected.

 

We do not currently intend to pay dividends on our Equity Shares

 

We currently intend to retain future earnings, if any, for future operation, expansion and debt repayment. Any decision to declare and pay dividends on our Equity Shares in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our financial results, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our Amended Credit Facility. As a result, you may not receive any return on an investment in our Common Shares in the foreseeable future unless you sell our Common Shares for a price greater than that which you paid for it.

 

We are a holding company

 

We are a holding company and a substantial portion of our assets are the capital stock of our subsidiaries. As a result, investors in the Company are subject to the risks attributable to our subsidiaries. As a holding company, we conduct substantially all of our business through our subsidiaries, which generate substantially all of our revenues. Consequently, the Company’s cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of its subsidiaries and the distribution of those earnings to the Company. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of our subsidiaries, holders of indebtedness and trade creditors will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to the Company. The Common Shares are effectively junior to indebtedness and other liabilities (including trade payables) of our subsidiaries. If any dividends are payable, holders of each Proportionate Voting Share will receive 1,000 times the amount paid to the holder of each Common Share. See “Description of Capital Structure” above.

 

The IRS may assert that a certain acquisition is an inversion transaction

 

In certain circumstances, a U.S. corporation that is acquired by a non-U.S. corporation may be required to recognize certain taxable income, or the new foreign parent corporation may be treated as a U.S. corporation for U.S. federal income tax purposes (“inversion transactions”). If the Company were treated as a U.S. corporation for U.S. federal income tax purposes, the Company and its Shareholders that are not U.S. Holders could be subject to adverse tax consequences. The Company believes, based on the facts and circumstances of the acquisition of the Bauer Business at the time of the IPO and the Company’s operations that such acquisition was not an inversion transactions, but there can be no assurance that the IRS will not challenge this conclusion.

 

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The Kohlberg Funds will indirectly retain a level of control of the Company and their interests may conflict with your interests

 

The Kohlberg Funds, collectively, own an equivalent of 10,661,695 Common Shares (assuming the conversion of all Proportionate Voting Shares to Common Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share), representing a 30.3% equity and voting interest in the Company, 25.3% on a fully diluted basis.

 

Accordingly, and for so long as the Kohlberg Funds continue to have significant voting power among the Equity Shares, they could exercise a significant influence over our business and affairs, including in the election of the Board of Directors and other matters involving ordinary resolutions. The Kohlberg Funds’ level of control at 30.3% equity and voting interest also in effect removes a level of shareholders’ decision making rights in the event of a special resolution. The Kohlberg Funds effectively have a block in situations requiring a special resolution of two-thirds majority vote, which includes any fundamental changes such as certain acquisitions, mergers, amalgamations or other liquidity events. This concentration of voting power could have the effect of deterring or preventing a change in control of Bauer Performance Sports that might otherwise be beneficial to our Shareholders. See also “Description of Capital Structure”.

 

The Kohlberg Funds also have certain rights to nominate directors for election, and as such, may exercise further control on our business, affairs and strategic direction.  See “Material Contracts — Nomination Rights Agreement”.

 

Conversions and potential future sales of Equity Shares could adversely affect prevailing market prices for the Equity Shares

 

Common Shares may at any time, at the option of the holder, be converted into Proportionate Voting Shares on the basis of 1,000 Common Shares for one Proportionate Voting Share. Each issued and outstanding Proportionate Voting Share may at any time, at the option of the holder, be converted into 1,000 Common Shares. See “Description of Capital Structure — Conversion Rights”.

 

The Kohlberg Funds may sell some or all of their Equity Shares in the future and no prediction can be made as to the effect, if any, such future sales of Equity Shares could have on the market price of the Common Shares or other Equity Shares prevailing from time to time.

 

Future sales of a substantial number of Equity Shares by our Shareholders, officers, directors, principal shareholder and their affiliates, or the perception that such sales could occur, could adversely affect prevailing market prices for the Equity Shares and could impair our ability to raise capital through any future sales of our securities. Pursuant to the Registration Rights Agreement, the Existing Holders are granted certain demand and “piggy-back” registration rights. See “Material Contracts — Registration Rights Agreement”.

 

No prediction can be made as to the effect of any conversion of an Equity Share into another class of Equity Shares. Generally, any conversion between our Equity Shares could have adverse effects on the liquidity and market prices for the shares of the class from which conversion is made and the shares of the class to which conversion is made, respectively.

 

Risks Related to Macroeconomic Environment

 

Fluctuations in the value of the Canadian dollar and the U.S. dollar in relation to each other and other world currencies may impact our operating and financial results and may affect the comparability of our results between financial periods

 

We are exposed to market risks attributable to fluctuations in foreign currency exchange rates, primarily changes in the value of the U.S. dollar versus other currencies such as the Canadian dollar, the euro and the Swedish krona. Exchange rate fluctuations could have an adverse effect on our results of operations. We conduct business in many geographic markets. For example, most of our supply purchases are in U.S. dollars, and approximately half of our revenues are in Canadian dollars. Therefore, a fluctuation in the exchange rate of U.S. dollar versus other currencies such as the Canadian dollar, the euro and the Swedish krona, could materially affect our gross profit

 

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margins and operating results. We have entered into various arrangements to mitigate our foreign currency rate, but there can be no assurances that such arrangements will prove to be favourable to the Company.

 

For the purposes of financial reporting, our financial statements are presented in accordance with IFRS, and we report, and will report, our results in U.S. dollars. Any change in the value of the Canadian dollar against the U.S. dollar during a given financial reporting period would result in a foreign currency loss or gain on the translation of U.S. dollar denominated revenues and costs. Consequently, our reported earnings could fluctuate materially as a result of foreign exchange translation gains or losses and may not be comparable from period to period.

 

In addition, if you are a U.S. Shareholder, the value of your investment in us will fluctuate as the U.S. dollar rises and falls against the Canadian dollar. Also, if we pay dividends in the future, we may pay those dividends in Canadian dollars. Accordingly, if the U.S. dollar rises in value relative to the Canadian dollar, the U.S. dollar value of the dividend payments received by U.S. shareholders would be less than they would have been if exchange rates were stable.

 

The Company employs a hedging strategy that can include foreign exchange swaps, interest rate contracts, and foreign currency forwards as economic hedges. Currency hedging entails a risk of illiquidity and the risk of using hedges could result in losses greater than if the hedging had not been used. Hedging arrangements may have the effect of limiting or reducing the total returns to the Company if purchases at hedged rates result in lower margins than otherwise earned if purchases had been made at spot rates. In addition, the costs associated with a hedging program may outweigh the benefits of the arrangements in such circumstances.

 

Global capital and credit market conditions, and resulting declines in consumer confidence and spending, could have a material adverse effect on our business, operating results, and financial condition

 

Continued volatility and disruption in the global capital and credit markets have led to a tightening of business credit and liquidity, a contraction of consumer credit, business failures, higher unemployment, and declines in consumer confidence and spending in Canada, the United States and internationally. If global economic and financial market conditions deteriorate or remain weak for an extended period of time, the following factors could have a material adverse effect on our business, operating results, and financial condition:

 

·                  slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, increased inventories, and lower gross profit margins;

 

·                  we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so;

 

·                  the failure of financial institution counterparties to honor their obligations to us under credit and derivative instruments could jeopardize our ability to rely on and benefit from those instruments. Our ability to replace those instruments on the same or similar terms may be limited under poor market conditions;

 

·                  we conduct transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported financial results and condition;

 

·                  continued volatility in the markets and prices for commodities and raw materials we use in our products and in our supply chain (such as petroleum-based products) could have a material adverse effect on our costs, gross profit margins, and profitability;

 

·                  if retailers of our products experience declining revenues, or retailers experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, inability of retailers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts, and increased bad debt expense;

 

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·                  if retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could reduce the availability of our products to consumers; and

 

·                  if contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance general working capital needs, it may result in delays or non-delivery of shipments of our products.

 

A reduction in discretionary consumer spending could reduce sales of our sporting equipment and related apparel

 

We sell recreational, non-essential products. The success of our business depends to a significant extent upon discretionary consumer spending. Discretionary consumer spending is affected by general economic conditions affecting disposable consumer income, such as rates of employment, business conditions, consumer confidence, the stock market, interest rates and taxation. Any significant decline in these general economic conditions or uncertainties regarding future economic prospects that adversely affect discretionary consumer spending could lead to reduced sales of our sporting equipment and related apparel, which could have an adverse effect on our business and financial condition. Anticipating and forecasting such changes in discretionary consumer spending is difficult and cannot be done with certainty. We use internal forecasts to plan and make important decisions relating to our business, however these forecasts may prove to be incorrect and this can lead to negative economic consequences for the business.

 

Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability

 

We are subject to income taxes in Canada, the United States, and numerous foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the outcome of income tax audits in various jurisdictions around the world. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to discretion. If our assessments are incorrect, it could have an adverse effect on our business and financial condition.

 

On March 21, 2013, the Canadian government announced that it will reduce import tariffs on certain hockey equipment effective as of April 1, 2013 (“Canadian Tariff Reduction”). Prior to April 1, 2013, the Company’s tariffs on hockey equipment imported into Canada were up to 18.0% and were included in the Company’s cost of goods sold. Retroactive to April 1, 2013, Bauer Hockey reduced wholesale prices to its Canadian retail partners to reflect the lower duties on certain categories of hockey equipment. Management currently expects that the reduced wholesale prices on affected products will have a limited impact on future profitability, as the reduction in the costs of goods sold is passed on to retailers. We also reduced wholesale prices on products affected by the Canadian Tariff Reduction that were imported prior to April 1, 2013. The total amount of import tariffs paid on products imported prior to April 1, 2013 was $1.6 million. The higher cost of goods sold for these products will primarily be recognized within the fourth quarter of Fiscal 2013 and the first half of Fiscal 2014 as this inventory is sold. See “Forward-Looking Statements”.

 

The inability for counterparties and customers to meet their financial obligations to us may result in financial losses

 

Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to us.

 

We sell to a diverse customer base over a global geographic area. We evaluate collectability of specific customers receivables based on a variety of factors including currency risk, geopolitical risk, payment history, customer stability and other economic factors. Collectability of receivables is reviewed on an ongoing basis by management and the allowance for doubtful accounts is adjusted as required. Account balances are charged against the allowance for doubtful accounts when we determine that it is probable that the receivable will not be recovered. Although the geographic diversity of the customer base, combined with our established credit approval practices and ongoing monitoring of customer balances mitigates the counterparty risk, there are no assurances that our customers will meet their contractual obligations to us.

 

55

 

Natural disasters, unusual weather, pandemic outbreaks, boycotts and geo-political events or acts of terrorism could adversely affect our operations and financial results

 

The occurrence of one or more natural disasters, such as hurricanes, floods and earthquakes, unusually adverse weather, pandemic outbreaks, boycotts and geo-political events, such as civil unrest in countries in which our suppliers are located and acts of terrorism, or similar disruptions could adversely affect our operations and financial results. These events could result in physical damage to one or more of our properties, increases in fuel or other energy prices, the temporary or permanent closure of one or more of our warehouses or distribution centers, the temporary lack of an adequate workforce in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to our warehouses, and distribution centers, and disruption to our information systems. These factors could otherwise disrupt our operations and could have an adverse effect on our business and financial condition.

 

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

 

We are from time to time involved in legal proceedings and regulatory actions of a nature considered normal to our business. We believe that none of the litigation in which we are currently involved, or have been involved since the beginning of the most recently completed fiscal year, individually or in the aggregate, is not material to, or exceeds in value 10% of the current assets of, the Company.

 

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

 

Other than as set out below or as described elsewhere in this Annual Information Form, none of (i) the directors or executive officers of the Company, (ii) the Shareholders who beneficially own or control or direct, directly or indirectly, more than 10% of the voting shares of the Company, or (iii) any associate or affiliate of the persons referred to in (i) and (ii), has or has had any material interest, direct or indirect, in any transaction within the three most recently completed fiscal years or during the current fiscal year, or in any proposed transaction that has materially affected or is reasonably expected to materially affect the Company or any of its subsidiaries.

 

In connection with the financing of the Cascade Acquisition, on June 29, 2012, the Company entered into an agreement with the Kohlberg Funds, pursuant to which the Kohlberg Funds subscribed for an aggregate of 642,000 Common Shares on a concurrent private placement resulting in gross and net proceeds of Cdn$5 million.

 

In connection with the acquisition of the Bauer Hockey Business from Nike, KSGI entered into several agreements with all or certain of the Existing Holders that are customary for businesses that are closely held or purchased and owned by private equity sponsors.  These agreements include the KSGI Securityholders Agreement, the KSGI Registration Rights Agreement, the Management Services Agreement and consulting agreements with certain Kohlberg representatives on the KSGI board of directors.  Upon the acquisition of the Bauer Hockey Business, a transaction fee was also payable to Kohlberg.  The business purpose of these transactions was to compensate Kohlberg and certain of its representatives for its ongoing advisory services to KSGI and its subsidiaries and affiliates.  The nature of services included, among other things, (i) developing and implementing corporate business strategy and planning; (ii) arranging debt and equity financings and refinancings; and (iii) establishing, maintaining and evaluating banking, legal and other business relationships.  In connection with the IPO, each of the agreements referred to above were terminated.  Pursuant to an agreement between Kohlberg and KSGI, KSGI paid Kohlberg an aggregate fee equal to $4 million upon completion of the IPO in connection with the termination of the Management Services Agreement.  In connection with the IPO, the Existing Holders entered into certain securityholders’ agreements with the Company as more particular described under “Material Contracts”.  In addition, the Company has entered into a consulting agreement with Richard W. Frank in order to continue to receive the consulting services Mr. Frank is providing in connection with business planning and strategy.

 

56

 

AUDITORS, TRANSFER AGENT AND REGISTRAR

 

Our auditor is KPMG LLP and its address is Two Financial Center, 60 South Street, Boston, Massachusetts 02111, United States.

 

The transfer agent and registrar for the Common Shares and Proportionate Voting Shares is Equity Financial Trust Company which can be contacted at its principal offices at 200 University Avenue, Suite 400, Toronto, Ontario M5H 4H1, Canada. TMX Equity Transfer Services Inc. is operating the transfer agency and corporate trust business in the name of Equity Financial Trust Company for a transitional period.

 

MATERIAL CONTRACTS

 

The following are the only material contracts, other than those contracts entered into in the ordinary course of business, which the Company has entered into since the beginning of the last fiscal year before the date of this Annual Information Form, entered into prior to such date but which contract is still in effect, or to which the Company is a party to. Each of the summaries below describes certain material provisions of the relevant material contract and is subject to, and qualified in its entirety by reference to, the relevant material contract, a copy of which is available on SEDAR at www.sedar.com.

 

Copies of the material agreements may be inspected during ordinary business hours at the Company’s principal executive offices located at 100 Domain Drive, Exeter, New Hampshire 03833, United States, during the period of distribution of the Common Shares or may be found on SEDAR at www.sedar.com.

 

Nomination Rights Agreement

 

The Kohlberg Funds and the Company entered into a nomination rights agreement dated March 10, 2011 (the “Nomination Rights Agreement”) pursuant to which the Company covenanted to take all permissible corporate action such that the Board of Directors consists of a total of nine directors, with the Kohlberg Funds receiving certain director nomination rights. For so long as the Kohlberg Funds beneficially own a specified percentage of the combined voting power of all Equity Shares, the Kohlberg Funds are entitled to nominate for election or appointment to the Board of Directors a specified number of the Company’s directors, as set out in the table below.

 

	
Percentage of the Voting and Equity Power of all of the Equity Shares
    	
 
    	
Number of Directors
    	
 
    
	
Greater than or equal to 50% 
    	
 
    	
5/9
    	
 
    
	
Less than 50% but not less than 40% 
    	
 
    	
4/9
    	
 
    
	
Less than 40% but not less than 30% 
    	
 
    	
3/9
    	
 
    
	
Less than 30% but not less than 20% 
    	
 
    	
2/9
    	
 
    
	
Less than 20% but not less than 10% 
    	
 
    	
1/9
    	
 
    
	
Less than 10% 
    	
 
    	
None
    	
 
    

 

Assuming the Kohlberg Funds continues to own less than 40%, but not less than 30% of the combined voting power of all Equity Shares, they will have the right to nominate three directors at the Company’s next annual general meeting.

 

Also under the Nomination Rights Agreement, if there are three or more Kohlberg Funds nominees serving as directors, the Company must use its best efforts to include two of such Kohlberg Funds nominees, where one serves as chairman, on each of the Compensation Committee and the Corporate Governance and Nominating Committee unless otherwise waived by the Kohlberg Funds. If there are not more than two Kohlberg Funds nominees serving as directors, at least one Kohlberg Funds nominee must be included on each of the aforementioned committees.

 

Registration Rights Agreement

 

The Existing Holders and the Company entered into a registration rights agreement dated March 10, 2011 (the “Registration Rights Agreement”) pursuant to which the Company provides for demand registration rights in favour of the Kohlberg Funds (or their permitted assignees) that enable them to require the Company to qualify by prospectus all or a portion of its Common Shares, including Common Shares issuable upon conversion of its Proportionate Voting Shares, held by them for a distribution to the public in Canada, provided such demand will

 

57

 

result in a minimum offering size of $10 million. In accordance with the terms of the Registration Rights Agreement, the Kohlberg Funds will be limited to participate on an aggregate basis in three demand registrations in any 12-month period, commencing 180 days after Closing of the IPO. The Company is entitled to defer, for valid business reasons, any such demand for a period of up to 90 days in certain circumstances.

 

The Registration Rights Agreement also provides the Existing Holders with incidental, or piggy-back, registration rights. Where the Company proposes to file a preliminary prospectus with respect to a distribution of Common Shares in Canada, the Existing Holders have the right to request that all or a portion of their Common Shares, including Common Shares issuable upon conversion of its Proportionate Voting Shares, be included as a part of such distribution, subject to certain limitations. In addition, where the Kohlberg Funds have made a demand registration, the other Existing Holders have a piggy-back registration right, subject to certain limitations.

 

Subject to the minimum offering size and the restrictions described above, the Kohlberg Funds may make an unlimited number of demand registrations for so long as the Kohlberg Funds, in the aggregate, beneficially own more than 10% of the outstanding Equity Shares representing more than 10% of the combined voting power of all Equity Shares. The Existing Holders (other than the Kohlberg Funds) will continue to have piggy-back registration rights for so long as the Kohlberg Funds have demand registration rights under the Registration Rights Agreement.

 

The Company will pay all distribution expenses in connection with all demand registrations and piggy-back registrations, and all expenses incurred by the Existing Holders in connection therewith, other than underwriting fees, discounts and commissions in respect of the Existing Holders’ Common Shares sold pursuant to any registration, which will be for the account of the Existing Holders.

 

On September 26, 2012, the Kohlberg Funds exercised a demand registration right and entered into a bought deal offering pursuant to which they sold to the public an aggregate of 4,140,000 Common Shares at a price of Cdn$9.90 per share, representing gross proceeds of Cdn$40,986,000 (including the full exercise of the over-allotment option). On January 17, 2013, the Kohlberg Funds again exercised a demand registration and entered into a bought deal offering pursuant to which they sold to the public an aggregate of 3,450,000 Common Shares at a price of Cdn$11.60 per share, representing gross proceeds of Cdn$40,020,000 (including the full exercise of the over-allotment option).

 

The Amended Credit Facility

 

General

 

In connection with the closing and funding of the Cascade Acquisition, the Company amended its existing credit facility and entered into the Amended Credit Facility. The Amended Credit Facility is comprised of a (i) $130 million term loan facility (the “Amended Term Loan”), denominated in both Canadian dollars and U.S. dollars, of which approximately $119 million is currently available, and (ii) $145 million revolving loan (the “Amended Revolving Loan”), denominated in both Canadian dollars and U.S. dollars, the availability of which is subject to meeting certain borrowing base requirements. The Amended Revolving Loan includes a $20 million letter of credit subfacility and a $10 million swing line loan subfacility.

 

Interest Rate and Fees

 

The interest rates per annum applicable to the loans under the Amended Credit Facility are equal to an applicable margin percentage, as further described below, plus, at the Borrowers’ option, (i) the U.S. base rate or (ii) LIBOR (each as determined in accordance with the terms of the Amended Credit Facility).

 

Any portion of the outstanding principal balance under the Amended Revolving Loan in Canadian dollars and any portion of the Amended Term Loan in Canadian dollars bears interest equal to the applicable margin percentage, as further described below, plus, at the Borrowers’ option, (i) the Canadian base rate or (ii) the Bankers’ Acceptance rate (each as determined in accordance with the terms of the Amended Credit Facility).

 

The applicable margin percentages are subject to adjustment based upon the ratio of the total debt to EBITDA (as defined under the Amended Credit Facility) as follows:

 

58

 

	
Leverage Ratio
    	
 
    	
Base Rate/Canadian
   Base Rate Margin
    	
 
    	
LIBOR/BA Rate
   Margin
    	
 
    	
Unused
   Commitment Fees
    	
 
    
	
Equal to or greater than 3.00:1.00 
    	
 
    	
1.25
    	
%
    	
2.50
    	
%
    	
0.50
    	
%
    
	
Equal to or greater than 2.50:1.00 but less than 3.00:1.00 
    	
 
    	
1.00
    	
%
    	
2.25
    	
%
    	
0.45
    	
%
    
	
Equal to or greater than 2.00:1.00 but less than 2.50:1.00 
    	
 
    	
0.75
    	
%
    	
2.00
    	
%
    	
0.40
    	
%
    
	
Less than 2.00:1.00 
    	
 
    	
0.50
    	
%
    	
1.75
    	
%
    	
0.35
    	
%
    

 

On the last day of each calendar quarter, the Borrowers pay a commitment fee to GE Canada Finance Holding Company (the “Administrative Agent”) on account of each of the Lenders in respect of any unused commitments under the Amended Revolving Loan, in an amount based upon the ratio of the total debt to EBITDA on the average unused daily balance (less any outstanding letters of credit) as described above under the column “Unused Commitment Fees”.

 

Prepayments

 

For a period of 30 consecutive days between February 1 and March 31 of each year, the Borrowers cannot have advances under the Amended Revolving Loan outstanding in a maximum aggregate principal amount exceeding $65 million. Mandatory excess cash flow payments (if any) are applicable under certain circumstances.

 

Covenants

 

The Amended Credit Facility increases the permitted Maximum Leverage Ratio (as defined under the Amended Credit Facility).

 

Permitted Acquisitions

 

The Borrowers were permitted to make the Cascade Acquisition, and such acquisition was deemed to be a Permitted Acquisition under the Amended Credit Facility, and such acquisition does not count against certain capped dollar amounts that limit the size of permitted acquisitions in general.

 

Guarantees and Security

 

The Administrative Agent, for the benefit of itself and the Lenders, has a first priority perfected security interest in all existing and after acquired real and personal property of the Company and its subsidiaries, subject to certain exceptions and materiality thresholds.

 

The Administrative Agent received a first priority perfected pledge, for the benefit of itself and the Lenders, of all the outstanding capital stock or other equity securities of the Company’s material subsidiaries.

 

The material subsidiaries of the Borrowers acquired in the Cascade Acquisition have also guaranteed the obligations of both Borrowers.

 

The Vapor License Agreement

 

At the time of the sale of the Bauer Hockey Business by Nike, Nike granted to us an exclusive, worldwide, royalty-free, perpetual limited license to use the VAPOR brand in connection with the manufacture and sale of certain products, subject to the terms and conditions set out in a trademark license agreement, dated April 16, 2008 (the “Vapor License Agreement”). Pursuant to a co-existence agreement, Nike assigned to us its ownership of the SUPREME brand with respect to hockey and skating equipment and related apparel.

 

59

 

INTERESTS OF EXPERTS

 

KPMG LLP has advised the Company that they are independent in accordance with all relevant professional and regulatory standards.

 

ADDITIONAL INFORMATION

 

Additional information relating to Bauer Performance Sports may be found on SEDAR at www.sedar.com.

 

Additional information, including, without limitation, directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized for issuance under equity compensation plans will be contained in the Company’s management information circular to be mailed and filed in connection with its annual meeting of shareholders scheduled to be held on October 16, 2013.

 

Additional financial information is provided in the audited consolidated financial statements and management’s discussion and analysis of the Company for the year ended May 31, 2013.

 

60

 

APPENDIX A
 GLOSSARY OF TERMS

 

“Adjusted EBITDA” is defined as before restructuring and acquisition related charges, sponsor fees and fees related to the IPO, normalization adjustments relating to the sale of the Bauer Hockey Business by Nike to the Existing Holders, as well as stock-based compensation expense.

 

“Adjusted EBITDA Margin” means Adjusted EBITDA divided by net revenues.

 

“Adjusted Gross Profit” is a gross profit plus the following expenses which are part of cost of goods sold: (i) amortization, (ii) non-cash charges to cost of goods sold resulting from fair market value adjustments to inventory, (iii) reserves established to dispose of obsolete inventory acquired through acquisitions, and (iv) costs incurred in Fiscal 2008 for businesses that were retained by Nike after the purchase of the Bauer Business by the Existing Holders.

 

“Adjusted Gross Profit Margin” means Adjusted Gross Profit divided by net revenues.

 

“Administrative Agent” has the meaning set out under the heading “Material Contracts — The Amended Credit Facility — Interest Rate and Fees”.

 

“Amended Credit Facility” has the meaning set out under the heading “General Development of the Business — The Cascade Acquisition.”

 

“Amended Revolving Loan” has the meaning set out under the heading “Material Contracts — The Amended Credit Facility — General”

 

“Amended Term Loan” has the meaning set out under the heading “Material Contracts — The Amended Credit Facility — General”

 

“Annual Information Form” means this annual information form.

 

“Articles” means the articles of incorporation of the Company.

 

“Audit Committee” has the meaning set out under the heading “Audit Committee Information — Charter of the Audit Committee”.

 

“Bauer Performance Sports” or “Company” means Bauer Performance Sports Ltd.

 

“Bauer Business” means the business as currently carried on by the Company, consisting of, among other things, the design development, manufacturing and marketing of performance sports products of ice hockey, roller hockey, lacrosse and baseball/softball.

 

“Bauer Hockey Business” means the business consisting of, among other things, the design development, manufacturing and marketing of performance sports products of ice hockey and roller hockey, as at the time of the sale of such business by Nike.

 

“BCBCA” means the British Columbia Business Corporations Act.

 

“BCHL” means British Columbia Hockey League.

 

“Board of Directors” means the board of directors of the Company.

 

“Borrowers” means Bauer Hockey Corp. and Bauer Hockey, Inc.

 

“Canadian GAAP” means generally accepted accounting principles in Canada.

 

“Canadian Tariff Reduction” means the Canadian government’s announcement that it will reduce import tariffs on certain hockey equipment effective as of April 1, 2013.

 

A-1

 

“Cascade” means Cascade Helmets Holdings, Inc.

 

“Cascade Acquisition” means the strategic acquisition of Cascade in June 2012.

 

“CEO” means chief executive officer of the Company.

 

“CFO” means chief financial officer of the Company.

 

“Charter of the Audit Committee” has the meaning set out under the heading “Audit Committee Information — Charter of the Audit Committee”.

 

“Closing” means the closing of the IPO.

 

“Combat Sports” means the Combat Sports business.

 

“Combat Acquisition” means the strategic acquisition of Combat Sports in May 2013.

 

“Common Shares” means the common shares of the Company.

 

“CSA” means the Canadian Standards Association.

 

“Easton” means Easton-Bell Sports, Inc.

 

“EBITDA” means earnings before interest, taxes, depreciation and amortization.

 

“Equity Shares” means, together, the Common Shares and the Proportionate Voting Shares.

 

“Existing Holders” means the former securityholders of KSGI who sold KSGI and its subsidiaries to Bauer Performance Sports on March 10, 2011 pursuant to the acquisition agreement dated March 3, 2011.

 

“FIFA” means the International Federation of Association Football.

 

“Fiscal 2008” means the Company’s fiscal year ended May 31, 2008.

 

“Fiscal 2009” means the Company’s fiscal year ended May 31, 2009.

 

“Fiscal 2010” means the Company’s fiscal year ended May 31, 2010.

 

“Fiscal 2011” means the Company’s fiscal year ended May 31, 2011.

 

“Fiscal 2012” means the Company’s fiscal year ended May 31, 2012.

 

“Fiscal 2013” means the Company’s fiscal year ended May 31, 2013.

 

“GAAP” means the generally acceptable accounting principles.

 

“Hockey Canada” means the Canadian Hockey Association.

 

“IFRS” means the International Financial Reporting Standards.

 

“Inaria” means Inaria International Inc.

 

“Inaria Acquisition” means the strategic acquisition of Inaria in October 2012.

 

“inversion transaction” has the meaning set out under the heading “Risk Factors — Risks Related to our Business — The IRS may assert that a certain acquisition is an inversion transaction”.

 

“IPO” means the Company’s initial public offering of Common Shares completed on March 10, 2011.

 

A-2

 

“IRS” means the Internal Revenue Service.

 

“Jock Plus Hockey Intellectual Property Acquisition” means the acquisition of intellectual property assets from Jock Plus Hockey in November 2009.

 

“Kohlberg” means Kohlberg Management VI, L.L.C.

 

“Kohlberg Funds” means, collectively, Kohlberg TE Investors VI, LP, Kohlberg Investors VI, LP, Kohlberg Partners VI, LP, and KOCO Investors VI, LP, each of which are Existing Holders and funds advised or managed by Kohlberg.

 

“KSGI” means Kohlberg Sports Group Inc., a Cayman Island corporation.

 

“KSGI Registration Rights Agreement” means the registration rights agreement in respect of KSGI that was terminated on March 10, 2011.

 

“KSGI Securityholders Agreement” means the securityholders agreement in respect of KSGI that was terminated on March 10, 2011.

 

“Lenders” means the Canadian chartered banks that are members of a syndicate of lenders that have made available the Amended Credit Facility to the Company.

 

“Management Services Agreement” means the management services agreement between subsidiaries of KSGI and Kohlberg & Company LLC that was terminated on March 10, 2011.

 

“Maverik” means Maverik Lacrosse LLC, a predecessor to Bauer Performance Lacrosse Inc.

 

“Maverik Lacrosse Acquisition” means the strategic acquisition of MAVERIK in June 2010.

 

“Mission-ITECH” or “MISSION” means Mission-ITECH Hockey Inc.

 

“Mission-ITECH Acquisition” means the strategic acquisition of Mission-ITECH in September 2008.

 

“NCAA” means the National Collegiate Athletic Association.

 

“NFHS” means the National Federation of State High School Associations.

 

“NHL” means the National Hockey League.

 

“NI 52-110” has the meaning set out under the heading “Audit Committee Information — Composition of the Audit Committee”.

 

“Nike” means NIKE, Inc., including its affiliates, as applicable.

 

“Nomination Rights Agreement” has the meaning set out under the heading “Material Contracts — Nomination Rights Agreement”.

 

“Odd Lot” has the meaning set out under the heading “Description of Capital Structure — Take-Over Bid Protection”.

 

“Offer” has the meaning set out under the heading “Description of Capital Structure — Take-Over Bid Protection”.

 

“Over-Allotment Option” means the option granted by the Company to the underwriters to purchase up to 15% additional Common Shares at the IPO price of Cdn$7.50, exercisable for a period of 30 days from the Closing.

 

“Proportionate Voting Shares” means the proportionate voting shares of the Company.

 

“Reebok” means Reebok International Ltd., a subsidiary of Adidas AG.

 

A-3

 

“Registration Rights Agreement” has the meaning set out under the heading “Material Contracts — Registration Rights Agreement”.

 

“SFIA” means the Sports and Fitness Industry Association.

 

“Shareholders” means, together, holders of the Company’s Common Shares and Proportionate Voting Shares.

 

“TSX” means the Toronto Stock Exchange.

 

“U.S. GAAP” means generally accepted accounting principles in the United States.

 

“US Lacrosse” means US Lacrosse, Inc., the national governing body of men’s and women’s lacrosse in the United States.

 

“Vapor License Agreement” has the meaning set out under the heading “Material Contracts — Vapor License Agreement”

 

A-4

 

APPENDIX B
 CHARTER OF THE AUDIT COMMITTEE

 

This charter governs the operations of the audit committee (the “Committee”) of Bauer Performance Sports Ltd. (the “Corporation”). This charter describes the principal duties and responsibilities of the Committee. These are set forth as a guide with the understanding that the Committee may supplement them as appropriate.

 

1.                                      OBJECTIVES

 

The Committee has three primary objectives:

 

(a)                                 to assist the board of directors of the Corporation (the “Board”) in fulfilling its oversight responsibilities relating to the Corporation’s financial statements;

 

(b)                                 to assist the Board in fulfilling its oversight responsibilities relating to the integrity of the Corporation’s internal control over financial reporting and management information systems; and

 

(c)                                  to fulfill the responsibilities assigned to the Committee by the Board pursuant to this charter.

 

2.                                      CONSTITUTION

 

2.1                               Membership

 

The Committee must be composed of a minimum of three members. Every Committee member must be a director of the Corporation (a “Director”). Every Committee member must be “independent” as such term is defined in National Instrument 52-110 — Audit Committees (“NI 52-110”) or an exemption from the requirement that every Committee member be “independent” must be available for the Corporation to rely upon. Every Committee member must be “financially literate” as such term is defined in NI 52-110.

 

2.2                               Chair

 

The Board shall appoint the Chair of the Committee from the members of the Committee (or if it fails to do so, the members of the Committee shall appoint the Chair of the Committee from among its members).

 

2.3                               Annual Appointment of Members

 

The appointment of members of the Committee and the designation of its Chair shall take place annually at the first meeting of the Board after a meeting of the shareholders at which Directors are elected. The Board may appoint a member to fill a vacancy which occurs in the Committee between annual elections of Directors.

 

2.4                               Continuance of Existing Mandate

 

If an appointment of members of the Committee is not made as prescribed, the members shall continue as such until their successors are appointed.

 

2.5                               Quorum

 

A quorum of the Committee shall be a majority of its members.

 

2.6                               Secretary

 

The Chair of the Committee may designate from time to time a person to be the Secretary of the Committee. The Secretary may, but need not, be a member of the Committee.

 

B-1

 

2.7                               Committee Procedures

 

The time and place of the meetings of the Committee and the calling of meetings and the procedure in all things at such meetings shall be determined by the Committee.

 

2.8                               Attendees at Meetings

 

The Committee may invite Directors, officers and employees of the Corporation or any other person to attend meetings of the Committee to assist in the discussion and examination of the matters under consideration by the Committee.

 

3.                                      AUTHORITY

 

The Committee has the authority:

 

(a)                                 to engage independent counsel and other advisors as it determines necessary or advisable to carry out its duties;

 

(b)                                 to set and pay the compensation for any advisors employed by the Committee; and

 

(c)                                  to communicate directly with the internal and external auditors.

 

The Committee also has the authority to delegate certain responsibilities to individual members or subcommittees of the Committee in accordance with NI 52-110.

 

In discharging its oversight role, the Committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities, and personnel of the Corporation.

 

4.                                      RESPONSIBILITIES

 

4.1                               External Auditor

 

(a)                                 The Corporation’s external auditor is required to report directly to the Committee.

 

(b)                                 The Committee is responsible for recommending to the Board:

 

(i)                                     the external auditor to be nominated for the purpose of preparing or issuing an auditor’s report or performing other audit, review or attest services for the Corporation; and

 

(ii)                                  the compensation of the external auditor.

 

(c)                                  The Committee is directly responsible for overseeing the work of the external auditor engaged for the purpose of preparing or issuing an auditor’s report or performing other audit, review or attest services for the Corporation, including the resolution of disagreements between management and the external auditor regarding financial reporting.

 

(d)                                 The Committee is responsible for reviewing and approving the proposed audit scope, focus areas, timing and key decisions underlying the audit plan.

 

(e)                                  The Committee is also responsible for:

 

(i)                                     monitoring and reporting to the Board with regards to the qualifications, independence and performance of the external auditor;

 

B-2

 

(ii)                                  receiving and reviewing reports from the external auditor on the progress against the approved audit plan, important findings, recommendations for improvements and the auditors’ final report; and

 

(iii)                               reviewing, at least annually, a report from the external auditor on all relationships and engagements that may reasonably be thought to bear on the independence of the auditor;

 

(f)                                   The Committee should meet separately at least annually with management and the external auditors to discuss issues and concerns warranting committee attention. The Committee should provide sufficient opportunity for the external auditors to meet privately with the members of the Committee. The Committee should review with the external auditor any audit problems or difficulties and management’s response.

 

4.2                               Pre-Approval and Non-Audit Services

 

The Committee is responsible for pre-approving all “non-audit services” (as such term is defined in NI 52-110) to be provided to the Corporation or its subsidiary entities by the Corporation’s external auditor.

 

4.3                               Review of Financial Statements and MD&A

 

The Committee is responsible for reviewing the Corporation’s financial statements, MD&A and annual and interim earnings press releases before the Corporation publicly discloses this information.

 

4.4                              Review of Public Disclosure of Financial Information

 

The Committee is responsible for being satisfied that adequate procedures are in place for the review of the Corporation’s public disclosure of financial information extracted or derived from the Corporation’s financial statements, other than the public disclosure referred to in section 4.3 above, and periodically assessing the adequacy of those procedures.

 

4.5                               Submission Systems and Treatment of Complaints

 

The Committee is responsible for establishing procedures for:

 

(a)                                 the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls, or auditing matters; and

 

(b)                                 the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters.

 

4.6                               Hiring Policies

 

The Committee is responsible for reviewing and approving the Corporation’s hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of the Corporation.

 

4.7                               Internal Controls and Management Information Systems

 

The Committee is responsible for reviewing and monitoring the integrity and adequacy of the Corporation’s internal controls over financial reporting and management information systems, reporting to the Board thereon and overseeing the implementation by management of any changes to such systems to ensure the integrity of such systems as required by the Board.

 

4.8                               Other Responsibilities

 

The Committee is also responsible for:

 

B-3

 

(a)                                 taking into account the reports of management and such other persons as the Committee may consider appropriate, identifying the principal risks of the Corporation’s business, satisfying itself as to the implementation of appropriate systems to manage these risks and reporting and making recommendations to the Board with respect to these matters;

 

(b)                                 reviewing and making recommendations to the Board on the Corporation’s Corporate Disclosure Policy; and

 

(c)                                  monitoring compliance with the Code of Business Conduct, reviewing the report of management concerning compliance with the Code of Business Conduct and, if appropriate, reporting and making recommendations to the Board with respect to these matters.

 

4.9                               Consultation with the Board

 

The Committee shall report to the Board at the Board’s next meeting on the proceedings of any meeting of the Committee, all recommendations to the Board made by the Committee at such meeting and any approvals given by the Committee at such meeting.

 

5.                                      GENERAL

 

5.1                               Subject to by-laws, etc.

 

The provisions of this charter are subject to the provisions of the by-laws of the Corporation and to the applicable provisions of the Canada Business Corporations Act and any other applicable legislation.

 

5.2                               Annual Review of Charter

 

The Committee shall review and reassess this charter at least annually and obtain the approval of the Board. The Committee should also perform an evaluation of its performance and this charter at least annually to determine whether it is functioning effectively.

 

B-4Exhibit 4.2

 

Bauer Performance Sports Ltd.

 

Consolidated Financial Statements

For the years ended May 31, 2013 and May 31, 2012

(Expressed in U.S. dollars)

 

 

	

    
	
 
    	
KPMG LLP
    
	
 
    	
Two   Financial Center
    
	
 
    	
60   South Street
    
	
 
    	
Boston,   MA 02111
    

 

Independent Auditors’ Report

 

To the Shareholders of Bauer Performance Sports Ltd.:

 

We have audited the accompanying consolidated financial statements of Bauer Performance Sports Ltd. (“the Company”), which comprise the consolidated statements of financial position as at May 31, 2013 and 2012, the consolidated statements of comprehensive income, changes in equity and cash flows for the years ended May 31, 2013 and 2012, and notes, comprising a summary of significant accounting policies and other explanatory information.

 

Management’s Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with Canadian generally accepted auditing standards and auditing standards generally accepted in the United States of America.  Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

	
 
    	
KPMG   LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG   International Cooperative (“KPMG International”), a Swiss entity.
    

 

 

Opinion

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Bauer Performance Sports Ltd. as at May 31, 2013 and 2012, and of its consolidated financial performance and its consolidated cash flows for the years ended May 31, 2013 and 2012 in accordance with International Financial Reporting Standards as issued by the International Standards Board.

 

	
 
    	

    	
 
    

 

 

August 7, 2013

Boston, Massachusetts, USA

 

2

 

BAUER PERFORMANCE SPORTS LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Expressed in thousands of U.S. dollars)

 

	
 
    	
 
    	
As of
    	
 
    	
As of
    	
 
    
	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
ASSETS
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current assets:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash
    	
 
    	
$
    	
4,467
    	
 
    	
$
    	
5,147
    	
 
    
	
Trade and other receivables (Note 12)
    	
 
    	
113,682
    	
 
    	
103,442
    	
 
    
	
Inventories (Note 13)
    	
 
    	
109,747
    	
 
    	
84,180
    	
 
    
	
Income taxes recoverable (Note 16)
    	
 
    	
1,966
    	
 
    	
3,305
    	
 
    
	
Foreign currency forward contracts (Note 24)
    	
 
    	
4,513
    	
 
    	
3,105
    	
 
    
	
Prepaid expenses and other assets
    	
 
    	
3,084
    	
 
    	
2,337
    	
 
    
	
Total current assets
    	
 
    	
237,459
    	
 
    	
201,516
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Property, plant and equipment (Note 14)
    	
 
    	
10,509
    	
 
    	
7,544
    	
 
    
	
Goodwill and intangible assets (Note 15)
    	
 
    	
152,644
    	
 
    	
80,697
    	
 
    
	
Foreign currency forward contracts (Note 24)
    	
 
    	
1,119
    	
 
    	
1,829
    	
 
    
	
Other non-current assets
    	
 
    	
721
    	
 
    	
954
    	
 
    
	
Deferred income taxes (Note 16)
    	
 
    	
4,985
    	
 
    	
16,423
    	
 
    
	
TOTAL ASSETS
    	
 
    	
$
    	
407,437
    	
 
    	
$
    	
308,963
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current liabilities:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Debt (Note 17)
    	
 
    	
$
    	
10,774
    	
 
    	
$
    	
9,195
    	
 
    
	
Trade and other payables
    	
 
    	
22,548
    	
 
    	
24,126
    	
 
    
	
Accrued liabilities (Note 18)
    	
 
    	
25,672
    	
 
    	
27,387
    	
 
    
	
Provisions (Note 19)
    	
 
    	
2,041
    	
 
    	
1,735
    	
 
    
	
Foreign currency forward contracts (Note 24)
    	
 
    	
—
    	
 
    	
52
    	
 
    
	
Income taxes payable (Note 16)
    	
 
    	
989
    	
 
    	
551
    	
 
    
	
Retirement benefit obligations (Note 20)
    	
 
    	
358
    	
 
    	
364
    	
 
    
	
Total current liabilities
    	
 
    	
62,382
    	
 
    	
63,410
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Debt (Note 17)
    	
 
    	
160,913
    	
 
    	
126,927
    	
 
    
	
Provisions (Note 19)
    	
 
    	
383
    	
 
    	
429
    	
 
    
	
Retirement benefit obligations (Note 20)
    	
 
    	
5,522
    	
 
    	
5,348
    	
 
    
	
Other non-current liabilities
    	
 
    	
879
    	
 
    	
16
    	
 
    
	
Deferred income taxes (Note 16)
    	
 
    	
918
    	
 
    	
—
    	
 
    
	
TOTAL LIABILITIES
    	
 
    	
230,997
    	
 
    	
196,130
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
EQUITY
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Share capital (Note 21)
    	
 
    	
141,397
    	
 
    	
107,858
    	
 
    
	
Contributed surplus (Note 22)
    	
 
    	
9,562
    	
 
    	
4,489
    	
 
    
	
Retained earnings
    	
 
    	
27,037
    	
 
    	
1,705
    	
 
    
	
Accumulated other comprehensive loss
    	
 
    	
(1,556
    	
)
    	
(1,219
    	
)
    
	
TOTAL EQUITY
    	
 
    	
176,440
    	
 
    	
112,833
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
TOTAL LIABILITIES & EQUITY
    	
 
    	
$
    	
407,437
    	
 
    	
$
    	
308,963
    	
 
    

 

Commitments and Contingencies (Note 25)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

	
On behalf of the Board
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
Bernard McDonell (signed), Director
    	
 
    	
Shant Mardirossian (signed), Director
    

 

1

 

BAUER PERFORMANCE SPORTS LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Expressed in thousands of U.S. dollars, except per share amounts)

 

	
 
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Revenues
    	
 
    	
$
    	
399,593
    	
 
    	
$
    	
374,770
    	
 
    
	
Cost of goods sold (Notes 14 and 15)
    	
 
    	
252,419
    	
 
    	
232,121
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gross profit
    	
 
    	
147,174
    	
 
    	
142,649
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Selling, general and administrative expenses   (Notes 10, 14 and 15)
    	
 
    	
90,435
    	
 
    	
83,297
    	
 
    
	
Research and development expenses
    	
 
    	
16,056
    	
 
    	
13,915
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Income before finance costs, finance income, gain   on bargain purchase, other expenses and income tax expense
    	
 
    	
40,683
    	
 
    	
45,437
    	
 
    
	
Finance costs (Note 11)
    	
 
    	
8,566
    	
 
    	
16,416
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Finance income (Note 11)
    	
 
    	
(2,000
    	
)
    	
(14,514
    	
)
    
	
Gain on bargain purchase (Note 5)
    	
 
    	
(1,190
    	
)
    	
—
    	
 
    
	
Other expenses
    	
 
    	
158
    	
 
    	
230
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Income before income tax expense
    	
 
    	
35,149
    	
 
    	
43,305
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Income tax expense (Note 16)
    	
 
    	
9,817
    	
 
    	
13,122
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net income
    	
 
    	
$
    	
25,332
    	
 
    	
$
    	
30,183
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Other comprehensive loss:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Foreign currency translation differences
    	
 
    	
(120
    	
)
    	
(2,424
    	
)
    
	
Actuarial loss on defined benefit plans, net (Note   20)
    	
 
    	
(217
    	
)
    	
(299
    	
)
    
	
Other comprehensive loss, net of taxes
    	
 
    	
(337
    	
)
    	
(2,723
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total comprehensive income
    	
 
    	
$
    	
24,995
    	
 
    	
$
    	
27,460
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic earnings per common share (Note 23)
    	
 
    	
$
    	
0.74
    	
 
    	
$
    	
1.00
    	
 
    
	
Diluted earnings per common share (Note 23)
    	
 
    	
$
    	
0.70
    	
 
    	
$
    	
0.95
    	
 
    

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2

 

BAUER PERFORMANCE SPORTS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Expressed in thousands of U.S. dollars)

 

	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Actuarial
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Foreign
    	
 
    	
loss on
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Retained
    	
 
    	
currency
    	
 
    	
defined
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Contributed
    	
 
    	
earnings
    	
 
    	
translation
    	
 
    	
benefit plans,
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
Share capital
    	
 
    	
surplus
    	
 
    	
(deficit)
    	
 
    	
differences
    	
 
    	
net of taxes
    	
 
    	
Total Equity
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance as of June 1, 2011
    	
 
    	
$
    	
107,730
    	
 
    	
$
    	
1,590
    	
 
    	
$
    	
(28,478
    	
)
    	
$
    	
1,718
    	
 
    	
$
    	
(214
    	
)
    	
$
    	
82,346
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
30,183
    	
 
    	
—
    	
 
    	
—
    	
 
    	
30,183
    	
 
    
	
Other comprehensive loss
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(2,424
    	
)
    	
(299
    	
)
    	
(2,723
    	
)
    
	
Share-based payment transactions
    	
 
    	
128
    	
 
    	
2,899
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
3,027
    	
 
    
	
Balance as of May 31, 2012
    	
 
    	
$
    	
107,858
    	
 
    	
$
    	
4,489
    	
 
    	
$
    	
1,705
    	
 
    	
$
    	
(706
    	
)
    	
$
    	
(513
    	
)
    	
$
    	
112,833
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance as of May 31, 2012
    	
 
    	
$
    	
107,858
    	
 
    	
$
    	
4,489
    	
 
    	
$
    	
1,705
    	
 
    	
$
    	
(706
    	
)
    	
$
    	
(513
    	
)
    	
$
    	
112,833
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
25,332
    	
 
    	
—
    	
 
    	
—
    	
 
    	
25,332
    	
 
    
	
Other comprehensive loss
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(120
    	
)
    	
(217
    	
)
    	
(337
    	
)
    
	
Issuance of common shares
    	
 
    	
32,902
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
32,902
    	
 
    
	
Common share issuance costs
    	
 
    	
—
    	
 
    	
(2,098
    	
)
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(2,098
    	
)
    
	
Share-based payment transactions
    	
 
    	
637
    	
 
    	
4,248
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4,885
    	
 
    
	
Recognition of deferred tax on items recorded to   equity
    	
 
    	
—
    	
 
    	
2,923
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
2,923
    	
 
    
	
Balance as of May 31, 2013
    	
 
    	
$
    	
141,397
    	
 
    	
$
    	
9,562
    	
 
    	
$
    	
27,037
    	
 
    	
$
    	
(826
    	
)
    	
$
    	
(730
    	
)
    	
$
    	
176,440
    	
 
    

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3

 

BAUER PERFORMANCE SPORTS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in thousands of U.S. dollars)

 

	
 
    	
 
    	
For the twelve months ended
    	
 
    
	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
OPERATING ACTIVITIES:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net income
    	
 
    	
$
    	
25,332
    	
 
    	
$
    	
30,183
    	
 
    
	
Adjustments to net income:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Share-based payment expense (Note 22)
    	
 
    	
3,611
    	
 
    	
1,318
    	
 
    
	
Depreciation and amortization
    	
 
    	
7,757
    	
 
    	
5,470
    	
 
    
	
Finance costs (Note 11)
    	
 
    	
8,566
    	
 
    	
16,416
    	
 
    
	
Finance income (Note 11)
    	
 
    	
(2,000
    	
)
    	
(14,514
    	
)
    
	
Income tax expense (Note 16)
    	
 
    	
9,817
    	
 
    	
13,122
    	
 
    
	
Bad debt expense
    	
 
    	
117
    	
 
    	
698
    	
 
    
	
Gain on bargain purchase (Note 5)
    	
 
    	
(1,190
    	
)
    	
—
    	
 
    
	
Loss on disposal of assets
    	
 
    	
45
    	
 
    	
57
    	
 
    
	
Net changes in balances related to operations   (excluding the effect of acquisitions):
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Trade and other receivables
    	
 
    	
(3,319
    	
)
    	
(18,076
    	
)
    
	
Inventories
    	
 
    	
(17,674
    	
)
    	
4,430
    	
 
    
	
Prepaid expenses and other assets
    	
 
    	
1,135
    	
 
    	
(2,498
    	
)
    
	
Trade and other payables
    	
 
    	
(2,423
    	
)
    	
(8,397
    	
)
    
	
Accrued and other liabilities
    	
 
    	
(3,992
    	
)
    	
(3,749
    	
)
    
	
Cash from operating activities
    	
 
    	
25,782
    	
 
    	
24,460
    	
 
    
	
Interest paid
    	
 
    	
(6,246
    	
)
    	
(7,388
    	
)
    
	
Income taxes paid
    	
 
    	
(2,649
    	
)
    	
(2,564
    	
)
    
	
Income tax refunds received
    	
 
    	
24
    	
 
    	
2,644
    	
 
    
	
Net cash from operating activities
    	
 
    	
16,911
    	
 
    	
17,152
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
INVESTING ACTIVITIES:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Acquisition of subsidiaries, net of cash acquired   (Note 5)
    	
 
    	
(74,008
    	
)
    	
—
    	
 
    
	
Purchase of property, plant, equipment and   intangible assets
    	
 
    	
(7,377
    	
)
    	
(4,497
    	
)
    
	
Proceeds from disposition of property, plant and   equipment
    	
 
    	
—
    	
 
    	
15
    	
 
    
	
Net cash used in investing activities
    	
 
    	
(81,385
    	
)
    	
(4,482
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
FINANCING ACTIVITIES:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Proceeds from debt (Note 17)
    	
 
    	
30,000
    	
 
    	
—
    	
 
    
	
Repayment of debt
    	
 
    	
(9,569
    	
)
    	
(8,908
    	
)
    
	
Net movement in revolving debt
    	
 
    	
14,595
    	
 
    	
—
    	
 
    
	
Debt issuance costs (Note 17)
    	
 
    	
(1,265
    	
)
    	
—
    	
 
    
	
Net proceeds from issuance of common shares (Note   21)
    	
 
    	
30,804
    	
 
    	
—
    	
 
    
	
Payment of taxes upon net stock option exercise
    	
 
    	
(694
    	
)
    	
(94
    	
)
    
	
Net cash from (used in) financing activities
    	
 
    	
63,871
    	
 
    	
(9,002
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
    	
 
    	
(77
    	
)
    	
(506
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
(DECREASE) INCREASE IN CASH
    	
 
    	
(680
    	
)
    	
3,162
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
BEGINNING CASH
    	
 
    	
5,147
    	
 
    	
1,985
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ENDING CASH
    	
 
    	
$
    	
4,467
    	
 
    	
$
    	
5,147
    	
 
    

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

1.              GENERAL INFORMATION

 

Bauer Performance Sports Ltd. and its subsidiaries (“Bauer” or the “Company”) is a public company incorporated pursuant to the laws of the Province of British Columbia. The Company is listed on the Toronto Stock Exchange (TSX: BAU).

 

Bauer is primarily engaged in the design, manufacture and distribution of performance sports equipment for ice hockey, roller hockey, and lacrosse, as well as related apparel and accessories. The ice hockey products include skates, skate blades, protective gear, sticks, team apparel and accessories. The roller hockey products include skates, protective gear and accessories. The lacrosse products include sticks (shafts and heads) and protective gear. The Company distributes its products primarily in the United States, Canada and Europe to specialty retail stores, sporting goods and national retail chains as well as directly to sports teams. The Company is headquartered at 100 Domain Drive in Exeter, New Hampshire and has leased sales offices in the United States, Canada, Sweden, Germany and Finland. The Company has leased distribution centers located in Toronto, Ontario and Seattle, Washington and third party distribution centers in Boras, Sweden and Aurora, Illinois. The Company’s Liverpool, New York and Ottawa, Ontario leased facilities have manufacturing and distribution operations. The Company conducts research and development and limited manufacturing at a leased facility in St. Jerome, Quebec and has a leased sourcing office in Taiwan.

 

2.              STATEMENT OF COMPLIANCE

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

These consolidated financial statements were approved by the Board of Directors on August 7, 2013.

 

3.              BASIS OF PRESENTATION

 

3.1                     Basis of measurement

 

The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments which are measured at fair value through profit or loss and defined benefit obligations which are measured at present value.

 

3.2                     Functional and presentation currency

 

The Company’s consolidated financial statements are presented in U.S. dollars. All financial information presented in U.S. dollars has been rounded to the nearest thousand, except for share and per share amounts.

 

3.3                     Use of estimates and judgments

 

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

 

Critical accounting estimates

 

Information about critical accounting estimates that have the most significant effect on the amounts recognized in these financial statements are as follows:

 

Acquisitions

 

The fair value of assets acquired and liabilities assumed in a business combination is estimated based on information available at the date of the acquisition. The estimate of fair value of the acquired intangible assets (including goodwill), 

 

5

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

property, plant and equipment and other assets and the liabilities assumed at the date of acquisition as well as the useful lives of the acquired intangible assets and property, plant and equipment is based on assumptions. The measurement is largely based on projected cash flows, discount rates and market conditions at the date of acquisition.

 

Valuation of derivatives

 

In the valuation of the Company’s outstanding derivatives, foreign currency forward contracts and foreign exchange swaps, the fair value is based on current foreign exchange rates at each reporting date. Since the Company recognizes the fair value of these financial instruments on the consolidated statements of financial position and records changes in fair value in the current period earnings, these estimates will have a direct impact on the Company’s net income for the period.

 

Share-based payments

 

Accounting for the grant date fair value of stock option awards and the number of awards that are expected to vest is based on a number of assumptions and estimates, including the risk-free interest rate, expected share volatility, expected dividend yield, estimated forfeiture rates, and expected term. The calculation of the grant date fair value requires the input of highly subjective assumptions and changes in subjective input assumptions can materially affect the fair value estimate.

 

Provision for warranties

 

Estimated future warranty costs are accrued and charged to cost of goods sold in the period in which revenues are recognized from the sale of goods. The recognized amount of future warranty costs is based on management’s best information and judgment and is based in part upon the Company’s historical experience. An increase in the provision for warranty costs, with a corresponding charge to earnings, is recorded in the period in which management estimates that additional warranty obligations are likely.

 

Retirement benefit obligations

 

Accounting for the costs of the defined benefit obligations is based on actuarial valuations. The present value of the defined benefit obligation recognized in the consolidated statements of financial position and the net financing charge recognized in the consolidated statements of comprehensive income is dependent on current market interest rates of high quality, fixed rate debt securities. Other key assumptions within this calculation are based on market conditions or estimates of future events, including mortality rates. Since the determination of the costs and obligations associated with employee future benefits requires the use of various assumptions, there is measurement uncertainty inherent in the actuarial valuation process.

 

Depreciation and amortization

 

Management is required to make certain estimates and assumptions when determining the depreciation and amortization methods and rates, and residual values of equipment and intangible assets. Useful lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their life, such as changes in technology. Management reviews amortization methods, rates, and residual values annually and adjusts amortization accordingly on a prospective basis.

 

Critical judgments in applying accounting policies

 

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in these financial statements are as follows:

 

Income tax

 

The measurement of income taxes payable and deferred income tax assets and liabilities requires management to make judgments in the interpretation and application of the relevant tax laws. The actual amount of income taxes only becomes final upon filing and acceptance of the tax return by the relevant authorities, which occurs subsequent to the issuance of the financial statements.

 

6

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

Judgments are also made by management to determine the likelihood of whether deferred income tax assets at the end of the reporting period will be realized from future taxable earnings.

 

Impairment of non-financial assets

 

Management exercises judgment in assessing whether there are indications that an asset may be impaired. In determining the recoverable amount of assets, in the absence of quoted market prices, impairment tests are based on estimates of discounted cash flow projections and other relevant assumptions. The assumptions used in the estimated discounted cash flow projections involve estimates and assumptions regarding discount rates, royalty rates, and long-term terminal growth rates. Differences in estimates could affect whether goodwill or intangible assets are in fact impaired and the dollar amount of that impairment.

 

3.4                     Basis of consolidation

 

(a)                       Business combinations

 

Acquisitions of businesses are accounted for using the acquisition method under IFRS 3 Business Combinations (“IFRS 3”). The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Company, liabilities incurred and equity interests issued by the Company which includes the fair value of any asset or liability from a contingent consideration arrangement. Transaction costs, other than those associated with the issue of debt or equity securities, are expensed as incurred.

 

The identifiable assets acquired and the liabilities assumed are recognized at their fair value at the acquisition date, except: (i) non-current assets that are classified as held for sale, which are recognized at fair value less cost to sell; (ii) deferred income tax assets or liabilities are recognized and measured in accordance with IAS 12 Income Taxes and (iii) assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 19 Employee Benefits (“IAS 19”).

 

The Company uses various methods in determining fair value of assets acquired and liabilities assumed. The fair value of property, plant and equipment recognized is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably and willingly. The fair value of items of plant, equipment, and fixtures is based on the market approach and cost approaches using quoted market prices for similar items when available and replacement cost when appropriate. The fair value of inventories is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. The fair value of trade names, trademarks and purchased technology is based on the relief from royalty method, an income approach. The fair value of customer relationships is determined using an excess earnings approach, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. The fair value of non-compete agreements is determined using the probability adjusted lost cash flows method. The fair value of lease agreements is based on analyzing current market rent against lease agreements acquired. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.

 

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately through profit or loss as a bargain purchase gain.

 

Subsequent changes in the fair value of the contingent consideration that result from additional information about facts and circumstances that existed at the acquisition date obtained during the measurement period  are measurement period 

 

7

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

adjustments against goodwill or gain on bargain purchase, as applicable. The measurement period cannot exceed one year from the acquisition date.

 

Subsequent changes in the fair value of contingent consideration that do not qualify as measurement period adjustments depend on how the contingent consideration is classified. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as a liability that is a financial instrument, and is within the scope of IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”), is measured at fair value with any resulting gain or loss recognized either in profit or loss or in other comprehensive income in accordance with IAS 39. Contingent consideration classified as a liability that is not within the scope of IAS 39 is accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”), or another IFRS as appropriate.

 

(b)                       Subsidiaries

 

These consolidated financial statements include the accounts of Bauer Performance Sports Ltd. and its subsidiaries. Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date control commences to the date control ceases. The Company owns 100% of the outstanding equity in each of its subsidiaries. All intercompany transactions are eliminated in consolidation.

 

4.              SIGNIFICANT ACCOUNTING POLICIES

 

The significant accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

 

4.1                     Foreign currency translation

 

The results and financial position of all of the Company’s foreign operations are translated into the Company’s functional and presentation currency, the U.S. dollar. The assets and liabilities of foreign operations are translated into U.S. dollars at exchange rates in effect at each accounting period end date. The income and expense items of foreign operations are translated to U.S. dollars at average exchange rates during the period. Gains or losses arising from translation of the financial statements of these foreign operations are recorded in foreign currency translation differences, a component of other comprehensive income in the consolidated statements of changes in equity.

 

Transaction gains and losses generated by the effect of foreign exchange on recorded assets and liabilities denominated in a currency different from the functional currency of the applicable entity are recorded in finance income and finance costs, respectively, in the consolidated statements of comprehensive income in the period in which they occur.

 

4.2                     Inventories

 

Inventories are measured at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method and includes all costs incurred in bringing each product to its present location and condition. Net realizable value is based on estimated selling price in the ordinary course of business less any further costs expected to be incurred to completion and disposal.

 

4.3                     Property, plant and equipment

 

Property, plant and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. Such cost includes costs directly attributable to making the asset capable of operating as intended. Subsequent costs are included in the asset’s carrying amount or recognized as a separate component as appropriate, only when it is probable that the future economic benefits associated with the item will flow to the Company and its cost can be reliably measured. The carrying amount of any replaced asset is derecognized. All repairs and maintenance costs are charged to profit or loss in the period in which they are incurred. When significant parts of property, plant and equipment have different useful lives, they are accounted for as a separate component of the asset and depreciated over their useful lives as described below.

 

8

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

Depreciation is provided on all property, plant and equipment. The method of depreciation, residual values and useful lives are reviewed at least annually and adjusted if appropriate. Depreciation expense is recognized in earnings on a straight-line basis over the estimated useful life of the related asset. The estimated useful lives are as follows:

 

	
Machinery and equipment
    	
2   - 8 years
    
	
Data processing equipment
    	
3   - 5 years
    
	
Furniture and fixtures
    	
2   - 8 years
    
	
Leasehold improvements
    	
Shorter   of lease term or remaining life of the assets
    
	
Assets under finance lease
    	
Shorter   of lease term or remaining life of the assets
    

 

The net carrying amounts of property, plant and equipment are reviewed for impairment when events and changes in circumstances indicate that the carrying amount may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any.

 

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying value of the asset and is recognized through profit or loss.

 

4.4                     Goodwill and intangible assets

 

(a)                       Goodwill

 

See Note 3.4 (a) for the policy on measurement of goodwill at initial recognition. After initial recognition, goodwill is stated at cost less accumulated impairment losses, with carrying value being reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may be impaired.

 

(b)                       Research and development

 

Research costs are charged to operations as incurred and product development costs are deferred if the product or process and its market or usefulness are defined, has reached technical feasibility, adequate resources exist or are expected to exist to complete the project and management intends to market or use the product or process. Technical feasibility is attained when the product or process has completed testing and has been determined to be viable for its intended use. To date, no development costs have been capitalized.

 

(c)                        Other intangible assets

 

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is measured at fair value. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment.

 

Internally generated intangible assets, except capitalized development and capitalized software costs, are expensed to profit or loss as incurred.

 

The useful lives of intangibles assets are assessed to be finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life. Amortization is based on the cost of an asset less its estimated residual value. The amortization methods, useful lives, and residual values for an intangible asset with a finite life are reviewed at least annually. Changes in the economic useful life or the expected pattern of consumption of future benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in an accounting estimate. For intangible assets with indefinite lives, the Company performs an impairment test annually or whenever events or changes in circumstances indicate that the carrying value may be impaired.

 

Gains or losses from the derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized through profit or loss when the asset is derecognized.

 

9

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

A summary of the policies applied to the Company’s intangible assets are:

 

	
 
    	
 
    	
 
    	
 
    	
Weighted-average
    	
 
    	
Method of
    	
 
    
	
Asset
    	
 
    	
Useful life
    	
 
    	
amortization period
    	
 
    	
amortization
    	
 
    
	
Trade names and trademarks
    	
 
    	
Indefinite
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Purchased technology
    	
 
    	
Finite
    	
 
    	
13 years
    	
 
    	
Straight-line
    	
 
    
	
Customer relationships
    	
 
    	
Finite
    	
 
    	
10 years
    	
 
    	
Cash   flow
    	
 
    
	
Leases
    	
 
    	
Finite
    	
 
    	
6 years
    	
 
    	
Straight-line
    	
 
    
	
Non-compete agreements
    	
 
    	
Finite
    	
 
    	
5 years
    	
 
    	
Straight-line
    	
 
    
	
Computer software
    	
 
    	
Finite
    	
 
    	
8 years
    	
 
    	
Straight-line
    	
 
    

 

The trade names and trademarks are considered an indefinite life asset as the Company has no restriction on the period of use of its trade name and trademark assets. The Company has no formal plans to sell or discontinue the use of any of its trade names or trademark assets.

 

4.5                     Impairment of non-financial assets

 

The net carrying amounts of the Company’s non-financial assets are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. For goodwill and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually at the same time. Where the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. To the extent that the net carrying amounts exceed their recoverable amounts, that excess is fully provided against in the financial year in which this is determined.

 

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

Impairment loss is recognized through profit or loss in the period in which it occurred. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed annually at each fiscal year end, or whenever indicators of reversal are detected, to determine whether the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

 

4.6                     Provisions

 

Provisions for warranty costs, product recall, restructuring, onerous contracts and product liability are recognized when the Company has a legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of economic benefits will be required to settle the obligation, and the amount can be reliably estimated.

 

Where the effect of the time value of money is material, the future cash flows expected to be required to settle the obligation are measured at the present value discounted using a current pre-tax rate that reflects the risks specific to the liability. The increase in the provision due to the passage of time is reflected as interest expense.

 

Warranty provisions, which are recognized when the underlying products are sold, represent the estimated cost of fulfilling the obligation of the Company’s general warranty policy in which it warrants its products against manufacturing defects and workmanship. Warranties range from thirty days up to one year from the date sold to the consumer, depending on the type of product. In determining the amount of the provision, the Company considers historical levels of claims, warranty terms and the estimated sell-through to the end consumer.

 

Product recall provision is recognized when the Company has an obligation to recall a product. The provision represents the estimate of claims expected from consumers and customers and legal and administrative costs.

 

10

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

A provision for restructuring is recognized when the Company has approved a detailed and formal restructuring plan and the restructuring either has commenced or has been announced publicly.

 

Onerous contracts are contracts where the unavoidable cost of meeting the obligations under the contract exceeds the economic benefit expected to be received under it. A provision is recognized at the lower of the net present value of the cash flows required to fulfill the contract or the cost of settling the obligation.

 

A provision for product liability is recognized at the best estimate of the expenditure to be incurred.

 

4.7                     Employee benefits

 

(a)                       Retirement benefit obligation

 

The Company has defined contribution plans and defined benefit plans consisting of pension and post-retirement life insurance plans.

 

Obligations to the defined contribution plans are recognized as an expense through profit or loss as incurred. The assets of the defined contribution plans are managed by insurance companies and are entirely separate from the Company’s assets.

 

The defined benefit pension plans are not registered, do not accept new participants and are unfunded. Payout under these plans is dependent on the Company’s ability to pay at the time the participants are entitled to receive their payments.

 

The liability recognized in the consolidated statements of financial position is the present value of the defined benefit obligation. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related liability. All actuarial gains and losses are recognized in other comprehensive income in the period in which they arise.

 

The post-retirement life insurance plan is not funded and the Company pays all of the plan costs. The liability for the post-retirement life insurance plan is recognized similar to the defined benefit pension plan and calculated annually using an actuarial valuation.

 

(b)                       Termination benefits

 

Termination benefits are payable when employment is terminated before the normal retirement date or when an employee accepts voluntary termination in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without realistic possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy.

 

(c)                        Share-based payment transactions

 

The Company maintains share-based compensation plans providing senior management, board members, certain other employees and consultants with stock options. The options vest in tranches over a vesting period of up to six years.

 

The fair value of each tranche of the options granted to senior management, board members, and certain other employees is determined separately at the date granted using the Black-Scholes option pricing model. The grant date fair value, net of expected forfeitures, is expensed over the vesting period of each tranche. For stock options granted to non-employees, the options are recorded at the fair value of the goods or services received. When the value of the goods or services received in exchange for the share-based payment cannot be reliably estimated, the fair value is measured using the Black-Scholes option pricing model. Compensation cost is recognized over the vesting period based on the number of options expected to vest using the graded vesting method.

 

11

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

Share-based payments expense is classified as selling, general and administrative expense in the consolidated statements of comprehensive income with a corresponding increase in equity. At each reporting date, a revised estimate is made of the number of options expected to vest. If the revised estimate differs from the original estimate, the charge to selling, general and administrative expenses is adjusted over the current and remaining vesting period of the options.

 

4.8                     Financial instruments

 

(a)                       Classification of financial instruments

 

Financial assets and financial liabilities are initially recorded at fair value and are subsequently measured based on their classification as described below. The Company classifies its financial instruments into various categories based on the purpose for which the financial instruments were acquired and their characteristics.

 

Cash: Cash is comprised of cash on hand and cash balances with banks.

 

Financial instruments at fair value through profit or loss: Financial assets that are purchased and held with the intention of generating profits in the short-term are classified as financial instruments at fair value through profit or loss. These investments are accounted for at fair value with the change in fair value recognized through profit or loss in the period in which they arise. The Company has not elected hedge accounting and therefore the changes in the fair value of these derivatives are recognized through profit or loss each reporting period. These derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes.

 

Receivables: The Company’s trade and other receivables are classified as current assets and are recorded at amortized cost, which upon their initial measurement is equal to their fair value. Subsequent measurement of trade receivables is at amortized cost, which usually corresponds to the amount initially recorded less any allowance for doubtful accounts.

 

Financial Liabilities: Trade and other payables, accrued liabilities and debt are classified as other financial liabilities and are measured at amortized cost. Debt is initially recorded at the proceeds received, net of transaction costs incurred. Debt is subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized through profit or loss over the term of the debt using the effective interest rate method.

 

(b)                       Derivative financial instruments

 

In the normal course of business, the financial position and results of operations of the Company are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as the Company purchases and sells goods in local currencies. The Company is also impacted by interest rate movements on its variable interest rate debt. The Company has established policies and business practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments, specifically foreign exchange swaps, foreign currency forward contracts, and interest rate contracts to manage exposures. All financial derivatives are recorded at fair value on the consolidated statements of financial position. Derivative instruments are included in current assets, non-current assets, current liabilities and non-current liabilities depending on their term to maturity.

 

(c)                        Impairment of financial assets

 

At each reporting date if there is objective evidence that an impairment loss has been incurred on financial assets, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after the write-down, the write-down of the financial asset is reversed. Any subsequent reversal of an impairment loss is recognized through profit or loss to the extent that the carrying value does not exceed its amortized cost at the reversal date.

 

12

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

4.9                     Revenue recognition

 

Revenues are recognized when the risks and rewards of ownership have passed to the customer based on the terms of the sale. Risk and rewards of ownership pass to the customer upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Amounts billed to customers for shipping and handling costs are included in revenues. At the time revenue is recognized the Company records estimated reductions to revenue for customer programs and incentive offerings, including special pricing agreements, promotions, advertising allowances and other volume-based incentives. Provisions for customer incentives and provisions for sales and return allowances are made at the time of product shipment. These estimates are based on agreements with applicable customers, historical experience with the customers and/or product, historical sales returns, and other relevant factors.

 

4.10              Advertising and promotion

 

Advertising costs are expensed as incurred and are included as a component of selling, general and administrative expenses.

 

A significant amount of the Company’s promotional expenses results from payments under endorsement contracts. Accounting for endorsement payments is based upon specific contract provisions. Generally, endorsement payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Prepayments made under contracts are included in prepaid expenses and other assets.

 

Through cooperative advertising programs, the Company reimburses its retail customers for certain of their costs of advertising the Company’s products. The Company records these costs as a reduction of revenues at the point in time when it is obligated to its customers for the costs, which is when the related revenues are recognized. This obligation may arise prior to the related advertisement being run.

 

4.11              Investment tax credits

 

Scientific Research and Experimental Development tax credits associated with research and development activities in Canada are recorded as a reduction of the expense to which the incentive applies. The benefit is recognized when the Company has complied with the terms of the applicable legislation and when it has reasonable assurance that the benefit will be realized.

 

4.12              Leases

 

Assets held under finance leases, which transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease, with a corresponding liability being recognized for the fair value of the leased asset if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the reduction of the lease liability and finance costs through profit or loss so as to achieve a constant rate of interest on the remaining liability. Assets held under finance leases are depreciated over the shorter of the useful life of the asset and the lease term.

 

Leases, where the lessee does not consider that it has substantially all of the risks and rewards of ownership of the asset, are classified as operating leases and rents payable are charged to profit or loss on a straight line basis over the lease term, including any rent-free periods.

 

Leases may include additional payments for real estate taxes, maintenance and insurance. These amounts are expensed in the period to which they relate.

 

4.13              Finance costs and finance income

 

Finance costs comprise interest expense, fair value losses on financial assets, impairment losses recognized on financial assets (other than trade receivables), foreign exchange loss, and losses on derivative instruments.

 

Finance income comprises interest income on bank balances, fair value gains on financial assets, foreign exchange gains, and gains on derivative instruments.

 

13

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

Foreign currency gains and losses are reported on a net basis as either finance cost or finance income depending on whether foreign currency movements are in a net loss or net gain position.

 

4.14              Income tax

 

Income tax expense comprises current and deferred income tax. Current tax and deferred income tax is recognized through profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

 

Deferred income tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax is not recognized for:

 

·                  temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

·                  temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and

·                  taxable temporary differences arising on the initial recognition of goodwill.

 

In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Company to change its judgments regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period the determination is made.

 

Deferred income tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

 

Deferred income tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

 

A deferred income tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

 

4.15              Earnings per share

 

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive stock options.

 

4.16              Share capital

 

Common shares

 

Common shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.

 

14

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

4.17              Segment reporting

 

The Company follows IFRS 8, Segment Reporting, which establishes standards for the way public business enterprises report information about operating segments. The method for determining what information to report is based on the way management organizes the segments of the Company for the chief operating decision maker to allocate resources, make operating decisions and assesses financial performance. The Company has one operating segment.

 

4.18              New accounting standards

 

There are several new standards, amendments to current standards and interpretations which have been issued but are not yet effective for the fiscal year ending May 31, 2013. Accordingly, they have not been applied in preparing these financial statements.

 

Financial Statement Presentation

 

The IASB issued amendments to IAS 1, Financial Statement Presentation, which requires changes in the presentation of other comprehensive income, including grouping together certain items of other comprehensive income that may be reclassified to net income. The new requirements are effective for annual periods beginning on or after July 1, 2012. The adoption of the amendments to this standard is not expected to have a material impact on the Company’s financial statements.

 

Employee Benefits

 

The IASB issued amendments to IAS 19. The revised standard requires immediate recognition of actuarial gains and losses in other comprehensive income, eliminating the previous options that were available, and enhances the guidance concerning the measurement of plan assets and defined benefit obligations, streamlining the presentation of changes in assets and liabilities arising from defined benefit plans and the introduction of enhanced disclosures for defined benefit plans. Retrospective application of this standard will be effective for annual periods beginning on or after January 1, 2013, with earlier adoption permitted. This amendment is not expected to have any significant impact as the Company already immediately records any actuarial gains and losses in other comprehensive income.

 

Financial Instruments: Presentation

 

The IASB issued amendments to IAS 32, Financial Instruments: Presentation (“IAS 32”). IAS 32 applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; and the right for offsetting financial assets and financial liabilities. A right to offset may be currently available or it may be contingent on a future event. An entity must have a legally enforceable right of set-off. The new requirements are effective for annual periods beginning on or after January 1, 2014. The Company is in the process of assessing the potential impact of the IAS 32 amendments.

 

Financial Instruments

 

The IASB issued IFRS 9 Financial Instrument (“IFRS 9”) as the first step in a multi-phase project to ultimately replace IAS 39 with the objective of improving and simplifying the reporting of financial instruments. IFRS 9 introduces new requirements for classifying and measuring financial assets and liabilities. This standard becomes effective on January 1, 2015. The Company is currently assessing the impact of and when to adopt IFRS 9.

 

Consolidated Financial Statements

 

The IASB issued IFRS 10, Consolidated Financial Statements (“IFRS 10”) which establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 supersedes IAS 27, Consolidated and Separate Financial Statements and SIC 12, Consolidation — Special Purpose Entities and is effective for annual periods beginning on or after January 1, 2013. Early adoption is permitted. The Company does not anticipate the application of IFRS 10 to have a significant impact on its consolidated financial statements.

 

15

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

Disclosure of Interests in Other Entities

 

The IASB issued IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”) which applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 is effective for annual periods beginning on or after January 1, 2013. Early adoption is permitted. The Company does not anticipate the application of IFRS 12 to have a significant impact on its consolidated financial statements.

 

Fair Value Measurements

 

The IASB issued IFRS 13, Fair Value Measurements (“IFRS 13”) which replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. This standard establishes a framework for measuring fair value and requires the fair value hierarchy, to be applied to all fair value measurements, including non-financial assets and liabilities that are measured or based on fair value in the statement of financial position as well as non-recurring fair value measurements such as assets held-for-sale. Furthermore, IFRS 13 expands disclosure requirements for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income. IFRS 13 is to be applied for annual periods beginning on or after January 1, 2013. Early adoption is permitted. The Company does not anticipate the application of IFRS 13 to have a significant impact on its consolidated financial statements.

 

5.              BUSINESS COMBINATIONS

 

Cascade Helmets Holdings, Inc.

 

On June 29, 2012, the Company purchased all of the issued and outstanding shares of the capital stock of Cascade Helmets Holdings, Inc. (“Cascade”), primarily a manufacturer and distributor of lacrosse equipment. The acquisition allows the Company to significantly expand its presence in the growing lacrosse market, whose helmet and headgear products are complementary to the Company’s existing offering of lacrosse equipment products under the Maverik brand.

 

The total consideration paid to the seller at closing was $68,131 in cash, or $64,788 net of cash acquired of $3,343. The acquisition was funded by a public offering of 3,691,500 common shares at a price of $7.80 Canadian dollars per share for aggregate proceeds, net of underwriting fees of $1,401 ($1,440 Canadian dollars), of $26,613 ($27,354 Canadian dollars) and the issuance of 642,000 common shares resulting in proceeds of $4,888 ($5,008 Canadian dollars). The acquisition was also funded by a $30,000 senior secured term facility maturing on March 16, 2016 and the balance through additional borrowings on the revolving loan.

 

The Company has completed the valuation of assets acquired and liabilities assumed. The allocation of the purchase price to the individual assets acquired and liabilities assumed under the purchase method of accounting resulted in $38,051 of goodwill of which the entire amount is not expected to be deductible for tax purposes. The goodwill associated with the transaction was due to management’s conclusion that the acquisition coincided with the Company’s strategy of expanding its lacrosse product offerings to drive revenue growth, expected synergies from combining operations and the requirement to record a deferred tax liability for the difference between the assigned values and the tax bases of the assets acquired and liabilities assumed.

 

16

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

The following table presents the allocation of purchase price related to the business as of the date of the acquisition:

 

	
Net assets acquired:
    	
 
    	
 
    	
 
    
	
Cash
    	
 
    	
$
    	
3,343
    	
 
    
	
Trade receivables (1)
    	
 
    	
4,000
    	
 
    
	
Inventories
    	
 
    	
1,672
    	
 
    
	
Property, plant and equipment
    	
 
    	
1,680
    	
 
    
	
Intangible assets
    	
 
    	
31,710
    	
 
    
	
Other assets
    	
 
    	
282
    	
 
    
	
Total assets acquired
    	
 
    	
42,687
    	
 
    
	
Current liabilities
    	
 
    	
(740
    	
)
    
	
Deferred income tax liability
    	
 
    	
(11,867
    	
)
    
	
Total liabilities assumed
    	
 
    	
(12,607
    	
)
    
	
Net assets acquired
    	
 
    	
$
    	
30,080
    	
 
    
	
Consideration paid to seller
    	
 
    	
$
    	
68,131
    	
 
    
	
Goodwill
    	
 
    	
$
    	
38,051
    	
 
    

 

(1)             Gross trade and other receivables acquired is $4,232, of which $232 was expected to be uncollectible at the acquisition date.

 

In the year ended May 31, 2013 the Company paid $173 in connection with the completion of the final working capital adjustment and recorded deferred tax adjustments on the net assets acquired.

 

The Company incurred acquisition-related costs of $1,577 relating to external legal fees, consulting fees and due diligence costs. The costs for the year ended May 31, 2012 were $1,126. The costs for the year ended May 31, 2013 were $451 and are included in selling, general and administrative expenses.

 

The Company entered into employment agreements with certain employees of Cascade. The Company agreed to pay $310 if the employees remain continuously employed through the fiscal year ended May 31, 2013. The Company agreed to pay an additional $310 if the employees remain continuously employed through the fiscal year ended May 31, 2014. These amounts will be accrued over the required service period and are included in selling, general and administrative expenses in the consolidated statements of comprehensive income. The costs in the year ended May 31, 2013 were $310. In addition, the Company incurred termination benefits expense of approximately $520 which was recognized in selling, general and administrative expense on the date of acquisition as continued service to the Company was not required to receive the benefit.

 

The amounts of Cascade’s revenue and net income included in the Company’s consolidated statements of comprehensive income for the year ended May 31, 2013 was $19,832 and $2,507, respectively.

 

Inaria International

 

On October 16, 2012 the Company acquired substantially all of the assets of Inaria International (“Inaria”), a manufacturer and distributor of team sports and active apparel. The acquisition provides the Company with full team apparel capabilities, including the design, development and manufacturing of uniforms for ice hockey, roller hockey, lacrosse, soccer and other team sports. The purchase price paid by the Company at closing was $7,048 Canadian dollars in cash. The acquisition was funded by additional borrowings on the revolving credit line.

 

The Company has completed the valuation of assets acquired and liabilities assumed. The allocation of the purchase price to the individual assets acquired and liabilities assumed under the purchase method of accounting resulted in $581 of goodwill of which the entire amount is expected to be deductible for tax purposes. The goodwill associated with the transaction was due to management’s conclusion that the acquisition coincided with the Company’s strategy of expanding its apparel product 

 

17

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

offerings to drive revenue growth, expected synergies from combining operations and the requirement to record a deferred income tax asset for the difference between the assigned values and the tax bases of the assets acquired and liabilities assumed. The following table presents the allocation of purchase price related to the business as of the date of the acquisition:

 

	
Net assets acquired:
    	
 
    	
 
    	
 
    
	
Trade receivables (1)
    	
 
    	
$
    	
546
    	
 
    
	
Inventories
    	
 
    	
4,707
    	
 
    
	
Property, plant and equipment
    	
 
    	
234
    	
 
    
	
Intangible assets
    	
 
    	
1,930
    	
 
    
	
Deferred income tax asset
    	
 
    	
69
    	
 
    
	
Other assets
    	
 
    	
35
    	
 
    
	
Total assets acquired
    	
 
    	
7,521
    	
 
    
	
Current liabilities
    	
 
    	
(957
    	
)
    
	
Total liabilities assumed
    	
 
    	
(957
    	
)
    
	
Net assets acquired
    	
 
    	
$
    	
6,564
    	
 
    
	
Consideration paid to seller
    	
 
    	
$
    	
7,145
    	
 
    
	
Goodwill
    	
 
    	
$
    	
581
    	
 
    

 

(1)             Gross trade and other receivables acquired is $630, of which $84 was expected to be uncollectible at the acquisition date.

 

The Company incurred acquisition-related costs in the year ended May 31, 2013 of $969 relating to external legal fees, consulting fees and due diligence costs. The costs are included in selling, general and administrative expenses.

 

The Company entered into employment agreements with the former owners of Inaria. Included in the employment agreements are yearly performance bonuses should Inaria achieve gross profit targets in the period one to four years following the closing. These amounts will be accrued over the required service period. The potential undiscounted amount of the future payments that the Company could be required to make is between $0 and $3,500 Canadian dollars over the four year period. During the year ended May 31, 2013 the Company recorded $627 in selling, general and administrative expenses related to the performance bonuses.

 

The amounts of Inaria’s revenue and net loss included in the Company’s consolidated statements of comprehensive income for the year ended May 31, 2013 was $4,771 and $1,979, respectively.

 

Combat Sports

 

On May 3, 2013, the Company acquired substantially all of the assets and assumed certain liabilities of Combat Sports (“Combat”), a manufacturer and distributor of composite baseball and softball bats, hockey sticks and lacrosse shafts. The acquisition provides the Company with intellectual property that will strengthen its research and development portfolio and expands the Company’s product offering into baseball and softball. The purchase price paid by the Company at closing was $3,370 Canadian dollars in cash, net of $630 cash received from the collection of trade receivables. The acquisition was funded through cash on hand.

 

The Company has completed the preliminary valuation of assets acquired and liabilities assumed. The allocation of the purchase price to the individual assets acquired and liabilities assumed under the purchase method of accounting resulted in a preliminary gain on bargain purchase as a result of the excess of the estimated fair value of the assets and liabilities acquired over the purchase price. The gain on bargain purchase of $1,190 was due to the fact that Combat was in bankruptcy and was being sold through a bidding process.

 

18

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

The following table presents the preliminary allocation of purchase price related to the business as of the date of the acquisition:

 

	
Net assets acquired:
    	
 
    	
 
    	
 
    
	
Trade receivables (1)
    	
 
    	
$
    	
2,235
    	
 
    
	
Inventories
    	
 
    	
1,702
    	
 
    
	
Property, plant and equipment
    	
 
    	
738
    	
 
    
	
Intangible assets
    	
 
    	
500
    	
 
    
	
Other assets
    	
 
    	
271
    	
 
    
	
Total assets acquired
    	
 
    	
5,446
    	
 
    
	
Current liabilities
    	
 
    	
(383
    	
)
    
	
Deferred income tax liability
    	
 
    	
(531
    	
)
    
	
Total liabilities assumed
    	
 
    	
(914
    	
)
    
	
Net assets acquired
    	
 
    	
$
    	
4,532
    	
 
    
	
Consideration paid to seller
    	
 
    	
$
    	
3,342
    	
 
    
	
Gain on bargain purchase
    	
 
    	
$
    	
1,190
    	
 
    

 

(1)       Gross trade and other receivables acquired is $2,582, of which $347 was expected to be uncollectible at the acquisition date.

 

The Company incurred acquisition-related costs in the year ended May 31, 2013 of $792 relating to external legal fees, consulting fees and due diligence costs. The costs are included in selling, general and administrative expenses.

 

The amount of revenue included in the Company’s consolidated statements of comprehensive income for the year ended May 31, 2013 relating to the acquisition of Combat was not material. The amount of Combat’s net loss included in the Company’s consolidated statements of comprehensive income for the year ended May 31, 2013, excluding the gain on bargain purchase, was $722.

 

Pro forma information

 

If the Cascade and Inaria acquisitions had occurred on June 1, 2012, consolidated revenue would have been approximately $405,005 and consolidated net income would have been approximately $24,829 for the year ended May 31, 2013. In determining these amounts, management has assumed the fair value adjustments which arose on the date of acquisition would have been the same if the acquisitions had occurred on June 1, 2012. This pro forma information is for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated at that time, nor is it intended to be a projection of future results.

 

The pro forma information above does not include the Combat acquisition. The Company acquired substantially all the assets and assumed liabilities of Combat out of bankruptcy. Due to the bankruptcy it is impractical to provide pro forma financial information for the impact on revenue and consolidated net income as the information cannot be reasonably determined.

 

6.              RISK

 

The Company has exposure to credit risk, liquidity risk and market risk (which consists of interest rate risk and foreign exchange risk) from its use of financial instruments. The Company’s management reviews these risks regularly as a result of changes in the market conditions as well as the Company’s activities.

 

Credit risk: Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is subject to concentrations of credit risk through its trade and other receivables and is influenced primarily by the individual characteristics of the customer, which management periodically assesses through its policy for the allowance for doubtful accounts as described below. The demographics of the Company’s trade receivables,

 

19

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

including the industry and country in which customers operate, have less influence on credit risk. For the years ended May 31, 2013 and 2012, revenues to a single customer were 11% of total revenues. As of May 31, 2013 and 2012, one customer accounted for 8% and 11%, respectively, of the Company’s total trade accounts receivable balance.

 

The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. In determining the amount of this allowance, management evaluates the ability to collect accounts receivable based on a combination of factors. Allowances are maintained based on the length of time the receivables are past due and on the status of a customer’s financial position. The Company considers historical levels of credit losses and makes judgments about the creditworthiness of customers based on ongoing credit evaluations. In determining the amount of the sales return reserve, the Company considers historical levels of returns and makes assumptions about future returns. In addition, the Company maintains a reserve for discounts related to accounts receivable. This includes accrued volume rebates and other customer allowances.

 

The detail of trade and other receivables is as follows:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Current
    	
 
    	
$
    	
88,714
    	
 
    	
$
    	
84,293
    	
 
    
	
Past due 0-60 days
    	
 
    	
11,463
    	
 
    	
10,114
    	
 
    
	
Past due over 61 days
    	
 
    	
16,850
    	
 
    	
10,601
    	
 
    
	
Trade receivables
    	
 
    	
117,027
    	
 
    	
105,008
    	
 
    
	
Other receivables
    	
 
    	
2,212
    	
 
    	
2,480
    	
 
    
	
Less: allowance for doubtful accounts
    	
 
    	
(3,972
    	
)
    	
(2,590
    	
)
    
	
Less: allowance for returns and discounts
    	
 
    	
(1,585
    	
)
    	
(1,456
    	
)
    
	
Total trade and other receivables
    	
 
    	
$
    	
113,682
    	
 
    	
$
    	
103,442
    	
 
    

 

The movement in the allowance for doubtful accounts with respect to trade accounts receivable is as follows:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Beginning balance
    	
 
    	
$
    	
2,590
    	
 
    	
$
    	
2,042
    	
 
    
	
Bad debt expense
    	
 
    	
1,936
    	
 
    	
1,546
    	
 
    
	
Uncollectible accounts written-off
    	
 
    	
(557
    	
)
    	
(978
    	
)
    
	
Exchange difference
    	
 
    	
3
    	
 
    	
(20
    	
)
    
	
Ending balance
    	
 
    	
$
    	
3,972
    	
 
    	
$
    	
2,590
    	
 
    

 

The Company may also have credit risk relating to cash and foreign currency forward contracts resulting in defaults by counterparties. The Company manages credit risk for cash by maintaining bank accounts with major international banks. The Company manages credit risk when entering into foreign currency forward contracts by purchasing contracts with highly rated banks.

 

Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages its liquidity risk through cash and debt management. Refer to Note 7 — Capital Disclosures for a more detailed discussion.

 

20

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

The table below summarizes the maturity profile of the financial liabilities based on the contractual undiscounted payments:

 

	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Remaining Term to Maturity
    	
 
    
	
 
    	
 
    	
Carrying
    	
 
    	
Contractual
    	
 
    	
Under 1
    	
 
    	
 
    	
 
    	
 
    	
 
    	
More than
    	
 
    
	
May 31, 2013
    	
 
    	
Amount
    	
 
    	
Cash Flows
    	
 
    	
year
    	
 
    	
1-3 years
    	
 
    	
4-5 years
    	
 
    	
5 years
    	
 
    
	
Non-interest   bearing:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Trade   and other payables
    	
 
    	
$
    	
22,548
    	
 
    	
$
    	
22,548
    	
 
    	
$
    	
22,548
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Accrued   liabilities
    	
 
    	
25,672
    	
 
    	
25,672
    	
 
    	
25,672
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Other   non-current liabilities
    	
 
    	
879
    	
 
    	
879
    	
 
    	
—
    	
 
    	
879
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Floating   interest rate instruments:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Debt   - Revolver and term loan
    	
 
    	
171,620
    	
 
    	
180,139
    	
 
    	
13,850
    	
 
    	
166,289
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Fixed   rate instruments:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Debt   - Finance lease obligations
    	
 
    	
69
    	
 
    	
69
    	
 
    	
54
    	
 
    	
15
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
220,788
    	
 
    	
$
    	
229,307
    	
 
    	
$
    	
62,124
    	
 
    	
$
    	
167,183
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    

 

	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Remaining Term to Maturity
    	
 
    
	
 
    	
 
    	
Carrying
    	
 
    	
Contractual
    	
 
    	
Under 1
    	
 
    	
 
    	
 
    	
 
    	
 
    	
More than
    	
 
    
	
May 31, 2012
    	
 
    	
Amount
    	
 
    	
Cash Flows
    	
 
    	
year
    	
 
    	
1-3 years
    	
 
    	
4-5 years
    	
 
    	
5 years
    	
 
    
	
Non-interest   bearing:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Trade   and other payables
    	
 
    	
$
    	
24,126
    	
 
    	
$
    	
24,126
    	
 
    	
$
    	
24,126
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Accrued   liabilities
    	
 
    	
27,387
    	
 
    	
27,409
    	
 
    	
27,409
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Financial   liabilities
    	
 
    	
52
    	
 
    	
52
    	
 
    	
52
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Other   non-current liabilities
    	
 
    	
16
    	
 
    	
16
    	
 
    	
16
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Floating   interest rate instruments:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Debt   - Revolver and term loan
    	
 
    	
135,972
    	
 
    	
148,663
    	
 
    	
12,920
    	
 
    	
18,764
    	
 
    	
116,979
    	
 
    	
—
    	
 
    
	
Fixed   rate instruments:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Debt   - Finance lease obligations
    	
 
    	
150
    	
 
    	
156
    	
 
    	
92
    	
 
    	
64
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
187,703
    	
 
    	
$
    	
200,422
    	
 
    	
$
    	
64,615
    	
 
    	
$
    	
18,828
    	
 
    	
$
    	
116,979
    	
 
    	
$
    	
—
    	
 
    

 

The gross outflows presented above represent the contractual undiscounted cash flows.

 

Interest rate risk: The Company is exposed to interest rate risk on the revolving loan and the term loan, as the rate is based on an index rate. In June 2011, the Company entered into an interest rate cap agreement with the Royal Bank of Canada to reduce market risk associated with the term loan. The agreement caps at 4% the Canadian Banker’s Acceptance interest rate applicable on the term loan amount of $47,694 Canadian dollars. The termination date of the agreement is May 31, 2014. Refer to Note 17 - Debt for details on the Company’s outstanding debt.

 

At May 31, 2013 and 2012, if the interest rate had been 50 basis points higher with all other variables held constant, net income would have been $955 and $812 lower, respectively, mainly as a result of higher interest expense on the floating rate borrowings, which was partially offset by the increase in value in the interest rate cap agreement.

 

Foreign exchange risk: The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company uses foreign currency forward contracts to hedge anticipated transactions. The foreign currency forward contracts are recorded in the consolidated statements of financial position at fair value. The Company has not elected hedge accounting and therefore the changes in the fair value of these derivatives are recognized through profit or loss each reporting period.

 

21

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

The Company’s cash flow exposures include recognized and anticipated foreign currency transactions, such as foreign currency denominated sales, costs of goods sold, as well as collections and payments. The risk in these exposures is the potential for losses associated with the remeasurement of nonfunctional currency cash flows into the functional currency. The currencies in which the Company’s transactions primarily are denominated are U.S. dollars, Canadian dollars, Euro, and Swedish krona.

 

The Company uses foreign currency forward contracts as an economic hedge to offset the effects of exchange rate fluctuations on certain of its forecasted foreign currency denominated sales and cost of sales transactions. During the years ended May 31, 2013 and May 31, 2012, the Company entered into various forward contracts with Fifth Third Bank and PNC Bank to hedge its Canadian dollar currency risk. As of May 31, 2013, the Company had forward contracts, maturing at various dates through January 2015, to buy the equivalent of $154,500 in foreign currencies at contracted rates. During the year ended May 31, 2013, the Company realized net gains (losses) of $300 (2012 — ($4,714)) from foreign currency forward contracts. During the year ended May 31, 2013 the Company recorded unrealized net gains of $942 (2012 — $14,297) from foreign currency forward contracts. The realized and unrealized losses and gains are included in finance costs and finance income, respectively, in the consolidated statements of comprehensive income.

 

The illustrative effect on net income for the year that would result from changes in exchange rates against the Canadian dollar can be summarized as follows:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Percentage change
    	
 
    	
10
    	
%
    	
10
    	
%
    
	
Impact on net income if the U.S. dollar   strengthens
    	
 
    	
$
    	
(2,116
    	
)
    	
$
    	
(2,654
    	
)
    
	
Impact on net income if the U.S. dollar weakens
    	
 
    	
$
    	
2,446
    	
 
    	
$
    	
2,920
    	
 
    

 

7.              CAPITAL DISCLOSURES

 

The Company’s objectives when managing capital are to:

 

·                  Ensure sufficient liquidity to pursue its organic growth combined with strategic acquisitions;

·                  Provide an appropriate return on investment to its shareholders; and

·                  Maintain a flexible capital structure that optimizes the cost of capital at acceptable risk and preserves the ability to meet financial obligations.

 

The capital structure of the Company consists of short and long-term debt and stockholders’ equity. In managing its capital structure, the Company monitors performance throughout the year to ensure working capital requirements and capital expenditures are funded from operations, available cash on deposit and, where applicable, bank borrowings. The Company may make adjustments to its capital structure in order to support the broader corporate strategy or in light of economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust its capital structure, the Company may issue shares or new debt, issue new debt to replace existing debt (with different characteristics), or reduce the amount of existing debt.

 

The Company monitors debt using the leverage ratio, defined as net indebtedness divided by EBITDA. Net indebtedness includes such items as the Company’s term loan, capital lease obligations, subordinated indebtedness, and average revolving loans for the last twelve months as of the reporting date, less the average amount of cash for the last twelve months as of the reporting date. EBITDA is defined in the Amended Credit Facility.

 

The Company monitors its capital structure using net income adjusted for income tax expense, depreciation and amortization, losses related to amendments to the Amended Credit Facility, gain or loss on disposal of fixed assets, net interest expense, deferred financing fees, unrealized gains and losses on derivative instruments, realized and unrealized gains and losses related to foreign exchange revaluation, restructuring and other one-time or non-cash charges associated with acquisitions, costs related to share offerings, and share-based payment expenses (“Adjusted EBITDA”). This measure is not recognized for

 

22

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

financial statement presentation purposes under IFRS and does not have a standardized meaning. Therefore, it is not likely to be comparable to similar measures presented by other entities.

 

The Company has never declared or paid any cash dividends on its common shares. The Company currently intends to use its earnings to finance the expansion of its business and to reduce indebtedness. Any future determination to pay dividends on common shares will be at the discretion of the Board of Directors and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial condition, contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the Board of Directors may deem relevant.

 

Total managed capital was as follows:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Total equity
    	
 
    	
$
    	
176,440
    	
 
    	
$
    	
112,833
    	
 
    
	
Long-term debt (including current portion)
    	
 
    	
171,687
    	
 
    	
136,122
    	
 
    
	
Total equity
    	
 
    	
$
    	
348,127
    	
 
    	
$
    	
248,955
    	
 
    

 

There were no changes in the Company’s approach to capital management during the periods. The Company is subject to financial covenants pursuant to the credit facility agreements, which are measured on a quarterly basis. During the years ended May 31, 2013 and 2012, the Company was in compliance with all such covenants.

 

8.              SEASONALITY

 

Our business demonstrates substantial seasonality. The Company launches new ice hockey products over two seasons each fiscal year, the April to September period which the Company classifies as the “Back-To-Hockey” season and the October to March period which we classify as the “Holiday” season. Generally, our highest revenues occur during the peak of the “Back-to-Hockey” season during the first quarter of our fiscal year, from June to August. The majority of our revenues for our “Holiday” season occur during the second quarter of our fiscal year, from September to November. The launch of new lacrosse products overlaps substantially with the “Holiday” season, from November through April. The launch of Inaria team apparel products overlaps substantially with the “Back-to-Hockey” season, from April to September. The launch of Combat products overlaps substantially with the “Holiday” season, from November through April.

 

9.              GEOGRAPHICAL INFORMATION

 

In presenting information on the basis of geography, revenues are based on the geographical location of customers:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
North America
    	
 
    	
$
    	
295,464
    	
 
    	
$
    	
276,262
    	
 
    
	
Rest of world
    	
 
    	
104,129
    	
 
    	
98,508
    	
 
    
	
Total revenues
    	
 
    	
$
    	
399,593
    	
 
    	
$
    	
374,770
    	
 
    

 

In presenting information on the basis of geography, non-current assets are based on the geographical location of the assets. Non-current assets presented consist of property, plant and equipment and goodwill and intangible assets:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
North America
    	
 
    	
$
    	
162,951
    	
 
    	
$
    	
88,092
    	
 
    
	
Rest of world
    	
 
    	
202
    	
 
    	
149
    	
 
    
	
Total non-current assets
    	
 
    	
$
    	
163,153
    	
 
    	
$
    	
88,241
    	
 
    

 

23

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

10.       EMPLOYEE BENEFITS EXPENSE

 

Employee benefits expense included in cost of goods sold, research and development, and selling, general and administrative expenses is as follows:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Wages and salaries
    	
 
    	
$
    	
41,293
    	
 
    	
$
    	
37,901
    	
 
    
	
Statutory benefits
    	
 
    	
9,359
    	
 
    	
8,239
    	
 
    
	
Share-based payments expense
    	
 
    	
3,514
    	
 
    	
1,318
    	
 
    
	
Retirement benefit obligations
    	
 
    	
290
    	
 
    	
273
    	
 
    
	
Termination benefits
    	
 
    	
1,513
    	
 
    	
168
    	
 
    
	
Other personnel costs and benefits
    	
 
    	
1,148
    	
 
    	
930
    	
 
    
	
Total employee benefits expense
    	
 
    	
$
    	
57,117
    	
 
    	
$
    	
48,829
    	
 
    

 

11.       FINANCE COSTS AND FINANCE INCOME

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Finance costs
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Interest expense
    	
 
    	
$
    	
8,246
    	
 
    	
$
    	
9,029
    	
 
    
	
Loss on amendment of revolving loan
    	
 
    	
320
    	
 
    	
—
    	
 
    
	
Realized loss on derivative instruments
    	
 
    	
—
    	
 
    	
4,714
    	
 
    
	
Foreign exchange losses
    	
 
    	
—
    	
 
    	
2,673
    	
 
    
	
Total finance costs
    	
 
    	
$
    	
8,566
    	
 
    	
$
    	
16,416
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Finance income
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Interest income
    	
 
    	
$
    	
(216
    	
)
    	
$
    	
(217
    	
)
    
	
Realized gain on derivative instruments
    	
 
    	
(300
    	
)
    	
—
    	
 
    
	
Unrealized gain on derivative instruments
    	
 
    	
(942
    	
)
    	
(14,297
    	
)
    
	
Foreign exchange gains
    	
 
    	
(542
    	
)
    	
—
    	
 
    
	
Total finance income
    	
 
    	
$
    	
(2,000
    	
)
    	
$
    	
(14,514
    	
)
    

 

12.       TRADE AND OTHER RECEIVABLES

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Trade receivables
    	
 
    	
117,027
    	
 
    	
105,008
    	
 
    
	
Other receivables
    	
 
    	
2,212
    	
 
    	
2,480
    	
 
    
	
Less: allowance for doubtful accounts
    	
 
    	
(3,972
    	
)
    	
(2,590
    	
)
    
	
Less: allowance for returns and discounts
    	
 
    	
(1,585
    	
)
    	
(1,456
    	
)
    
	
Total trade and other receivables
    	
 
    	
$
    	
113,682
    	
 
    	
$
    	
103,442
    	
 
    
								

 

On March 16, 2010, the Company announced a voluntary product recall of certain junior and youth composite sticks manufactured by a supplier. The affected composite sticks were manufactured during the period May 24, 2006 to January 21, 2010. This recall has not had a material impact on the Company’s results of operations, as the Company was indemnified by

 

24

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

the supplier of the composite sticks. The receivable recorded in accordance with the terms of a settlement and release agreement between the Company and the supplier totaled $1,425 at May 31, 2012. As of May 31, 2013, the supplier has fulfilled the obligations under the terms of the settlement and release agreement.

 

The Company’s exposure to credit and impairment losses related to trade and other receivables is disclosed in Note 6 — Risk.

 

13.       INVENTORIES

 

Inventories include the following:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Raw materials
    	
 
    	
$
    	
3,101
    	
 
    	
$
    	
1,077
    	
 
    
	
Work in process
    	
 
    	
136
    	
 
    	
72
    	
 
    
	
Finished goods
    	
 
    	
106,510
    	
 
    	
83,031
    	
 
    
	
Inventories
    	
 
    	
$
    	
109,747
    	
 
    	
$
    	
84,180
    	
 
    

 

 

The cost of inventories recognized as an expense and included in cost of goods sold for the year ended May 31, 2013 was $209,191 (2012 - $197,769). During the year ended May 31, 2013, the Company recorded in cost of goods sold $1,003 (2012 - $681) of write-downs of inventory as a result of net realizable value being lower than cost and no inventory write-downs recognized in previous years were reversed.

 

25

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

14.       PROPERTY, PLANT AND EQUIPMENT

 

	
 
    	
 
    	
 
    	
 
    	
Data
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
Machinery &
    	
 
    	
Processing
    	
 
    	
Furniture &
    	
 
    	
Leasehold
    	
 
    	
Construction
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
Equipment
    	
 
    	
Equipment
    	
 
    	
Fixtures
    	
 
    	
Improvements
    	
 
    	
in Progress
    	
 
    	
Total
    	
 
    
	
Cost
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance June 1, 2011
    	
 
    	
$
    	
5,177
    	
 
    	
$
    	
1,332
    	
 
    	
$
    	
2,248
    	
 
    	
$
    	
3,822
    	
 
    	
$
    	
1,270
    	
 
    	
$
    	
13,849
    	
 
    
	
Additions and transfers
    	
 
    	
771
    	
 
    	
1,508
    	
 
    	
1,415
    	
 
    	
232
    	
 
    	
(1,011
    	
)
    	
2,915
    	
 
    
	
Disposals
    	
 
    	
(578
    	
)
    	
24
    	
 
    	
(10
    	
)
    	
(1,223
    	
)
    	
—
    	
 
    	
(1,787
    	
)
    
	
Exchange difference and other
    	
 
    	
53
    	
 
    	
81
    	
 
    	
(83
    	
)
    	
15
    	
 
    	
(19
    	
)
    	
47
    	
 
    
	
Balance May 31, 2012
    	
 
    	
$
    	
5,423
    	
 
    	
$
    	
2,945
    	
 
    	
$
    	
3,570
    	
 
    	
$
    	
2,846
    	
 
    	
$
    	
240
    	
 
    	
$
    	
15,024
    	
 
    
	
Additions and transfers
    	
 
    	
361
    	
 
    	
1,164
    	
 
    	
1,037
    	
 
    	
256
    	
 
    	
625
    	
 
    	
3,443
    	
 
    
	
Acquisition of business
    	
 
    	
1,670
    	
 
    	
123
    	
 
    	
184
    	
 
    	
675
    	
 
    	
—
    	
 
    	
2,652
    	
 
    
	
Disposals
    	
 
    	
(433
    	
)
    	
(219
    	
)
    	
(33
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(685
    	
)
    
	
Exchange difference and other
    	
 
    	
(8
    	
)
    	
(19
    	
)
    	
19
    	
 
    	
(6
    	
)
    	
(5
    	
)
    	
(19
    	
)
    
	
Balance May 31, 2013
    	
 
    	
$
    	
7,013
    	
 
    	
$
    	
3,994
    	
 
    	
$
    	
4,777
    	
 
    	
$
    	
3,771
    	
 
    	
$
    	
860
    	
 
    	
$
    	
20,415
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance June 1, 2011
    	
 
    	
$
    	
(2,975
    	
)
    	
$
    	
(896
    	
)
    	
$
    	
(858
    	
)
    	
$
    	
(2,071
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(6,800
    	
)
    
	
Charge for the year
    	
 
    	
(681
    	
)
    	
(490
    	
)
    	
(634
    	
)
    	
(359
    	
)
    	
—
    	
 
    	
(2,164
    	
)
    
	
Disposals
    	
 
    	
530
    	
 
    	
(24
    	
)
    	
9
    	
 
    	
1,200
    	
 
    	
—
    	
 
    	
1,715
    	
 
    
	
Exchange difference and other
    	
 
    	
(146
    	
)
    	
(79
    	
)
    	
39
    	
 
    	
(45
    	
)
    	
—
    	
 
    	
(231
    	
)
    
	
Balance May 31, 2012
    	
 
    	
$
    	
(3,272
    	
)
    	
$
    	
(1,489
    	
)
    	
$
    	
(1,444
    	
)
    	
$
    	
(1,275
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(7,480
    	
)
    
	
Charge for the year
    	
 
    	
(1,039
    	
)
    	
(701
    	
)
    	
(956
    	
)
    	
(376
    	
)
    	
—
    	
 
    	
(3,072
    	
)
    
	
Disposals
    	
 
    	
413
    	
 
    	
219
    	
 
    	
33
    	
 
    	
—
    	
 
    	
—
    	
 
    	
665
    	
 
    
	
Exchange difference and other
    	
 
    	
1
    	
 
    	
(20
    	
)
    	
(3
    	
)
    	
3
    	
 
    	
—
    	
 
    	
(19
    	
)
    
	
Balance May 31, 2013
    	
 
    	
$
    	
(3,897
    	
)
    	
$
    	
(1,991
    	
)
    	
$
    	
(2,370
    	
)
    	
$
    	
(1,648
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(9,906
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net book value
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
At May 31, 2012
    	
 
    	
$
    	
2,151
    	
 
    	
$
    	
1,456
    	
 
    	
$
    	
2,126
    	
 
    	
$
    	
1,571
    	
 
    	
$
    	
240
    	
 
    	
$
    	
7,544
    	
 
    
	
At May 31, 2013
    	
 
    	
$
    	
3,116
    	
 
    	
$
    	
2,003
    	
 
    	
$
    	
2,407
    	
 
    	
$
    	
2,123
    	
 
    	
$
    	
860
    	
 
    	
$
    	
10,509
    	
 
    

 

The Company has contractual commitments at May 31, 2013 to purchase property, plant and equipment for $52.

 

Depreciation expense is included in the consolidated statement of income in the following captions:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Cost of goods sold
    	
 
    	
$
    	
262
    	
 
    	
$
    	
348
    	
 
    
	
Selling, general and administrative expenses
    	
 
    	
2,810
    	
 
    	
1,816
    	
 
    
	
Total depreciation expense
    	
 
    	
$
    	
3,072
    	
 
    	
$
    	
2,164
    	
 
    

 

26

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

15.       GOODWILL AND INTANGIBLE ASSETS

 

	
 
    	
 
    	
 
    	
 
    	
Trade names
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
&
    	
 
    	
Purchased
    	
 
    	
Customer
    	
 
    	
Non-compete
    	
 
    	
Computer
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
Goodwill
    	
 
    	
Trademarks
    	
 
    	
Technology
    	
 
    	
Relationships
    	
 
    	
Agreements
    	
 
    	
Software
    	
 
    	
Leases
    	
 
    	
Total
    	
 
    
	
Cost
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance   June 1, 2011
    	
 
    	
$
    	
8,900
    	
 
    	
$
    	
59,522
    	
 
    	
$
    	
9,321
    	
 
    	
$
    	
14,379
    	
 
    	
$
    	
505
    	
 
    	
$
    	
4,834
    	
 
    	
$
    	
2,722
    	
 
    	
$
    	
100,183
    	
 
    
	
Additions
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,311
    	
 
    	
—
    	
 
    	
1,311
    	
 
    
	
Disposals
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(10
    	
)
    	
(2,167
    	
)
    	
(2,177
    	
)
    
	
Exchange   difference
    	
 
    	
—
    	
 
    	
(2,352
    	
)
    	
(387
    	
)
    	
(625
    	
)
    	
—
    	
 
    	
(329
    	
)
    	
(98
    	
)
    	
(3,791
    	
)
    
	
Balance   May 31, 2012
    	
 
    	
$
    	
8,900
    	
 
    	
$
    	
57,170
    	
 
    	
$
    	
8,934
    	
 
    	
$
    	
13,754
    	
 
    	
$
    	
505
    	
 
    	
$
    	
5,806
    	
 
    	
$
    	
457
    	
 
    	
$
    	
95,526
    	
 
    
	
Acquisition   of a business
    	
 
    	
38,632
    	
 
    	
15,683
    	
 
    	
3,830
    	
 
    	
14,012
    	
 
    	
540
    	
 
    	
75
    	
 
    	
—
    	
 
    	
72,772
    	
 
    
	
Additions
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
3,986
    	
 
    	
—
    	
 
    	
3,986
    	
 
    
	
Disposals
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(82
    	
)
    	
—
    	
 
    	
(82
    	
)
    
	
Exchange   difference
    	
 
    	
(26
    	
)
    	
(25
    	
)
    	
3
    	
 
    	
(33
    	
)
    	
—
    	
 
    	
26
    	
 
    	
—
    	
 
    	
(55
    	
)
    
	
Balance   May 31, 2013
    	
 
    	
$
    	
47,506
    	
 
    	
$
    	
72,828
    	
 
    	
$
    	
12,767
    	
 
    	
$
    	
27,733
    	
 
    	
$
    	
1,045
    	
 
    	
$
    	
9,811
    	
 
    	
$
    	
457
    	
 
    	
$
    	
172,147
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Amortization
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance   June 1, 2011
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(1,836
    	
)
    	
$
    	
(8,634
    	
)
    	
$
    	
(101
    	
)
    	
$
    	
(1,680
    	
)
    	
$
    	
(2,295
    	
)
    	
$
    	
(14,546
    	
)
    
	
Charge   for the year
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(725
    	
)
    	
(1,536
    	
)
    	
(101
    	
)
    	
(714
    	
)
    	
(290
    	
)
    	
(3,366
    	
)
    
	
Disposals
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
10
    	
 
    	
2,167
    	
 
    	
2,177
    	
 
    
	
Exchange   difference
    	
 
    	
—
    	
 
    	
—
    	
 
    	
98
    	
 
    	
433
    	
 
    	
—
    	
 
    	
252
    	
 
    	
123
    	
 
    	
906
    	
 
    
	
Balance   May 31, 2012
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(2,463
    	
)
    	
$
    	
(9,737
    	
)
    	
$
    	
(202
    	
)
    	
$
    	
(2,132
    	
)
    	
$
    	
(295
    	
)
    	
$
    	
(14,829
    	
)
    
	
Charge   for the year
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,140
    	
)
    	
(2,403
    	
)
    	
(349
    	
)
    	
(799
    	
)
    	
(74
    	
)
    	
(4,765
    	
)
    
	
Disposals
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
46
    	
 
    	
—
    	
 
    	
46
    	
 
    
	
Exchange   difference
    	
 
    	
—
    	
 
    	
—
    	
 
    	
14
    	
 
    	
22
    	
 
    	
—
    	
 
    	
6
    	
 
    	
3
    	
 
    	
45
    	
 
    
	
Balance   May 31, 2013
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(3,589
    	
)
    	
$
    	
(12,118
    	
)
    	
$
    	
(551
    	
)
    	
$
    	
(2,879
    	
)
    	
$
    	
(366
    	
)
    	
$
    	
(19,503
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net book value
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
At   May 31, 2012
    	
 
    	
$
    	
8,900
    	
 
    	
$
    	
57,170
    	
 
    	
$
    	
6,471
    	
 
    	
$
    	
4,017
    	
 
    	
$
    	
303
    	
 
    	
$
    	
3,674
    	
 
    	
$
    	
162
    	
 
    	
$
    	
80,697
    	
 
    
	
At   May 31, 2013
    	
 
    	
$
    	
47,506
    	
 
    	
$
    	
72,828
    	
 
    	
$
    	
9,178
    	
 
    	
$
    	
15,615
    	
 
    	
$
    	
494
    	
 
    	
$
    	
6,932
    	
 
    	
$
    	
91
    	
 
    	
$
    	
152,644
    	
 
    

 

The Company has contractual commitments at May 31, 2013 to purchase computer software for $495.

 

Amortization expense is included in the consolidated statement of income in the following captions:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Cost of goods sold
    	
 
    	
$
    	
3,640
    	
 
    	
$
    	
2,573
    	
 
    
	
Selling, general and administrative expenses
    	
 
    	
1,125
    	
 
    	
793
    	
 
    
	
Total amortization expense
    	
 
    	
$
    	
4,765
    	
 
    	
$
    	
3,366
    	
 
    

 

The Company tested its intangible assets for impairment based on the methodologies outlined below. When a discounted cash flow was used to measure the recoverable amount, the calculations utilized revenue and cash flow projections based on anticipated growth over a five year period. Revenue growth was based on management’s assessment of inflation, economic projections, and market factors on price changes in the geographic locations in which the Company operates. Discount rates used were pre-tax and reflect specific risk relating to the relevant intangible assets.

 

Indefinite life intangible assets

 

The recoverable amount of goodwill and trade names and trademarks are based on the fair value less cost to sell calculations. The Company has determined that it has one cash generating unit for goodwill. The fair value of the goodwill was evaluated using the market value of the Company based on the closing share price at March 1, 2013 and 2012, respectively. The trade names and trademarks were evaluated using the relief from royalty method. The Bauer trade name and trademark was

 

27

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

evaluated based on a royalty rate of 5.0% (2012 — 5.0%), a discount rate of 10.8% (2012 — 10.2%) and a long-term terminal growth rate at the end of the five year period of 3.0% (2012 — 3.0%). The Maverik trade name and trademark was evaluated based on a royalty rate of 4.0% (2012 — 4.0%), a discount rate of 16.7% (2012 — 20.7%) and a long-term terminal growth rate at the end of the five year period of 5.0% (2012 — 5.0%). The Cascade trade name and trademark was evaluated based on a royalty rate of 8.0%, a discount rate of 12.0% and a long-term terminal growth rate at the end of the five year period of 4.0%. The Inaria trade name and trademark was evaluated based on a royalty rate of 2.0%, a discount rate of 25.4% and a long-term terminal growth rate at the end of the five year period of 2.0%. The Combat trade name and trademark was evaluated based on a royalty rate of 0.5%, a discount rate of 22.0% and a long-term terminal growth rate at the end of the five year period of 3.0%.

 

In both fiscal 2013 and 2012, the impairment test did not lead to an impairment charge for any of the indefinite lived intangible assets. The key sensitivities in the impairment test are the discount rate and terminal growth rate. Therefore, the Company carried out sensitivity analysis incorporating various scenarios and using reasonable possible changes in the key assumptions. No impairment losses were revealed.

 

Definite life intangible assets

 

Purchased technology, customer relationships, non-compete agreements, computer software and leases were reviewed for indications of impairment. There were no indicators of impairment.

 

16.       INCOME TAXES

 

The expense for income taxes consists of the following:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Tax recognized in profit or loss:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current tax expense (benefit):
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current year
    	
 
    	
$
    	
6,679
    	
 
    	
$
    	
500
    	
 
    
	
Adjustment for prior years
    	
 
    	
(918
    	
)
    	
(914
    	
)
    
	
Total
    	
 
    	
5,761
    	
 
    	
(414
    	
)
    
	
Deferred tax expense (benefit):
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Origination and reversal of temporary differences
    	
 
    	
3,969
    	
 
    	
12,457
    	
 
    
	
Change in unrecognized tax assets
    	
 
    	
(178
    	
)
    	
2,971
    	
 
    
	
Change in enacted rates
    	
 
    	
265
    	
 
    	
(1,892
    	
)
    
	
Total
    	
 
    	
4,056
    	
 
    	
13,536
    	
 
    
	
Total tax recognized in profit or loss
    	
 
    	
$
    	
9,817
    	
 
    	
$
    	
13,122
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Tax benefit recognized directly in equity:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Change in unrecognized tax assets
    	
 
    	
2,859
    	
 
    	
—
    	
 
    
	
Share-based compensation
    	
 
    	
1,968
    	
 
    	
1,803
    	
 
    
	
Total
    	
 
    	
$
    	
4,827
    	
 
    	
$
    	
1,803
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Tax benefit recognized in other comprehensive   income:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Defined benefit plans
    	
 
    	
$
    	
47
    	
 
    	
$
    	
117
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Tax benefit (expense) recognized in goodwill and   others:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Intangibles and others
    	
 
    	
$
    	
(13,171
    	
)
    	
$
    	
—
    	
 
    

 

The reconciliation of the income tax expense expected based on the combined Canadian federal and provincial income tax rates to the expense for income taxes included in the consolidated statements of comprehensive income is as follows:

 

28

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Combined basic Canadian federal and provincial   income tax rate
    	
 
    	
26.6
    	
%
    	
27.5
    	
%
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Provision for income taxes based on above rate
    	
 
    	
$
    	
9,360
    	
 
    	
$
    	
11,922
    	
 
    
	
Foreign tax rate differences
    	
 
    	
1,198
    	
 
    	
537
    	
 
    
	
Share-based compensation
    	
 
    	
332
    	
 
    	
696
    	
 
    
	
Gain on bargain purchase
    	
 
    	
(361
    	
)
    	
—
    	
 
    
	
Change in unrecognized tax assets
    	
 
    	
(178
    	
)
    	
2,971
    	
 
    
	
Change in enacted rates
    	
 
    	
265
    	
 
    	
(1,892
    	
)
    
	
Return to provision and other prior year items
    	
 
    	
(918
    	
)
    	
(887
    	
)
    
	
Other
    	
 
    	
119
    	
 
    	
(225
    	
)
    
	
Income tax expense in the consolidated statements   of comprehensive income
    	
 
    	
$
    	
9,817
    	
 
    	
$
    	
13,122
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Effective tax rate
    	
 
    	
28.0
    	
%
    	
30.3
    	
%
    

 

The change in the effective tax rate was driven by a favorable impact from the non-taxable gain on bargain purchase on the acquisition of Combat and favorable adjustments related to prior period items, partially offset by an increase in the Company’s estimated U.S. state tax rates.

 

Deferred income tax balances are detailed in the following table:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Deferred income tax assets
    	
 
    	
$
    	
4,985
    	
 
    	
$
    	
16,423
    	
 
    
	
Deferred income tax liabilities
    	
 
    	
(918
    	
)
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
4,067
    	
 
    	
$
    	
16,423
    	
 
    

 

Deferred income tax assets are recognized only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences or tax losses can be utilized. The tax effect of temporary differences and carryforwards, which give rise to net deferred income tax balances, consists of the following:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Allowance for doubtful accounts
    	
 
    	
$
    	
2,174
    	
 
    	
$
    	
1,379
    	
 
    
	
Inventory
    	
 
    	
1,988
    	
 
    	
1,781
    	
 
    
	
Accrued expenses
    	
 
    	
2,204
    	
 
    	
3,432
    	
 
    
	
Net operating loss carryforwards
    	
 
    	
2,232
    	
 
    	
2,918
    	
 
    
	
Share-based compensation and defined benefit plans
    	
 
    	
8,351
    	
 
    	
5,858
    	
 
    
	
Property, plant and equipment
    	
 
    	
851
    	
 
    	
(1,972
    	
)
    
	
Intangible assets
    	
 
    	
(16,113
    	
)
    	
467
    	
 
    
	
Deferred research expenses
    	
 
    	
—
    	
 
    	
1,750
    	
 
    
	
Investment tax credit carryforwards
    	
 
    	
1,284
    	
 
    	
1,322
    	
 
    
	
Other
    	
 
    	
1,096
    	
 
    	
(512
    	
)
    
	
Total
    	
 
    	
$
    	
4,067
    	
 
    	
$
    	
16,423
    	
 
    

 

The movement in deferred income tax balances is as follows:

 

29

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

	
 
    	
 
    	
 
    	
 
    	
Recognized
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
June 1,
    	
 
    	
in profit or
    	
 
    	
Recognized
    	
 
    	
Recognized
    	
 
    	
 
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2011
    	
 
    	
loss
    	
 
    	
in OCI
    	
 
    	
in equity
    	
 
    	
Other (1)
    	
 
    	
2012
    	
 
    
	
Allowance for doubtful accounts
    	
 
    	
$
    	
1,330 
    	
 
    	
$
    	
62
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(13
    	
)
    	
$
    	
1,379
    	
 
    
	
Inventory
    	
 
    	
1,654
    	
 
    	
127
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,781
    	
 
    
	
Accrued expenses
    	
 
    	
2,807
    	
 
    	
642
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(17
    	
)
    	
3,432
    	
 
    
	
Net operating loss carryforwards
    	
 
    	
15,981
    	
 
    	
(13,162
    	
)
    	
—
    	
 
    	
—
    	
 
    	
99
    	
 
    	
2,918
    	
 
    
	
Share-based compensation and defined benefit plans
    	
 
    	
4,595
    	
 
    	
(539
    	
)
    	
117
    	
 
    	
1,803
    	
 
    	
(118
    	
)
    	
5,858
    	
 
    
	
Property, plant and equipment
    	
 
    	
(1,023
    	
)
    	
(1,033
    	
)
    	
—
    	
 
    	
—
    	
 
    	
84
    	
 
    	
(1,972
    	
)
    
	
Intangible assets
    	
 
    	
625
    	
 
    	
(261
    	
)
    	
—
    	
 
    	
—
    	
 
    	
103
    	
 
    	
467
    	
 
    
	
Deferred research expenses
    	
 
    	
1,103
    	
 
    	
770
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(123
    	
)
    	
1,750
    	
 
    
	
Investment tax credit carryforwards
    	
 
    	
806
    	
 
    	
(207
    	
)
    	
—
    	
 
    	
—
    	
 
    	
723
    	
 
    	
1,322
    	
 
    
	
Other
    	
 
    	
(583
    	
)
    	
65
    	
 
    	
—
    	
 
    	
—
    	
 
    	
6
    	
 
    	
(512
    	
)
    
	
Total
    	
 
    	
$
    	
27,295
    	
 
    	
$
    	
(13,536
    	
)
    	
$
    	
117
    	
 
    	
$
    	
1,803
    	
 
    	
$
    	
744
    	
 
    	
$
    	
16,423
    	
 
    

 

	
 
    	
 
    	
 
    	
 
    	
Recognized
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
May 31,
    	
 
    	
in profit or
    	
 
    	
Recognized
    	
 
    	
Recognized
    	
 
    	
 
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2012
    	
 
    	
loss
    	
 
    	
in OCI
    	
 
    	
in equity
    	
 
    	
Other (1)
    	
 
    	
2013
    	
 
    
	
Allowance for doubtful accounts
    	
 
    	
$
    	
1,379
    	
 
    	
$
    	
483
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
312
    	
 
    	
$
    	
2,174
    	
 
    
	
Inventory
    	
 
    	
1,781
    	
 
    	
653
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(446
    	
)
    	
1,988
    	
 
    
	
Accrued expenses
    	
 
    	
3,432
    	
 
    	
(1,383
    	
)
    	
—
    	
 
    	
—
    	
 
    	
155
    	
 
    	
2,204
    	
 
    
	
Net operating loss carryforwards
    	
 
    	
2,918
    	
 
    	
(3,821
    	
)
    	
—
    	
 
    	
2,923
    	
 
    	
212
    	
 
    	
2,232
    	
 
    
	
Share-based compensation and defined
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
benefit plans
    	
 
    	
5,858
    	
 
    	
478
    	
 
    	
47
    	
 
    	
1,968
    	
 
    	
—
    	
 
    	
8,351
    	
 
    
	
Property, plant and equipment
    	
 
    	
(1,972
    	
)
    	
3,514
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(691
    	
)
    	
851
    	
 
    
	
Intangible assets
    	
 
    	
467
    	
 
    	
(4,043
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(12,537
    	
)
    	
(16,113
    	
)
    
	
Deferred research expenses
    	
 
    	
1,750
    	
 
    	
(1,750
    	
)
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Investment tax credit carryforwards
    	
 
    	
1,322
    	
 
    	
269
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(307
    	
)
    	
1,284
    	
 
    
	
Other
    	
 
    	
(512
    	
)
    	
1,544
    	
 
    	
—
    	
 
    	
—
    	
 
    	
64
    	
 
    	
1,096
    	
 
    
	
Total
    	
 
    	
$
    	
16,423
    	
 
    	
$
    	
(4,056
    	
)
    	
$
    	
47
    	
 
    	
$
    	
4,891
    	
 
    	
$
    	
(13,238
    	
)
    	
$
    	
4,067
    	
 
    

 

(1)       Other comprises research credits, goodwill and foreign exchange rates effects.

 

Deferred tax assets have not been recognized in respect of the following items:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Tax losses
    	
 
    	
$
    	
—
    	
 
    	
$
    	
20,340
    	
 
    
	
Share issuance costs
    	
 
    	
—
    	
 
    	
1,908
    	
 
    
	
Total unrecognized deferred tax assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
22,248
    	
 
    

 

As of May 31, 2013 and 2012 the Company has Canadian non-capital loss carryforwards of $4,670 and $15,630, respectively. Included in the non-capital loss carryforward as of May 31, 2012 is $2,789 related to amortization of share issuance costs which the Company did not expect to be realizable as it did not expect future earnings in the legal entity that incurred those costs to offset the net operating losses. During the year ended May 31, 2013, the Company undertook a tax planning strategy to generate earnings in that entity which allowed the Company to recognize the asset.

 

As of May 31, 2013 and 2012, the Company has intangible assets (net of amortization) exclusive of computer software and deferred financing costs in the U.S. of $30,306 and $29,774, respectively, which are amortizable for income tax purposes. These U.S. intangible assets are amortizable for income tax purposes on a straight line basis over 15 years. As of May 31, 2013 and 2012 the Company has intangible assets (net of amortization) exclusive of computer software and deferred

 

30

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

financing costs in Canada of $34,158 and $42,586, respectively, which is amortizable for income tax purposes. Under Canadian tax law 75% of the Canadian tax intangible assets are amortizable for income tax purposes at a rate of 7% per year.

 

The Company is subject to examination in various jurisdictions for the tax years ended May 31, 2013 and 2012. However, as a condition of the stock purchase agreement with Nike, Inc. (“Nike”) in April 2008, the Company is indemnified by Nike for any tax exposures related to the pre-acquisition period. The Company’s acquired Mission entities are also subject to examination in periods prior to the acquisition; however, as a condition to the stock purchase agreement with the Mission stockholders, the Company is indemnified for any tax exposures related to the pre-acquisition period for Mission and its subsidiaries. The open tax years after consideration of the indemnifications are May 31, 2011, May 31, 2010, year beginning April 18, 2008 and ending May 31, 2008 and one day year ended April 17, 2008. The Company does not anticipate any changes as a result of any ongoing examinations by taxing authorities.

 

For the year ended May 31, 2012, the Company has taken on a tax position in the amount of $228 it believes to be less than fifty percent probable to be sustained in an examination. The Company’s position on this has not changed for the year ended May 31, 2013. The Company has taken no new tax positions that are less than fifty percent probable of being sustained in an examination.

 

The Company has recognized a deferred income tax liability in the amount of $789 for the undistributed earnings of two of its subsidiaries in the current or prior years for the earnings it expects to repatriate. The Company has not recognized a deferred income tax liability for the undistributed earnings of its other subsidiaries because the Company currently does not expect to sell those investments, and for those undistributed earnings that would become taxable, there is no current intention to repatriate the earnings in total of $427 from its foreign subsidiaries which are owned directly by Bauer Hockey Corp., which is a Canadian corporation.

 

17.       DEBT

 

The total debt outstanding is comprised of:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Revolving loan
    	
 
    	
$
    	
67,683
    	
 
    	
$
    	
53,080
    	
 
    
	
Term loan due 2016
    	
 
    	
107,854
    	
 
    	
87,309
    	
 
    
	
Finance lease obligations
    	
 
    	
67
    	
 
    	
150
    	
 
    
	
Financing costs
    	
 
    	
(3,917
    	
)
    	
(4,417
    	
)
    
	
Total debt
    	
 
    	
$
    	
171,687
    	
 
    	
$
    	
136,122
    	
 
    
	
Current
    	
 
    	
$
    	
10,774
    	
 
    	
$
    	
9,195
    	
 
    
	
Non-current
    	
 
    	
160,913
    	
 
    	
126,927
    	
 
    
	
Total debt
    	
 
    	
$
    	
171,687
    	
 
    	
$
    	
136,122
    	
 
    

 

On June 29, 2012, the Company amended the previous credit facility (the “Amended Credit Facility”) to increase its borrowing capacity. The Amended Credit Facility is comprised of a (i) $130,000 term loan facility, denominated in both Canadian dollars and U.S. dollars and (ii) $145,000 revolving loan, denominated in both Canadian dollars and U.S. dollars, the availability of which is subject to meeting certain borrowing base requirements, such as eligible accounts receivable and inventory. The revolving loan includes a $20,000 letter of credit subfacility and a $10,000 swing line loan facility. In addition, the Company may, under certain circumstances and subject to receipt of additional commitments from existing lenders and/or new lenders, increase the size of the Amended Credit Facility in an aggregate amount of up to $30,000. The term loan and the revolving loan each mature on March 10, 2016. In connection with the Amended Credit Facility, the Company incurred $1,569 in fees, of which $304 was recognized in selling, general and administrative expenses in the year ended May 31, 2013 and $1,265 was capitalized.

 

The interest rates per annum applicable to the loans under the Amended Credit Facility equal an applicable margin percentage, plus, at the Company’s option depending on the currency of borrowing, (i) the U.S. base rate/Canadian Base rate

 

31

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

or (ii) LIBOR/Bankers Acceptance rate. The applicable margin percentages and the unused commitment fee will be subject to adjustment based upon the ratio of the total debt to Adjusted EBITDA as follows:

 

	
Total Debt to Adjusted EBITDA
    	
 
    	
Base Rate/
    Canadian Base Rate
    	
 
    	
LIBOR/BA
   Rate
    	
 
    	
Unused
    Commitment
    Fee
    	
 
    
	
Equal to or greater than 3.0x
    	
 
    	
1.25
    	
%   
    	
2.50
    	
%
    	
0.50
    	
%
    
	
Equal to or greater than 2.5x but less than 3.0x
    	
 
    	
1.00
    	
%
    	
2.25
    	
%
    	
0.45
    	
%
    
	
Equal to or greater than 2.0x but less than 2.5x
    	
 
    	
0.75
    	
%
    	
2.00
    	
%
    	
0.40
    	
%
    
	
Less than 2.0x
    	
 
    	
0.50
    	
%
    	
1.75
    	
%
    	
0.35
    	
%
    

 

Beginning with a first installment on August 31, 2012, the Amended Credit Facility requires scheduled quarterly payments in the amount of 7.5% of the term loan per annum for each of years one to three. In year four, payments shall consist of three quarterly payments of 1.875% of the original principal amount and a fourth and final payment of the entire remaining unpaid balance then outstanding due on maturity. For a period of 30 consecutive days between January 15 and March 15 of each year, the Company cannot have advances under the revolving loan outstanding in a maximum aggregate principal amount exceeding $65,000. Maturities of debt in each of the fiscal years ending May 31 are as follows:

 

	
2014
    	
 
    	
$
    	
10,771
    	
 
    
	
2015
    	
 
    	
8,083
    	
 
    
	
2016
    	
 
    	
152,833
    	
 
    
	
Total debt
    	
 
    	
$
    	
171,687
    	
 
    

 

The Amended Credit Facility includes covenants that require the Company to maintain a minimum fixed charge ratio, a minimum leverage ratio and maximum capital expenditures. As of May 31, 2013, the Company was in compliance with the covenants required under the Amended Credit Facility.

 

The interest rate on the revolving loan for the year ended May 31, 2013 ranged from 2.52% to 5.50% (2012 — 3.69% to 5.50%). At May 31, 2013 there are three letters of credit in the amount of $1,532 outstanding under the revolving loan.

 

The interest rate on the term loan for the year ended May 31, 2013 ranged from 2.53% to 5.50% (2012 — 3.75% to 5.50%). Total repayments on the term loan for the year ended May 31, 2013 were $9,551.

 

32

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

18.       ACCRUED LIABILITIES

 

Accrued liabilities include the following:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Accrued payroll and related costs, excluding taxes
    	
 
    	
$
    	
11,286
    	
 
    	
$
    	
12,437
    	
 
    
	
Accrued advertising and volume rebate
    	
 
    	
5,788
    	
 
    	
6,086
    	
 
    
	
Accrued legal fees
    	
 
    	
601
    	
 
    	
1,068
    	
 
    
	
Accrued endorsements and royalties
    	
 
    	
1,023
    	
 
    	
966
    	
 
    
	
Customer credit balances
    	
 
    	
1,008
    	
 
    	
407
    	
 
    
	
Acquisition contingent consideration
    	
 
    	
—
    	
 
    	
2,228
    	
 
    
	
Other
    	
 
    	
5,966
    	
 
    	
4,195
    	
 
    
	
Total
    	
 
    	
$
    	
25,672
    	
 
    	
$
    	
27,387
    	
 
    

 

19.       PROVISIONS

 

Provisions include the following:

 

	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Onerous
    	
 
    	
Product
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
Warranty
    	
 
    	
Product recall
    	
 
    	
contracts
    	
 
    	
Liability
    	
 
    	
Total
    	
 
    
	
Balance May 31, 2012
    	
 
    	
$
    	
1,501
    	
 
    	
$
    	
13
    	
 
    	
$
    	
650
    	
 
    	
$
    	
—
    	
 
    	
$
    	
2,164
    	
 
    
	
Acquisition of a business
    	
 
    	
382
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
382
    	
 
    
	
Additions
    	
 
    	
4,769
    	
 
    	
—
    	
 
    	
210
    	
 
    	
265
    	
 
    	
5,244
    	
 
    
	
Reversals
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(112
    	
)
    	
(112
    	
)
    
	
Utilizations
    	
 
    	
(4,945
    	
)
    	
(13
    	
)
    	
(383
    	
)
    	
—
    	
 
    	
(5,341
    	
)
    
	
Exchange differences
    	
 
    	
82
    	
 
    	
—
    	
 
    	
5
    	
 
    	
—
    	
 
    	
87
    	
 
    
	
Balance May 31, 2013
    	
 
    	
$
    	
1,789
    	
 
    	
$
    	
—
    	
 
    	
$
    	
482
    	
 
    	
$
    	
153
    	
 
    	
$
    	
2,424
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current
    	
 
    	
$
    	
1,789
    	
 
    	
$
    	
—
    	
 
    	
$
    	
99
    	
 
    	
$
    	
153
    	
 
    	
$
    	
2,041
    	
 
    
	
Non-current
    	
 
    	
—
    	
 
    	
—
    	
 
    	
383
    	
 
    	
—
    	
 
    	
383
    	
 
    
	
Balance May 31, 2013
    	
 
    	
$
    	
1,789
    	
 
    	
$
    	
—
    	
 
    	
$
    	
482
    	
 
    	
$
    	
153
    	
 
    	
$
    	
2,424
    	
 
    

 

Warranty: This provision represents the estimated cost of fulfilling warranty obligations.

 

Onerous contracts: The Company has recorded provisions for onerous leases resulting from the Mission Itech Hockey, Inc. acquisition on September 22, 2008.

 

Product Liability: This provision represents the estimated cost of a product liability claim.

 

20.       RETIREMENT BENEFIT OBLIGATIONS

 

Defined benefit plans

 

The Company has two defined benefit pension plans. These plans are not registered, are not funded, and do not accept new participants. Additionally, current participants do not earn any additional benefits. The Canadian defined benefit pension plan was available to designated senior management and executives. The US defined benefit pension plan was available to designated employees. Payouts under these plans are dependent on the Company’s ability to pay at the time the participants are entitled to receive their payments.

 

The Company also pays all of the costs of a post-retirement life insurance plan which is available to most Canadian employees. This plan is not funded.

 

The IAS 19 results are based on an actuarial valuation by a qualified actuary. The following table provides the defined benefit plan liabilities:

 

33

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Post-retirement life insurance
    	
 
    	
Total retirement benefit
    	
 
    
	
 
    	
 
    	
Defined benefit pension plan
    	
 
    	
plan
    	
 
    	
obligations
    	
 
    
	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    	
2013
    	
 
    	
2012
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Current
    	
 
    	
358
    	
 
    	
364
    	
 
    	
—
    	
 
    	
—
    	
 
    	
358
    	
 
    	
364
    	
 
    
	
Non-current
    	
 
    	
4,913
    	
 
    	
4,943
    	
 
    	
609
    	
 
    	
405
    	
 
    	
5,522
    	
 
    	
5,348
    	
 
    
	
Total
    	
 
    	
$
    	
5,271
    	
 
    	
$
    	
5,307
    	
 
    	
$
    	
609
    	
 
    	
$
    	
405
    	
 
    	
$
    	
5,880
    	
 
    	
$
    	
5,712
    	
 
    
																				

 

Changes in the present value of the defined benefit pension plan are as follows:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Beginning balance
    	
 
    	
$
    	
5,307
    	
 
    	
$
    	
5,236
    	
 
    
	
Interest cost
    	
 
    	
236
    	
 
    	
273
    	
 
    
	
Benefits paid
    	
 
    	
(358
    	
)
    	
(363
    	
)
    
	
Exchange rate gain
    	
 
    	
(15
    	
)
    	
(256
    	
)
    
	
Actuarial losses
    	
 
    	
101
    	
 
    	
417
    	
 
    
	
Ending balance
    	
 
    	
$
    	
5,271
    	
 
    	
$
    	
5,307
    	
 
    

 

The following table provides the principal actuarial assumptions used in determining the defined benefit pension obligation:

 

	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Canadian Plan
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Discount rate
    	
 
    	
4.10
    	
%
    	
4.40
    	
%
    
	
Inflation rate
    	
 
    	
2.10
    	
%
    	
2.10
    	
%
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
U.S. Plan
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Discount rate
    	
 
    	
3.50
    	
%
    	
3.60
    	
%
    
	
Inflation rate
    	
 
    	
N/A
    	
 
    	
N/A
    	
 
    

 

The discount rate was selected based on a review of current market interest rates of high quality, fixed rate debt securities adjusted to reflect the duration of expected future cash outflows for the defined pension benefit payments. The rate is determined by management with the aid of third-party actuaries. The mortality table used for the defined benefit plan obligation and benefit plan costs was UP-94 Generational.

 

The effect of a 1% change in the discount rate and inflation rate of the defined benefit pension obligation is reflected in the following table:

 

34

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

	
 
    	
 
    	
Discount Rate
    	
 
    	
Inflation Rate
    	
 
    
	
 
    	
 
    	
For the year ended May 31, 2013
    	
 
    	
For the year ended May 31, 2013
    	
 
    
	
 
    	
 
    	
1% Increase
    	
 
    	
1% Decrease
    	
 
    	
1% Increase
    	
 
    	
1% Decrease
    	
 
    
	
Effect on interest cost
    	
 
    	
26
    	
 
    	
(35
    	
)
    	
(2
    	
)
    	
1
    	
 
    

 

	
 
    	
 
    	
Discount Rate
    	
 
    	
Inflation Rate
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2013
    	
 
    
	
 
    	
 
    	
1% Increase
    	
 
    	
1% Decrease
    	
 
    	
1% Increase
    	
 
    	
1% Decrease
    	
 
    
	
Effect on defined benefit obligation
    	
 
    	
(468
    	
)
    	
551
    	
 
    	
(35
    	
)
    	
29
    	
 
    

 

The amounts recognized in net income and other comprehensive income for the defined benefit pension plan and the post-retirement life insurance plan was:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Recognized in profit or loss:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Selling, general and administrative expenses
    	
 
    	
$
    	
290
    	
 
    	
$
    	
273
    	
 
    
	
Recognized in other   comprehensive income (loss):
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Actuarial losses, net of taxes
    	
 
    	
$
    	
217
    	
 
    	
$
    	
299
    	
 
    

 

The cumulative actuarial losses recognized in other comprehensive income or the defined benefit pension plan and the post-retirement life insurance plan are $730. Benefits expected to be paid in the next fiscal year are $358.

 

Defined contribution plans

 

The Company has two defined contribution pension plans. A defined contribution Registered Retirement Savings Plan (“RRSP”) which is available to most Canadian employees and a defined contribution 401(k) plan that covers all employees in the United States. The terms of the RRSP provides for annual contributions by the Company as determined by executive management. Contributions to the RRSP for the years ended May 31, 2013 and 2012 were $447 and $425, respectively. The RRSP contributions are included in cost of goods sold and selling, general and administrative expenses.

 

Employees are eligible to participate in the defined contribution 401(k) plan (“401(k)”) immediately upon hire, there is no service requirement. The 401(k) plan provides for matching contributions in an amount equal to 100% of the first 4% contributed by the employee to the plan. Matching contributions to the 401(k) plan were $478 and $361 for the year ended May 31, 2013 and 2012, respectively. The 401(k) contributions are included in selling, general and administrative expenses.

 

21.       SHARE CAPITAL

 

(a)         Authorized Share Capital

 

The Company’s authorized share capital consists of an unlimited number of Common Shares without par value and an unlimited number of Proportionate Voting Shares.

 

Common Shares may at any time, at the option of the holder, be converted into Proportionate Voting Shares on the basis of 1,000 common shares for one Proportionate Voting Share. Each outstanding Proportionate Voting Share may at any time, at the option of the holder, be converted into 1,000 Common Shares. Except in limited circumstances, no fractional equity share will be issued on any conversion of another equity share. For all matters coming before shareholders, the Common Shares carry one vote per share and the Proportionate Voting Shares carry 1,000 votes per share.

 

Immediately at the time that none of the initial holders of Proportionate Voting Shares and their affiliates beneficially owns, controls or directs, directly or indirectly, any Proportionate Voting Shares: all issued and outstanding Proportionate Voting Shares will automatically convert into Common Shares on a one to 1,000 basis; the right of holders of Common Shares to 

 

35

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

convert their Common Shares into shares of Proportionate Voting Shares will be terminated; and all authorized and unissued Proportionate Voting Shares shall automatically convert into authorized and unissued Common Shares on a one to 1,000 basis; and the Board of Directors shall not be entitled to thereafter issue any Proportionate Voting Shares.

 

The holders of common shares and proportionate voting shares are entitled to receive notice of any meeting of shareholders of the Company and to attend and vote at those meetings, except those meetings at which holders of a specific class of shares are entitled to vote separately as a class under the British Columbia Business Corporations Act.

 

(b)         Issued and outstanding shares

 

The Company’s issued and outstanding shares are detailed in the table below:

 

	
 
    	
 
    	
Number of Units (1)
    	
 
    	
Amount
    	
 
    
	
Balance as of May 31, 2011
    	
 
    	
30,046,115
    	
 
    	
$
    	
107,730
    	
 
    
	
Common shares issued upon exercise of stock   options
    	
 
    	
36,810
    	
 
    	
128
    	
 
    
	
Balance as of May 31, 2012
    	
 
    	
30,082,925
    	
 
    	
$
    	
107,858
    	
 
    
	
Issuance of common shares
    	
 
    	
642,000
    	
 
    	
4,888
    	
 
    
	
Public offering
    	
 
    	
3,691,500
    	
 
    	
28,014
    	
 
    
	
Common shares issued upon exercise of stock   options
    	
 
    	
171,292
    	
 
    	
637
    	
 
    
	
Balance as of May 31, 2013
    	
 
    	
34,587,717
    	
 
    	
$
    	
141,397
    	
 
    

 

(1) Reflects a conversion of Proportionate Voting Shares to Common Shares at the conversion ratio of 1,000 Common Shares to 1 Proportionate Voting Share.

 

The acquisition of Cascade was funded by the issuance of 642,000 common shares resulting in proceeds of $4,888 ($5,008 Canadian dollars) and a public offering of 3,691,500 common shares at a price of $7.80 Canadian dollars per share for gross proceeds of $28,014 ($28,794 Canadian dollars). The Company incurred $2,098 in share offering costs in the year ended May 31, 2013. These costs are recorded as a reduction of share capital. Refer to Note 5 — Business Combinations for a description of the acquisition.

 

22.       SHARE-BASED PAYMENTS

 

Each of the Company’s stock option plans are described in detail below.

 

The Rollover Plan (equity-settled)

 

The Rollover Plan was adopted by the Board of Directors on March 10, 2011. The terms of the Rollover Plan are substantially similar to the terms of the 2011 Plan detailed below, except that all rollover options are fully vested and no further options may be granted under the Rollover Plan. An aggregate of 5,119,815 rollover options were issued under the Rollover Plan.

 

Information concerning stock option activity under the Rollover Plan for the year ended May 31, 2012 is summarized as follows:

 

36

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

	
 
    	
 
    	
 
    	
 
    	
Weighted -
    	
 
    	
Weighted -
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Average Exercise
    	
 
    	
Average Remaining
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Price (Canadian
    	
 
    	
Contractual Term
    	
 
    
	
 
    	
 
    	
Number of Options
    	
 
    	
dollars)
    	
 
    	
(years)
    	
 
    
	
Beginning of the period
    	
 
    	
5,119,815
    	
 
    	
$
    	
4.20
    	
 
    	
7.01
    	
 
    
	
Exercised (1)
    	
 
    	
(104,259
    	
)
    	
3.49
    	
 
    	
6.72
    	
 
    
	
Outstanding and exercisable at end of period
    	
 
    	
5,015,556
    	
 
    	
$
    	
4.21
    	
 
    	
6.00
    	
 
    

 

(1)         The weighted average share price at the date of exercise for the stock options exercised in the year ended May 31, 2012 was $6.80.

 

Information concerning stock option activity under the Rollover Plan for the year ended May 31, 2013 is summarized as follows:

 

	
 
    	
 
    	
 
    	
 
    	
Weighted -
    	
 
    	
Weighted -
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Average Exercise
    	
 
    	
Average Remaining
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Price (Canadian
    	
 
    	
Contractual Term
    	
 
    
	
 
    	
 
    	
Number of Options
    	
 
    	
dollars)
    	
 
    	
(years)
    	
 
    
	
Beginning of the period
    	
 
    	
5,015,556
    	
 
    	
$
    	
4.21
    	
 
    	
6.00
    	
 
    
	
Exercised (1)
    	
 
    	
(316,278
    	
)
    	
3.49
    	
 
    	
4.93
    	
 
    
	
Outstanding and exercisable at end of period
    	
 
    	
4,699,278
    	
 
    	
$
    	
4.26
    	
 
    	
5.00
    	
 
    

 

(1)         The weighted average share price at the date of exercise for the stock options exercised in the year ended May 31, 2013 was $11.18.

 

The range of exercise prices for options outstanding and exercisable at May 31, 2013 is $3.49 - $10.46 Canadian dollars. In the twelve months ended May 31, 2013, the Company recognized share-based payments expense for its Rollover Plan of $277. Share-based payments expense recognized in income is included in selling, general and administrative expense, and was credited to contributed surplus. As of May 31, 2013, there is no unrecognized cost for the Rollover Plan.

 

The 2011 Plan (equity-settled)

 

The 2011 Plan was adopted by the Board of Directors on March 10, 2011. The maximum aggregate number of common shares which may be subject to options under the 2011 Plan and any other proposed or established share compensation arrangement of the Company (other than the Rollover Plan) is 12% of the Company’s common shares outstanding from time to time (assuming the conversion of all Proportionate Voting Shares to Common Shares on the basis of 1,000 common shares for one Proportionate Voting Share). On this basis, at May 31, 2013, the maximum number of common shares available under the 2011 Plan was 4,150,526.

 

The exercise price per share of each share option shall be fixed by the Board of Directors and shall not be less than the market value of the common shares at the time of the grant. The options expire ten years from the date of grant and are subject to accelerated vesting upon change of control. For options granted to employees, officers, and directors the options vest one-fourth each year at each anniversary of the date of the grant. For options granted to consultants, the options vest one-sixth each year at each anniversary of the date of the grant. Expected volatility is estimated by considering historic average share price volatility of comparable public companies.

 

37

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

The assumptions used for options granted and the fair value at the date of grant is noted in the following table:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Weighted average expected term (in years)
    	
 
    	
6.25
    	
 
    	
6.34
    	
 
    
	
Weighted average expected volatility
    	
 
    	
36.53
    	
%
    	
36.27
    	
%
    
	
Weighted average risk-free interest rate
    	
 
    	
1.44
    	
%
    	
1.45
    	
%
    
	
Expected dividend yield
    	
 
    	
0
    	
%
    	
0
    	
%
    
	
Weighted average fair value per option granted
    	
 
    	
$
    	
3.81
    	
 
    	
$
    	
2.29
    	
 
    
								

 

Information concerning stock option activity under the 2011 Plan for year ended May 31, 2012 is summarized as follows:

 

	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Weighted - Average
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Weighted - Average
    	
 
    	
Remaining
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Exercise Price
    	
 
    	
Contractual Life
    	
 
    
	
 
    	
 
    	
Number of Options
    	
 
    	
(Canadian dollars)
    	
 
    	
(years)
    	
 
    
	
Beginning of the period
    	
 
    	
907,000
    	
 
    	
$
    	
7.50
    	
 
    	
9.78
    	
 
    
	
Granted
    	
 
    	
103,997
    	
 
    	
6.18
    	
 
    	
9.49
    	
 
    
	
Forfeited
    	
 
    	
(12,500
    	
)
    	
7.50
    	
 
    	
 
    	
 
    
	
Options outstanding at end of period
    	
 
    	
998,497
    	
 
    	
$
    	
7.36
    	
 
    	
8.85
    	
 
    
	
Exercisable at end of period
    	
 
    	
223,625
    	
 
    	
$
    	
7.50
    	
 
    	
8.77
    	
 
    

 

Information concerning stock option activity under the 2011 Plan for year ended May 31, 2013 is summarized as follows:

 

	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Weighted - Average
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Weighted - Average
    	
 
    	
Remaining
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Exercise Price
    	
 
    	
Contractual Life
    	
 
    
	
 
    	
 
    	
Number of Options
    	
 
    	
(Canadian dollars)
    	
 
    	
(years)
    	
 
    
	
Beginning of the period
    	
 
    	
998,497
    	
 
    	
$
    	
7.36
    	
 
    	
8.85
    	
 
    
	
Granted
    	
 
    	
2,340,000
    	
 
    	
10.88
    	
 
    	
9.48
    	
 
    
	
Exercised (1)
    	
 
    	
(50,000
    	
)
    	
7.50
    	
 
    	
7.78
    	
 
    
	
Cancelled
    	
 
    	
(17,000
    	
)
    	
10.54
    	
 
    	
9.34
    	
 
    
	
Forfeited
    	
 
    	
(205,500
    	
)
    	
8.89
    	
 
    	
 
    	
 
    
	
Options outstanding at end of period
    	
 
    	
3,065,997
    	
 
    	
$
    	
9.92
    	
 
    	
9.03
    	
 
    
	
Exercisable at end of period
    	
 
    	
418,750
    	
 
    	
$
    	
7.43
    	
 
    	
7.82
    	
 
    

 

(1)         The weighted average share price at the date of exercise for the stock options exercised in the year ended May 31, 2013 was $11.38.

 

The range of exercise prices for options outstanding at May 31, 2013 is $5.36 to $11.81 Canadian dollars. Estimated forfeiture rates are incorporated into the measurement of share-based payments expense for certain classes of employees. In the twelve months ended May 31, 2013, the Company recognized share-based payments expense for its 2011 Plan of $3,237 (2012 - $1,318). Share-based payments expense recognized in income is included in selling, general and administrative expense, and was credited to contributed surplus.

 

Deferred Share Unit Plan (equity-settled)

 

On September 18, 2012, the Board adopted a Deferred Share Unit Plan (the “Plan”) for the directors of the Company. The purpose of the Plan is to promote a greater alignment of interests between certain eligible directors (“Eligible Directors”) and the shareholders of the Company. Under the terms of the Plan, each Eligible Director may elect to receive director fees (i.e. retainers, meeting fees) and other cash compensation payable for services as an independent contractor paid entirely in cash or up to 100% in deferred share units (“DSUs”).

 

38

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

The number of DSUs issued to each Eligible Director who elects to receive DSUs is determined by dividing the amount of the director’s quarterly remuneration to be provided in DSUs by the fair market value of the Company’s Common Shares. For Canadian participants, the fair market value is equal to the volume weighted average trading price of the Common Shares for the five trading days ending on the trading day immediately preceding the first business day of the fiscal quarter in respect of which the DSUs are to be issued. For U.S. participants, the fair market value is equal to the closing market price of the Common Shares on the trading day immediately preceding the first business day of the fiscal quarter in respect of which the DSUs are to be issued. Each DSU represents the right of the Eligible Director to receive, on a deferred basis and at the option of the Company, an award of one Common Share issued from treasury, purchased on the open market, the equivalent cash value or a combination thereof. If an Eligible Director ceases, for any reason except as a result of death, to be a director of the Company, DSUs held by such Eligible Director may be redeemed at the election of such Eligible Director on or prior to December 15 in the first calendar year commencing after the date that the Eligible Director retires from or otherwise ceases to hold such positions. In the event of death of an Eligible Director, the Company will redeem all DSUs held by the Eligible Director within 90 days of the death. In the case of any Eligible Director who is considered to be a U.S. participant under the DSU Plan, all DSUs held by such Eligible Director will be redeemed on the earlier of (i) such Eligible Director’s separation from service with the Company for any reason and (ii) a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company.

 

The Company reserved 100,000 Common Shares for issuance under the Plan. Of the 100,000 DSU’s authorized for issuance under the plan, 90,973 were available for issuance as of May 31, 2013. During the year ended May 31, 2013, 9,027 DSU’s were issued and a total amount of $98 was credited to contributed surplus. As of May 31, 2013, 9,027 DSU’s are outstanding with related contributed surplus amounting to $98.

 

23.       EARNINGS PER SHARE

 

The computation of basic and diluted earnings per common share follows:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013 (1)
    	
 
    	
May 31, 2012 (1)
    	
 
    
	
Net income
    	
 
    	
$
    	
25,332
    	
 
    	
$
    	
30,183
    	
 
    
	
Weighted average common shares outstanding
    	
 
    	
34,107,334
    	
 
    	
30,054,586
    	
 
    
	
Assumed conversion of dilutive stock options and   awards
    	
 
    	
2,299,674
    	
 
    	
1,646,453
    	
 
    
	
Diluted weighted average common shares outstanding
    	
 
    	
36,407,008
    	
 
    	
31,701,039
    	
 
    
	
Basic earnings per common share
    	
 
    	
$
    	
0.74
    	
 
    	
$
    	
1.00
    	
 
    
	
Diluted earnings per common share
    	
 
    	
$
    	
0.70
    	
 
    	
$
    	
0.95
    	
 
    

 

(1) Reflects a conversion of Proportionate Voting Shares to Common Shares at the conversion ratio of 1,000 Common Shares to 1 Proportionate Voting Share.

 

For the year ended May 31, 2013, options to purchase an additional 745,717 (2012 — 1,628,484) common shares were outstanding, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

 

39

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

24.       FINANCIAL INSTRUMENTS

 

The classification of the Company’s financial instruments, as well as their carrying amounts and fair values, are shown in the tables below.

 

	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
 
    	
 
    	
Carrying
    	
 
    	
 
    	
 
    	
Carrying
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
Amount
    	
 
    	
Fair Value
    	
 
    	
Amount
    	
 
    	
Fair Value
    	
 
    
	
Financial Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash
    	
 
    	
$
    	
4,467
    	
 
    	
$
    	
4,467
    	
 
    	
$
    	
5,147
    	
 
    	
$
    	
5,147
    	
 
    
	
Receivables:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Trade receivables
    	
 
    	
117,027
    	
 
    	
117,027
    	
 
    	
105,008
    	
 
    	
105,008
    	
 
    
	
Other receivables
    	
 
    	
2,212
    	
 
    	
2,212
    	
 
    	
2,480
    	
 
    	
2,480
    	
 
    
	
Financial instruments at fair value through profit   or loss:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Foreign currency forward contracts
    	
 
    	
5,632
    	
 
    	
5,632
    	
 
    	
4,934
    	
 
    	
4,934
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Financial Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Trade and other payables
    	
 
    	
22,548
    	
 
    	
22,548
    	
 
    	
24,126
    	
 
    	
24,126
    	
 
    
	
Accrued liabilities
    	
 
    	
25,672
    	
 
    	
25,672
    	
 
    	
27,387
    	
 
    	
27,387
    	
 
    
	
Revolving credit line
    	
 
    	
67,683
    	
 
    	
67,683
    	
 
    	
53,080
    	
 
    	
53,080
    	
 
    
	
Term loan due 2016, bearing interest at variable   rates
    	
 
    	
107,854
    	
 
    	
107,854
    	
 
    	
87,309
    	
 
    	
87,309
    	
 
    
	
Finance lease obligations
    	
 
    	
67
    	
 
    	
67
    	
 
    	
150
    	
 
    	
150
    	
 
    
	
Financial instruments at fair value through profit   or loss:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Foreign currency forward contracts
    	
 
    	
—
    	
 
    	
—
    	
 
    	
52
    	
 
    	
52
    	
 
    
														

 

The Company has determined that the fair value of its current financial assets and liabilities approximates their respective carrying amounts as of the reporting dates because of the short-term nature of those financial instruments. The fair value of the Company’s long-term debt bearing interest at variable rates, the fair value is considered to approximate the carrying amount. The fair value of the finance lease obligations was calculated using market interest rates at the reporting date. The fair value of the foreign exchange swaps and foreign currency forward contracts were measured using Level 2 inputs in the fair value hierarchy.

 

The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

·                  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

·                  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

·                  Level 3 inputs are unobservable inputs for the asset or liability.

 

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

The fair values of derivative instruments held as of May 31, 2013 and 2012:

 

40

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

	
 
    	
 
    	
Valuation
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
Method
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Asset derivatives not designated as hedging   instruments:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Foreign currency forward contracts included in   current assets
    	
 
    	
Level 2
    	
 
    	
$
    	
4,513
    	
 
    	
$
    	
3,105
    	
 
    
	
Foreign currency forward contracts included in   non-current assets
    	
 
    	
Level 2
    	
 
    	
1,119
    	
 
    	
1,829
    	
 
    
	
Total
    	
 
    	
 
    	
 
    	
$
    	
5,632
    	
 
    	
$
    	
4,934
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Liability derivatives not designated as hedging   instruments:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Foreign currency forward contracts included in   current liabilities
    	
 
    	
Level 2
    	
 
    	
$
    	
—
    	
 
    	
$
    	
52
    	
 
    
	
Total
    	
 
    	
 
    	
 
    	
$
    	
—
    	
 
    	
$
    	
52
    	
 
    

 

The changes in the fair value of the foreign currency forward contracts recorded in earnings are summarized below:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Fair value of contracts outstanding at beginning   of the period
    	
 
    	
$
    	
4,882
    	
 
    	
$
    	
(9,497
    	
)
    
	
Net change in fair value - unrealized gain
    	
 
    	
942
    	
 
    	
14,379
    	
 
    
	
Exchange rate loss
    	
 
    	
(192
    	
)
    	
—
    	
 
    
	
Fair value of contracts outstanding at end of the   period
    	
 
    	
$
    	
5,632
    	
 
    	
$
    	
4,882
    	
 
    

 

The losses and gains resulting from the net changes in fair value are included in finance costs and finance income in the consolidated statements of comprehensive income.

 

25.       COMMITMENTS AND CONTINGENCIES

 

Commitments

 

The Company has entered into long-term operating lease agreements for buildings and equipment that expire at various dates through fiscal 2023. Amounts of minimum future annual rental commitments under non-cancelable operating leases are as follows:

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Less than one year
    	
 
    	
$
    	
4,980
    	
 
    	
$
    	
4,432
    	
 
    
	
Between one and five years
    	
 
    	
8,256
    	
 
    	
10,782
    	
 
    
	
More than five years
    	
 
    	
3,081
    	
 
    	
3,705
    	
 
    
	
Total
    	
 
    	
$
    	
16,317
    	
 
    	
$
    	
18,919
    	
 
    

 

Certain of the leases contain renewal clauses for the extension of the lease for one or more renewal periods. Rent expense included in selling, general and administrative expenses for the years ended May 31, 2013 and 2012 was $2,726 and $2,264, respectively.

 

Total contractual sublease rent to be received by the Company in future years amounted to $1,941 at May 31, 2013 and $2,264 at May 31, 2012. Sublease income (expense), consisting of sublease rent received and sublease related expenses, included in other expenses for the years ended May 31, 2013 and 2012 was $11 and ($58), respectively.

 

The Company enters into endorsement contracts(1) with athletes and sports teams. Amounts of commitments under endorsement contracts are as follows:

 

41

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

	
 
    	
 
    	
May 31,
    	
 
    	
May 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Less than one year
    	
 
    	
$
    	
4,029
    	
 
    	
$
    	
3,809
    	
 
    
	
Between one and five years
    	
 
    	
3,373
    	
 
    	
4,151
    	
 
    
	
More than five years
    	
 
    	
—
    	
 
    	
67
    	
 
    
	
Total
    	
 
    	
$
    	
7,402
    	
 
    	
$
    	
8,027
    	
 
    

 

(1)                     The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees the Company is obligated to pay athlete and sport team endorsers of the Company’s products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. In addition to the cash payments, the Company is obligated to furnish the endorsers with products for their use. It is not possible to determine how much the Company will spend on this product on an annual basis as the contracts do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors including general playing conditions, the number of sporting events in which they participate, and the Company’s decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source, and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers.

 

At May 31, 2013, the Company had commitments to purchase inventory of $50,315 and non-inventory of $1,435.

 

Contingencies

 

The Company acquired Kohlberg Sports Group Inc. (“KSGI”) on March 10, 2011. In connection with the formation of KSGI in March 2008, a subsidiary of KSGI agreed to pay additional consideration to Nike in future periods, based upon the attainment of a qualifying exit event. At May 31, 2013, the maximum potential future consideration pursuant to such arrangements, to be resolved on or before the eighth anniversary of April 16, 2008, is $10,000. On April 16, 2008, all of the security holders of KSGI (collectively, the “Existing Holders”) entered into a reimbursement agreement with the Company pursuant to which each such Existing Holder agreed to reimburse the Company, on a pro rata basis, in the event that the Company or any of its subsidiaries are obligated to make a payment to Nike.

 

In the ordinary course of its business, the Company is involved in various legal proceedings involving contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. The Company does not believe there are any pending legal proceedings that will have a material impact on the Company’s financial position or results of operations.

 

26.       SUBSIDIARIES

 

The Company has direct or indirect investments in the common share capital of the following subsidiaries which principally affect the net income and net assets of the Company.

 

42

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

	
 
    	
 
    	
 
    	
 
    	
Proportion of shares
    	
 
    
	
 
    	
 
    	
Country of incorporation
    	
 
    	
and voting rights held
    	
 
    
	
 
    	
 
    	
and operations
    	
 
    	
by the Company (1)
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Bauer Hockey Corp.
    	
 
    	
Canada
    	
 
    	
100
    	
%
    
	
Bauer Hockey, Inc.
    	
 
    	
U.S.A
    	
 
    	
100
    	
%
    
	
Bauer Performance Lacrosse Inc. (2)
    	
 
    	
U.S.A
    	
 
    	
100
    	
%
    

 

(1)       directly or indirectly

 

(2)       Formerly Sport Helmets, Inc., the sole surviving entity following the reorganization of the Company’s lacrosse operatingentities and holding bodies, including Cascade Helmets Holdings, Inc. and Maverik Lacrosse LLC, which was completed on December 31, 2012.

 

To avoid a table of excessive length, smaller subsidiaries representing an aggregate of less than 10% of the consolidated revenues of the Company have been omitted. The Company, directly or indirectly, holds 100% of the shares and voting rights of these smaller subsidiaries.

 

27.       RELATED PARTIES

 

The ultimate controlling party of the Company is the Kohlberg Funds. The Kohlberg Funds include Kohlberg TE Investors VI, LP, Kohlberg Investors VI, LP, Kohlberg Partners VI, LP, and KOCO Investors VI, LP, each of which is managed by Kohlberg & Co L.L.C. On June 29, 2012, in conjunction with the acquisition of Cascade and related share offering, the Company issued 642,000 Common Shares as part of a concurrent private placement to the Kohlberg Funds resulting in gross and net proceeds of $4,888 ($5,008 Canadian dollars). Refer to Note 5 — Business Combinations and Note 21 - Share Capital.

 

On September 26, 2012, the Kohlberg Funds entered into an agreement for a secondary offering, on a bought deal basis, of 3,600,000 Common Shares of the Company at an offering price of $9.90 Canadian dollars per Common Share. In addition, an over-allotment option was granted, exercisable for a period of 30 days from closing, to purchase up to an additional 540,000 Common Shares. On October 17, 2012, the Kohlberg Funds completed the sale of an aggregate of 4,140,000 Common Shares at a price of $9.90 Canadian dollars per Common Share, including the exercise in full of the over-allotment option. The Company did not receive any proceeds from the secondary offering. The Common Shares sold under the terms of the offering had previously been held by the Kohlberg Funds in the form of Proportionate Voting Shares which were converted to Common Shares on the basis of one Proportionate Voting Share for 1,000 Common Shares to facilitate the secondary offering. In connection with the secondary offering, the Company incurred $461 in fees in the year ended May 31, 2013, which was recognized in selling, general and administrative expenses.

 

On January 17, 2013, the Kohlberg Funds entered into an agreement for a secondary offering, on a bought deal basis, of 3,000,000 Common Shares of the Company at an offering price of $11.60 Canadian dollars per Common Share. In addition, an over-allotment option was granted, exercisable for a period of 30 days from closing, to purchase up to an additional 450,000 Common Shares. On February 6, 2013, the Kohlberg Funds completed the sale of an aggregate of 3,450,000 Common Shares at a price of $11.60 Canadian dollars per Common Share, including the exercise in full of the over-allotment option. The Company did not receive any proceeds from the secondary offering. The Common Shares sold under the terms of the offering had previously been held by the Kohlberg Funds in the form of Proportionate Voting Shares which were converted to Common Shares on the basis of one Proportionate Voting Share for 1,000 Common Shares to facilitate the secondary offering. In connection with the secondary offering, the Company incurred $365 in fees which was recognized in selling, general and administrative expenses in the year ended May 31, 2013.

 

As of May 31, 2013 there were no outstanding balances due to or due from the Kohlberg Funds.

 

The Company has related party relationships with its Board of Directors and key management personnel. The Company’s key management personnel are comprised of the Chief Executive Officer, Chief Financial Officer and the top three senior 

 

43

 

BAUER PERFORMANCE SPORTS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended May 31, 2013 and May 31, 2012

(In thousands of U.S. dollars except for share and per share amounts)

 

executives. Employee benefits expense for the Company’s Board of Directors and key management personnel included in selling, general and administrative expenses is as follows:

 

	
 
    	
 
    	
Year ended
    	
 
    	
Year ended
    	
 
    
	
 
    	
 
    	
May 31, 2013
    	
 
    	
May 31, 2012
    	
 
    
	
Wages and salaries
    	
 
    	
$
    	
3,489
    	
 
    	
$
    	
3,246
    	
 
    
	
Statutory benefits
    	
 
    	
262
    	
 
    	
230
    	
 
    
	
Share-based payments expense
    	
 
    	
1,487
    	
 
    	
710
    	
 
    
	
Termination benefits
    	
 
    	
534
    	
 
    	
—
    	
 
    
	
Other personnel costs and benefits
    	
 
    	
7
    	
 
    	
11
    	
 
    
	
Total employee benefits expense
    	
 
    	
$
    	
5,779
    	
 
    	
$
    	
4,197
    	
 
    

 

44

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