Securities Law & Instruments

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption granted from requirement to provide audited financial statements of the acquired business in a BAR -- it is impracticable to prepare financial statements -- filer granted relief to include alternative financial information, comprised of statement of assets acquired and liabilities assumed and statement of operations, as financial statement disclosure for a significant acquisition.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4, 13.1.

National Instrument 44-101 Short Form Prospectus Distributions, s. 8.1.

Form 44-101F1, s. 10.2.

April 29, 2014

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF BAUER PERFORMANCE SPORTS LTD. (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for relief (the "Exemptions Sought") pursuant to part 13 of National Instrument 51-102 Continuous Disclosure Obligations ("NI 51-102") and part 8 of National Instrument 44-101 Short Form Prospectus Distributions ("NI 44-101"), respectively, that the Filer be exempt from requirements to provide certain historical financial statements of a business that constitutes a significant acquisition, together with an auditor's report on such financial statements:

a. in a business acquisition report ("BAR") required to be filed by the Filer under NI 51-102,

b. in any short form prospectus ("Prospectus") which the Filer files pursuant to NI 44-101 that would be required to include or incorporate by reference the financial statements as required by the BAR,

in connection with the Filer's acquisition of the EASTON baseball/softball product line (the "Acquired Assets") from Easton-Bell Sports, Inc.'s ("EBS") on April 15, 2014 (the "Acquisition Date").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

1. the Ontario Securities Commission is the principal regulator for this application; and

2. the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a corporation formed under the Business Corporations Act (British Columbia).

2. The Filer is a reporting issuer in Alberta, British Columbia, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland, Northwest Territories, Yukon and Nunavut, and is not in default of its reporting issuer obligations under the securities legislation of any of the jurisdictions of Canada.

3. The common shares of the Filer are listed and posted for trading on the TSX under the symbol "BAU".

4. The financial year-end of the Filer is May 31.

5. On February 13, 2014, the Filer announced that it entered into a definitive asset purchase agreement with EBS and certain of its subsidiaries to acquire the Acquired Assets from EBS (the "Acquisition"). The Filer announced the closing of the Acquisition on the Acquisition Date.

6. EBS is legally organized as a parent company, providing corporate level support and shared resources and services, as further described below, to three principal operating subsidiaries: (i) Easton Sports, Inc. ("ESI"); (ii) Riddell Sports Group, Inc. ("RSG"); and (iii) Bell Sports Corp. ("BSC"). ESI conducts business in Canada through its wholly-owned operating subsidiary Easton Sports Canada, Inc. ("ESC").

7. The Acquisition primarily includes the transfer of substantially all of the assets relating to the Acquired Assets, including all inventory, accounts receivable, real property leases, customer and supplier contracts, intellectual property rights, and the assumption of associated liabilities, along with employees who perform work in connection with the Acquired Assets.

8. The Filer has concluded that the Acquisition constitutes a significant acquisition. Accordingly, the Filer is required to file a BAR within 75 days following the Acquisition Date. In addition, in connection with the filing of any Prospectus following completion of the Acquisition in which the circumstances described in section 10.2(1) of Form 44-101F1 ("44-101F1") apply, the Filer will be required to include in any such Prospectus, in accordance with section 10.2(4)(a) or (b) of 44-101F1, financial statements or other information that is required to be included in, or incorporated by reference into, a business acquisition report filed under Part 8 of NI 51-102 or satisfactory alternative financial statements or other information.

9. In the course of their negotiations relating to the Acquisition, the Filer, being aware of the requirements under NI 51-102 and 44-101F1 referred to in the preceding paragraph, held discussions with EBS involving their respective auditors regarding these requirements and the type of financial disclosure required in order to satisfy the requirements under NI 51-102 and 44-101F1. In the course of these discussions, EBS advised the Filer that it did not treat the Acquired Assets as a separate and distinct business or division for accounting purposes, and as a result, EBS did not prepare or maintain stand-alone financial statements specific to the Acquired Assets.

10. EBS further informed the Filer that, in its view, the preparation of "carve-out" financial statements for the Acquired Assets in accordance with the requirements under section 8.4 of NI 51-102 is impracticable due to the following facts:

a. EBS did not maintain the distinct and separate accounts necessary to prepare the full financial statements of the Acquired Assets. The operations of the Acquired Assets are not attributable to any one stand-alone legal entity, but rather, are embodied in three different legal entities (ESI, ESC and BSC). Revenues for the Acquired Assets represented approximately 76% of ESI's revenues, approximately 24% of ESC's revenues, and approximately 5% of BSC's revenues. EBS prepares audited annual consolidated financial statements for EBS and its subsidiaries. In addition, EBS prepared stand-alone audited annual financial statements for each of ESI, RSG and BSC for their financial year ended December 29, 2012. No prior or future periods have been audited for ESI, RSG or BSC.

b. EBS provided corporate level support (including administrative support functions such as accounting, tax, legal and human resources) and shared resources and services (such as centralized accounts payable processing, information technology and research and development) to multiple product lines organized in multiple legal entities. As a result, selling, general and administrative expenses (including rent, personnel, insurance, audit, tax, etc.) are not specifically identifiable to specific product lines, including the Acquired Assets. In addition, the ESI and BSC entities incurred costs to support the various product lines within each entity (such as distribution, customer service, accounting, office expenses, utilities, etc.) and similarly, those costs are not specifically identifiable to specific product lines, including the Acquired Assets. Allocations of those costs to the Acquired Assets entails numerous assumptions, a number of which are highly arbitrary, with the result that the allocated costs would be unlikely to be indicative of what the Acquired Assets would have experienced as a stand-alone company.

c. Consistent with the foregoing, EBS's systems and procedures did not provide sufficient information for the preparation of stand-alone income tax and interest/capital cost provisions for the Acquired Assets, nor was this required for internal, regulatory or tax purposes as the Acquired Assets was not operated as a separate business or legal entity.

d. Due to the complimentary nature of EBS's product lines, many of its customers purchased products across multiple product lines, and many of its suppliers provided materials, products and services across multiple product lines. EBS and their systems did not maintain separate order forms and/or invoices for certain transactions related to the Acquired Assets. As a result, receivables and payables records and their related payments from customers and payments to vendors are commingled between the Acquired Assets and other product lines within EBS. Also, since such documents can relate to more than one product line, services, costs and liabilities (such as accrued marketing/cooperative advertising) related to such orders require an allocation to the Acquired Assets which would be unlikely to be indicative of what the Acquired Assets would have experienced as a stand-alone company. While identification of receivables and payables by product line would require a review of invoice and line item detail for each period presented, any attempt to construct cash flow statements for the Acquired Assets would entail numerous assumptions with respect to opening cash balances and sources and uses of cash for financing and operational purposes that are unlikely to be indicative of what the Acquired Assets would have experienced as a stand-alone company.

e. The records are insufficiently detailed to extract information specific to the Acquired Assets as would be required to produce the financial statements as set out in Part 8 of NI 51-102 (and accordingly, section 10.2(4)(a) of 44-101F1) and, in EBS's view, it is impracticable to do so.

f. The assumptions and estimates required for the Filer to "carve out" a complete set of financial statements for the Acquired Assets would by necessity be arbitrary and speculative and undermine the reliability of those statements. Any such statements would not reflect the true nature of the Acquired Assets or be useful to shareholders or investors.

11. Following the Acquisition, the Filer expects to integrate the Acquired Assets into its existing organization structure which will have a different cost structure than that of EBS.

12. Section 8.4 of NI 51-102 requires that the Filer include in the BAR, the following annual financial statements of the Acquired Business:

a. a statement of comprehensive income, a statement of changes in equity and a statement of cash flows for (i) the audited annual period ended December 28, 2013; and (ii) the annual period ended December 29, 2012;

b. an audited statement of financial position as at December 28, 2013;

c. a statement of financial position as at December 29, 2012; and

d. notes to the required financial statements.

13. Section 8.4(5) requires that the Filer include:

a. a pro forma statement of financial position of the Filer as at the date of the Filer's most recent statement of financial position filed that gives effect, as if the Acquisition has taken place as at the date of the pro forma statement of financial position, to the Acquisition; and

b. a pro forma income statement that gives effect to the Acquisition as if it had taken place as at June 1, 2012 for (i) the annual period ended May 31, 2013; and (ii) the most recent interim period of the Filer that ended immediately before the Acquisition Date.

14. Section 10.2(4) of 44-101F1 requires that in any Prospectus filed after completion of the Acquisition but for which the Filer has not yet filed a BAR in respect of the Acquisition under NI 51-102, the Filer would be required to include the financial statements that would be required under NI 51-102, as outlined above in paragraphs 12 and 13, or satisfactory alternative financial statements or other information.

15. The Filer proposes to include the following financial statements in the BAR and in any Prospectus (the "Alternative Financial Statements"):

a. an audited statement of the assets to be acquired and liabilities to be assumed by the Filer as at December 28, 2013 with an unaudited comparative statement of assets and liabilities as at December 29, 2012 prepared in accordance with U.S. GAAP (the "Statement of Assets Acquired and Liabilities Assumed") that:

i. includes all the assets and liabilities acquired;

ii. includes a statement that the Statement of Assets Acquired and Liabilities Assumed is prepared using accounting policies that are permitted by U.S. GAAP;

iii. includes a description of the accounting policies used to prepare the Statement of Assets Acquired and Liabilities Assumed; and

iv. includes an auditor's report that reflects the fact that the Statement of Assets Acquired and Liabilities Assumed was prepared in accordance with the basis of presentation disclosed in the notes to the Statement of Assets Acquired and Liabilities Assumed;

b. an audited statement of the Acquired Assets' direct revenues and expenses for the year ended December 28, 2013 with an unaudited comparative statement of direct revenues and expenses for the year ended December 29, 2012 (the "Statement of Direct Revenues and Expenses"). These statements will be prepared in accordance with U.S. GAAP and include direct revenues generated by the Acquired Assets less expenses directly attributable to the Acquired Assets and will include notes to the statements outlining the basis of preparation and assumptions used. The notes will include the assumptions used for any allocated costs (e.g. distribution and certain selling, general and administrative costs) and the nature of any costs excluded (e.g. treasury, tax, legal, information technology, human resources, interest expense and taxes). The Statement of Direct Revenues and Expenses will:

i. include a statement that the operating statements are prepared using accounting policies that are permitted by U.S. GAAP;

ii. include a description of the accounting policies used to prepare the operating statements; and

iii. include an auditor's report that reflects the fact that the operating statements were prepared in accordance with the basis of presentation disclosed in the notes to the operating statements;

c. in the event that the circumstances referred to in section 8.4(4) of NI 51-102 are not applicable, an unaudited statement of the assets to be acquired and liabilities to be assumed by the Filer as at the end date of EBS's most recently completed interim period ended before the Acquisition Date, reporting in a manner consistent with the Statement of Assets Acquired and Liabilities Assumed referred to in paragraph (a) above (the "Interim Statement of Assets Acquired and Liabilities Assumed"), as well as an unaudited statement of the Acquired Assets' direct revenues and expenses as at the end date of EBS's most recently completed interim period ended before the Acquisition Date, reporting direct revenues and expenses in a manner consistent with the Statement of Direct Revenues and Expenses referred to in paragraph (b) above (the "Interim Statement of Direct Revenues and Expenses");

d. pro forma operating statements for the year ended May 31, 2013, that includes the Filer's income statement for the year ended May 31, 2013 and a constructed statement of the Acquired Assets' direct revenues and expenses for the twelve-month period ended March 30, 2013 and pro forma operating statements that are based on the most recently completed interim period of the Filer ended before the Acquisition Date (the "Pro Forma Operating Statements"); and

e. a pro forma balance sheet as at the date of the Filer's most recent balance sheet filed that includes either the Statement of Assets Acquired and Liabilities Assumed or the Interim Statement of Assets Acquired and Liabilities Assumed, as applicable (the "Pro Forma Balance Sheet").

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemptions Sought are granted provided that the Filer includes in the BAR and in any Prospectus the Alternative Financial Statements.

"Shannon O'Hearn"
Manager, Corporate Finance
Ontario Securities Commission