X-treme Sports Equipment, SA Lausanne, Switzerland

In March 2008, Mr. Marcel Kouchner had to go to the bank. He hated going to the bank. Time with a banker or an accountant meant time away from building his business through sales. However, with cash balances at his wholesale business, X-treme Sports Equipment, below CHF 17,500[1], Marcel saw few alternatives. He had already prioritized his bills, paying only the most pressing obligations. Marcel was troubled both by the record-low level of cash and by the drop in cash in recent years. He wondered how the cash balance could be so low despite a sales growth that was the envy of the industry. Particularly problematic was the pressure Mr. Kouchner was receiving from several of his suppliers, whose calls for prompter payment of invoices were becoming all too frequent. Given Marcel’s plans for expansion into Northern Italy and Austria, good supplier relationships seemed essential. Two payment-related problems had recently kept Marcel up late into the night. First, X-treme Sports rarely had the liquidity to take advantage of the early discounts offered for prompt payment. Manufacturers typically offered terms of 2%/10 days, net/30 days. Second, one supplier with wide name-brand recognition had threatened to cancel Kouchner’s strategically important exclusive Swiss distribution rights. Marcel had been banking with Credit Suisse since he started the business in 1987. Ms. Heidi Hingis, a Credit Suisse commercial lending officer in the Lausanne office, seemed to understand Marcel’s potential. Heidi’s two boys had bought some of the first in-line skates sold through X-treme way back in 1987. In addition to checking and savings accounts, Credit Suisse had also provided renewable short-term notes to X-treme. The short-term loans carried interest rates tied to the 3-month LIBOR rate. Marcel asked Heidi to bump the level of short-term notes from CHF 65,000 to CHF 150,000. Marcel knew this was a bold request but he had prepared ready answers to Heidi’s predictable questions. Why did he need the loan? To build a reserve of cash and to pacify his more persistent trade creditors. How would he repay the loan? By collection of his record-high accounts receivables. When would he repay the loan? By the end of the year, December 31, 2008. Ms. Hingis promised to review the request and get back to Marcel within two days. Marcel was pleased to learn that interest rates were quite low because of growing economic concerns. The 3-month LIBOR rate was only 3.1 percent and X-treme could borrow at “LIBOR plus 250,” meaning the LIBOR rate plus 250 basis points or 5.6 percent. World-wide interest rates were very low because of the possibility of recession and the efforts of the U.S. Fed. Chairman, Ben Bernanke (Chairman of the Board of Governors of the Federal Reserve System), to stimulate the U.S. economy. X-treme Sports was a distributor of sporting goods, apparel, and accessories associated with the new, high-risk, and trendy “extreme sports,” popular with the so-called X-generation. X-treme was based in Lausanne, Switzerland, and was one of the first distributors in Switzerland of the now popular products such as in-line skates in the summer and snowboards in the winter. The fortuitous growth in popularity of extreme sports, particularly those promoted by ESPN2 and Eurosport, had been a perfect catalyst for Marcel to grow his business and expand his product line into more esoteric but profitable products, such as street luges. Although his business was headquartered in Switzerland, as a kid Marcel had split time between his father’s home in Chamonix-Mont Blanc in France (winters) and his mother’s home in La Jolla, California (summers). A naturally gifted athlete, Marcel excelled at both surfing and snow skiing. In the winters he skied at the many resorts near Chamonix-Mont Blanc.[2] In fact, Marcel’s grandfather had competed in the first Winter Olympic Games in 1924 held in Chamonix-Mont Blanc. In the summer, he surfed at Windansea Beach near La Jolla. In his early twenties, Marcel earned a spot on the French Olympic ski team. Once, while competing in Park City, Utah, he became intrigued with a few kids skiing on a single extra-wide ski. The kids’ motion reminded Marcel of surfing and skateboarding. After a series of knee injuries, Marcel was forced to quit competitive skiing. He finished his undergraduate degree in economics from University of California, San Diego and, after a few years of working as a brand manager, Marcel earned an MBA from the leading business school in Europe, IMD. With endorsement money from his skiing days and a substantial contribution from his wife’s father, Mr. Kouchner funded his then-called “mono-board” distributorship, which quickly grew to encompass the emerging extreme sports equipment market. Marcel’s good looks, Olympic medal, natural charm, and extensive contacts on two continents enabled him to secure numerous distribution rights from prominent manufacturers of sporting equipment. X-treme Sports was profitable from the very beginning. Its growth in the 90's was steady but slow. However, starting in the mid 2000s, the popularity of extreme sports in the U.S. began to spill over into Europe; and X-treme Sports’ sales took off. Sales in 2007 were CHF 10.8 million and Marcel anticipated 2008 sales to reach CHF 14.5 million. He did not think this forecast was unreasonable given the success of snowboarding-related events at the 2006 Winter Olympics in Torino, Italy and his new exclusive distribution rights in (Italy and Austria) for a popular line of skating equipment.[3] Much of X-treme’s success was directly the result of Mr. Kouchner’s abundant energy and natural charisma. People liked Marcel. He had won numerous sales contests sponsored by manufacturers. Contest awards often resulted in all-expenses-paid trips for Marcel and his wife to exotic and luxurious resorts. On these occasions he would swap ideas with others in the business and even made sales to several international customers. X-treme’s customer base consisted mostly of high-end retail sporting-goods shops that specialized in X-generation sports. However, as these sports had become more mainstream, Marcel’s base expanded to include generic sporting outlets and even department stores. The specialized retail sporting-goods stores tended to be small, poorly financed, and typically owned and operated by a sports enthusiast rather than a business professional. These customers, as a group, were slow to pay their bills. Competition from other distributors made it hard for Marcel to aggressively collect from these undercapitalized customers. Given the broad line of equipment including winter and summer sports, X-treme’s sales were not particularly seasonal other than a slight increase several months before Christmas. Marcel and his wife owned all of the company’s stock. Marcel was adamant about maintaining control and doing business his way. His highly competitive temperament also made partners unlikely. Company policy required 50 percent of income to be paid out as dividends. This policy allowed for some diversity in the Kouchners’ personal assets. However, much of the dividend money had been invested in U.S. stock and real estate mutual funds, which suffered in 2007.

X-treme Sports, SA
Exhibit 1

Income Statements
(thousands of Swiss Francs, CHF)

| |2004 |2005 |2006 |2007 |
|Net Sales |3,622 |5,397 |8,109 |10,795 |
|Cost of Goods Sold |2,961 |4,481 |6,805 |9,071 |
|Purchase Discounts |(21) |(36) |(30) |(25) |
|Operating, Selling, and Administrative Expense |502 |750 |1,129 |1,512 |
|Interest Expense |2 |4 |4 |5 |
|Profit Before Taxes |178 |198 |201 |232 |
|Income Taxes |84 |87 |89 |103 |
|Net Income |94 |111 |112 |129 |
|Dividends Paid |47 |55 |56 |64 |
| | | | | |
|Purchases |3,280 |4,644 |7,017 |9,286 |

X-treme Sports, SA
Exhibit 2

Balance Sheets as of December 31
(thousands of Swiss Francs, CHF)

| |2004 |2005 |2006 |2007 |
|Cash |54 |50 |38 |22 |
|Accounts Receivable, Net |609 |937 |1,344 |1,791 |
|Inventory |301 |464 |676 |891 |
|Fixed Assets, Net |85 |94 |99 |111 |
|Prepaid Expenses |18 |22 |33 |46 |
|Other Assets |49 |55 |76 |89 |
| TOTAL ASSETS |1,116 |1,622 |2,266 |2,950 |
| | | | | |
|Bank Notes |36 |57 |60 |65 |
|Accounts Payable |367 |756 |1,307 |1,917 |
|Miscellaneous Accruals |49 |89 |123 |127 |
|Capital Stock |560 |560 |560 |560 |
|Retained Earnings |104 |160 |216 |281 |
|TOTAL LIABILITIES AND EQUITY |1,116 |1,622 |2,266 |2,950 |

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[1] The Swiss franc is the currency of Switzerland, officially named the Swiss Confederation. Swiss francs’ official symbol is CHF (from the Latin name of the country, Confederation Helvetica, CH). Historically, one U.S. dollar was equal to about 1.5 Swiss francs. However, the subprime mortgage collapse and subsequent easy monetary policy in the U.S. resulted in a very weak dollar so that, at the time of the case (March 2008), the Swiss franc was almost at par with the dollar.
[2] Chamonix-Mont Blanc is in the French Alps south of Lake Geneva, Switzerland, near the border with Italy. The city is at the base of the highest mountain in Western Europe, Mont Blanc (4,807 meters). Chamonix-Mont Blanc is connected to Northern Italy by a 12 kilometer tunnel that goes under the Alps.
[3] The Italians call the city “Torino” but, historically, English speakers called the city “Turin.”