Exhibit 99.3
Financial Statements and Report of Independent Certified
Public Accountants
E-Conolight, LLC
December 26, 2010
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| Report of Independent Certified Public Accountants | 3 |
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| Balance Sheet | 4 |
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| Statement of Operations | 5 |
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| Statement of Members' Equity | 6 |
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| Statement of Cash Flows | 7 |
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| Notes to Financial Statements | 8 |
Report of Independent Certified Public Accountants
Members
E-Conolight, LLC
We have audited the accompanying balance sheet of E-Conolight, LLC (a Delaware limited liability company) (the “Company”) as of December 26, 2010, and the related statements of operations, members’ equity and cash flows for the period ended December 26, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of E-Conolight, LLC as of December 26, 2010 and the results of its operations and its cash flows for the period ended December 26, 2010, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Milwaukee, Wisconsin
April 27, 2011
E-CONOLIGHT, LLC
BALANCE SHEET
Period ended December 26, 2010
| ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash | | $ | 1,449,335 | |
| Accounts receivable | | | 45,231 | |
| Inventories | | | 6,905,977 | |
| Prepaid expenses and other assets | | | 60,743 | |
| | | | | |
Total current assets | | | 8,461,286 | |
| | | | | |
| FIXED ASSETS | | | | |
| Building improvements | | | 267,919 | |
| Machinery and equipment | | | 865,259 | |
| Website development | | | 25,000 | |
| | | | | |
| Less: accumulated depreciation | | | (116,253 | ) |
Total fixed assets, net | | | 1,041,925 | |
| | | | | |
| OTHER ASSETS | | | | |
| Goodwill | | | 13,910,842 | |
| Customer list, net | | | 2,786,883 | |
| Trade names, net | | | 2,401,369 | |
| Catalog, net | | | 54,308 | |
| Debt issuance costs, net | | | 335,469 | |
Total other non-current assets | | | 19,488,871 | |
| | | | | |
Total assets | | $ | 28,992,082 | |
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| LIABILITIES AND MEMBERS' EQUITY | | | | |
| | | | | |
| CURRENT LIABILITIES | | | | |
| Accounts payable | | | 3,730,970 | |
| Other accrued liabilities | | | 162,091 | |
| Accrued interest payable | | | 574,925 | |
| | | | | |
Total current liabilities | | | 4,467,986 | |
| | | | | |
| LONG-TERM LIABILITIES | | | | |
| Contingent consideration liability | | | 4,215,790 | |
| Subordinated debt | | | 15,600,000 | |
| | | | | |
Total long-term liabilities | | | 19,815,790 | |
| | | | | |
| MEMBERS' EQUITY | | | | |
| Member capital contributions, net of distributions | | | 5,368,888 | |
| Accumulated deficit | | | (660,582 | ) |
| | | | | |
Total members' equity | | | 4,708,306 | |
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Total liabilities and members' equity | | $ | 28,992,082 | |
The accompanying notes are an integral part of this statement.
E-CONOLIGHT, LLC
STATEMENT OF OPERATIONS
Period ended December 26, 2010
| Net sales | | $ | 28,239,900 | |
| | | | | |
| Cost of sales | | | 21,596,820 | |
| | | | | |
Gross profit | | | 6,643,080 | |
| | | | | |
| Selling, general and administrative expenses | | | 4,090,675 | |
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Income from operations | | | 2,552,405 | |
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| Other expense | | | | |
| Interest expense | | | 1,809,245 | |
| Remeasurement of contingent consideration liability | | | 964,440 | |
Total other expense, net | | | 2,773,685 | |
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| | | | | |
| NET LOSS | | $ | (221,280 | ) |
The accompanying notes are an integral part of this statement.
E-CONOLIGHT, LLC
STATEMENT OF MEMBERS' EQUITY
Period ended December 26, 2010
| | | Member | | | | | | | |
| | | units | | | | | | Total | |
| | | | | | Capital | | | Accumulated | | | members' | |
| | | Units (1) | | | contributions | | | deficit | | | equity | |
| | | | | | | | | | | | | |
| Balance at March 29, 2010 | | | 10,000 | | | $ | 5,400,000 | | | $ | (439,302 | ) | | $ | 4,960,698 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | (221,280 | ) | | | (221,280 | ) |
| | | | | | | | | | | | | | | | | |
| Distributions to members | | | - | | | | (31,112 | ) | | | - | | | | (31,112 | ) |
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| Balance at December 26, 2010 | | | 10,000 | | | $ | 5,368,888 | | | $ | (660,582 | ) | | $ | 4,708,306 | |
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(1) The outstanding units at December 26, 2010 include 1,000 profits interests units.
The accompanying notes are an integral part of this statement.
E-CONOLIGHT, LLC
STATEMENT OF CASH FLOWS
Period ended December 26, 2010
| Cash flows from operating activities: | | | |
| Net loss | | $ | (221,280 | ) |
| Adjustments to reconcile net loss to net cash provided by | | | | |
| operating activities - | | | | |
| Depreciation | | | 116,253 | |
| Amortization | | | 334,110 | |
| Contingent consideration liability remeasurement | | | 964,440 | |
| Increase (decrease) in cash resulting from changes in assets | | | | |
and liabilities - | | | | |
Accounts receivable | | | (45,231 | ) |
Inventories | | | (3,821,845 | ) |
Prepaid expenses and other assets | | | (30,913 | ) |
Accounts payable | | | 2,703,640 | |
Accrued interest payable | | | 574,925 | |
Other accrued liabilities | | | 162,091 | |
Net cash provided by operating activities | | | 736,190 | |
| | | | | |
| Cash flows from investing activities: | | | | |
| Purchase of fixed assets | | | (201,400 | ) |
Net cash used in investing activities | | | (201,400 | ) |
| | | | | |
| Cash flows from financing activities: | | | | |
| Distributions to members | | | (31,112 | ) |
Net cash used in financing activities | | | (31,112 | ) |
| | | | | |
NET INCREASE IN CASH | | | 503,678 | |
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| Cash, beginning of year | | | 945,657 | |
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| Cash, end of year | | $ | 1,449,335 | |
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| Supplemental disclosure of cash flow information: | | | | |
| Cash paid for interest | | $ | 1,234,321 | |
The accompanying notes are an integral part of this statement.
E-CONOLIGHT, LLC
NOTES TO FINANCIAL STATEMENTS
December 26, 2010
NOTE A - BASIS OF PRESENTATION AND NATURE OF OPERATIONS
E-Conolight, LLC (the “Company”) is a Delaware limited liability company. The Company sells lighting fixtures and accessories for use primarily in commercial and industrial settings. The Company’s products include floodlights, linear fluorescent lights, high & low bay lights, exit signs, emergency lights, and other lighting products. E-Conolight sells its products through direct-marketing catalogs and its website. The Company is based in Racine, Wisconsin.
On March 29, 2010, the Company purchased certain assets of Ruud Lighting (the “Seller”). The aggregate purchase price was $20,054,343. In addition, the Company is subject to contingent purchase price payments of up to $20,000,000. See note D for further discussion.
The acquisition was accounted for under the purchase method of accounting and the results of operations since the acquisition date of March 29, 2010 are included in the financial statements. The purchase price was allocated based on the estimated fair values of assets and liabilities at the date of acquisition.
The following outlines the fair value allocation as of March 29, 2010 of the acquired assets and assumed liabilities:
| Inventories | $ | 3,084,132 |
| Other current assets | | 29,830 |
| Property, plant and equipment | | 956,778 |
| Intangible assets | | 16,193,221 |
| Assumed liabilities | | (209,618) |
| Total assets acquired, net of liabilities assumed | $ | 20,054,343 |
The purchase price of $20,054,343 is net of $3,251,350 of contingent consideration recorded as of March 29, 2010.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
2. Revenue Recognition
The Company recognizes revenue when products are shipped and is recorded net of discounts, returns and allowances.
E-CONOLIGHT, LLC
NOTES TO FINANCIAL STATEMENTS
December 26, 2010
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Cash
The Company periodically maintains deposits in financial institutions that exceed the insurance provided on such deposits. The Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk.
4. Accounts Receivable
Accounts receivable represents amounts due from customers.
5. Inventories
Inventories are stated at the lower of cost or market. Inventories consisted of the following as of December 26, 2010:
| Inventory in transit | $ | 2,194,959 |
| Finished goods | | 4,711,018 |
| | $ | 6,905,977 |
6. Fixed Assets
Fixed assets are carried at cost less accumulated depreciation. Depreciation for financial reporting purposes is provided over the useful life of the respective asset using the straight-line method.
The estimated useful lives are as follows:
| Building improvements | | 7 years |
| Machinery and equipment | | 7 years |
| Website development | | 3 years |
Repairs and maintenance costs are expensed as incurred unless the costs extend the useful life of the asset, in which case the costs are capitalized and expensed over the remaining useful life of the related asset.
7. Goodwill and Other Intangible Assets
Intangible assets acquired as part of the acquisition were recorded at their estimated fair value. These assets are amortized over their estimated useful lives using the straight-line method. The useful lives by major intangible asset class are as follows:
| Customer list | | 15 years |
| Trade names | | 15 years |
| Catalog | | 3 years |
E-CONOLIGHT, LLC
NOTES TO FINANCIAL STATEMENTS
December 26, 2010
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
7. Goodwill and Other Intangible Assets - continued
We assess the carrying value of long-lived and intangible assets and the remaining useful lives whenever events or changes in circumstances indicate the carrying value may not be recoverable or the estimated useful life may no longer be appropriate. Factors considered important that could trigger this review include significant decreases in operating results, significant changes in our use of the assets, competitive factors, the strategy of our business and significant negative industry or economic trends. When we determine that the carrying value of long-lived and intangible assets may not be recoverable based on an assessment of future undiscounted cash flows from the use of those assets, an impairment charge to record the assets at fair value may be recorded. Impairment is measured based on fair values utilizing estimated discounted cash flows. No impairment related to long-lived assets was recorded for the period ended December 26, 2010.
The goodwill recorded on the balance sheet relates to the acquisition, as discussed in note A. The Company’s purchased goodwill is deemed to have an indefinite life and is not amortized. Instead, this asset will be evaluated on an annual basis for potential impairment. No impairment of goodwill was recorded during the period ended December 26, 2010.
8. Debt Issuance Costs
Debt issuance costs were incurred in conjunction with the subordinated debt and line of credit issuance. Debt issuance costs are being amortized over the applicable term of the credit agreements which ranges from five to seven years.
Debt issuance costs are the related amortization consist of the following as of December 26, 2010:
| Debt issuance costs | $ | 378,410 |
| Accumulated amortization | | (42,941) |
| Debt issuance costs, net | $ | 335,469 |
The scheduled future debt issuance cost amortization as of December 31 is as follows:
| 2011 | $ | 57,254 |
| 2012 | | 57,254 |
| 2013 | | 57,254 |
| 2014 | | 57,254 |
| 2015 | | 48,867 |
| Thereafter | | 57,586 |
| | $ | 335,469 |
E-CONOLIGHT, LLC
NOTES TO FINANCIAL STATEMENTS
December 26, 2010
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Contingent Consideration Liability
The contingent consideration liability represents the present value of anticipated future payments related to the acquisition discussed in note A. The liability is remeasured at each reporting period and is adjusted through the statement of operations.
10. Shipping and Handling
All fees billed to customers are classified as a component of net sales. All costs associated with shipping and handling is classified as a component of cost of sales.
11. Advertising Costs
Advertising and marketing costs are expensed as incurred. Advertising costs were $1,034,200 forthe period ended December 26, 2010.
12. Taxes Collected From Customers
Net sales is presented net of taxes collected from customers and remitted to governmental authorities. These taxes include all taxes assessed by a governmental authority that are imposed on and concurrent with a specific revenue-producing transaction between the Company and a customer.
13. New Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), that amends Accounting Standards Codification (“ASC”) Subtopic 820-10, Fair Value Measurements and Disclosures - Overall, and requires reporting entities to disclose (1) the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) separate information about purchases, sales, issuance and settlements in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). ASU 2010-06 also requires reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and disclose the inputs and valuation techniques for fair value measurements that fall within Levels 2 and 3 of the fair value hierarchy. These disclosures and clarification are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuance, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We adopted the provisions of ASU 2010-06 and the provisions of ASU 2010-06 did not have a material impact on our financial statements.
E-CONOLIGHT, LLC
NOTES TO FINANCIAL STATEMENTS
December 26, 2010
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
13. New Accounting Pronouncements - continued
In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other - When to Perform Step 2 of the Goodwill Impairment test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”), that amends ASC Subtopic 350-20, Intangibles - Goodwill and Other, and requires entities with reporting units that have carrying amounts that are zero or negative to assess whether it is more likely than not that the reporting units’ goodwill is impaired. In considering whether it is more likely than not that goodwill impairment exists, the entities shall evaluate whether there are adverse qualitative factors. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting units. ASU 2010-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of these provisions is not expected to have a material impact on our financial statements.
NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has the following intangible assets as of December 26, 2010:
| | | Gross carrying | | | Accumulated | | | Net carrying | |
| | | amount | | | amortization | | | amount | |
| Amortized intangible assets: | | | | | | | | | |
| Customer list | | $ | 2,933,562 | | | $ | (146,679 | ) | | $ | 2,786,883 | |
| Trade names | | | 2,527,757 | | | | (126,388 | ) | | | 2,401,369 | |
| Catalog | | | 72,410 | | | | (18,102 | ) | | | 54,308 | |
Total | | | 5,533,729 | | | | (291,169 | ) | | | 5,242,560 | |
| Goodwill | | | 13,910,842 | | | | - | | | | 13,910,842 | |
Total intangible assets | | $ | 19,444,571 | | | $ | (291,169 | ) | | $ | 19,153,402 | |
Total amortization expense for the period ended December 26, 2010 was $291,169. Amortization expense related to intangible assets for the years ending after December 26, 2010 is estimated to be as follows:
| 2011 | $ | 388,225 |
| 2012 | | 388,225 |
| 2013 | | 370,122 |
| 2014 | | 364,088 |
| 2015 | | 364,088 |
| Thereafter | | 3,367,812 |
| | $ | 5,242,560 |
E-CONOLIGHT, LLC
NOTES TO FINANCIAL STATEMENTS
December 26, 2010
NOTE D - CONTINGENT CONSIDERATION
As discussed in note A, in addition to the aggregate acquisition cost of $20,054,343, the Company is liable to make contingent purchase price payments of up to $20,000,000. The amount of the payment is determined based on an EBITDA target and will be paid each year in which the target is met through March 2022, or until $20,000,000 has been paid. The Company calculates the estimated contingent payments by taking the present value of estimated future EBITDA compared to the targeted EBITDA measures per the related agreement. The Company recorded a liability in the amount of $3,251,350 as of the March 29, 2010 acquisition date. This liability was remeasured as of December 26, 2010, which resulted in increasing the liability amount to $4,215,790. The increase in this liability in the amount of $964,440 was recorded as a non-operating expense on the statement of operations for the period ended December 26, 2010.
NOTE E - LINE OF CREDIT
Effective March 29, 2010, the Company entered into a revolving line of credit with a bank, with a maturity date of June 1, 2013. The credit agreement provides for revolving loans of up to $3,000,000 with interest at the one month LIBOR rate plus 3.5%. The Company did not draw on the line during the period ended December 26, 2010. The Company is subject to certain financial covenants and were in compliance with these covenants as of December 26, 2010.
NOTE F - SUBORDINATED DEBT
On March 29, 2010, the Company entered into a $15,600,000 subordinated debt agreement with a related party (see note I). The principal of the loan is payable in full on March 29, 2017. Interest is paid quarterly at 15.25%. The loan is secured by substantially all assets of the Company, and is subordinated to the Company’s line of credit with the bank. The outstanding balance was $15,600,000 at December 26, 2010 and March 29, 2010. Interest expense on the loan during the period ended December 26, 2010 was $1,804,075. The Company is subject to certain financial covenants and were in compliance with these covenants as of December 26, 2010.
NOTE G - INCOME TAXES
The Company is a limited liability company and is taxed under the partnership provisions of the Internal Revenue Code (the “IRC”). Under these provisions of the IRC, the members are responsible for reporting their share of the Company’s Federal taxable income or loss on their income tax returns. Accordingly, the Company is not subject to income taxes for Federal and most state jurisdictions. The Company has no liability for unrecognized tax benefits as of December 26, 2010. The Company is not subject to entity-level tax and has no years open to examination in the jurisdictions in which it operates.
E-CONOLIGHT, LLC
NOTES TO FINANCIAL STATEMENTS
December 26, 2010
NOTE H - LEASES
The Company has a non-cancelable operating lease for a warehouse. This lease was assigned to the Company on March 29, 2010, and runs through May 1, 2014. Monthly rent payments under the lease consist of base payments that escalate by approximately 2% each year. Rent expense totaled $273,198 for the period ended December 26, 2010.
Future minimum rental payments required under the leases as of December 26, 2010 are as follows:
| 2011 | $ | 369,795 |
| 2012 | | 376,906 |
| 2013 | | 384,545 |
| 2014 | | 129,059 |
| 2015 and thereafter | | - |
| | $ | 1,260,305 |
NOTE I - RELATED PARTY TRANSACTIONS
The Company entered into a subordinated debt agreement with a member, as discussed in note F. Interest expense on the loan during the period ended December 26, 2010 was $1,804,075.
Two members received fees totaling approximately $200,000 for management services during the period ended December 26, 2010.
NOTE J - MEMBERS’ EQUITY
The members of the Company are subject to an operating agreement entered into effective March 17, 2010. The agreement allows for the issuance of 1,000 profits interests, which are part of the 10,000 units outstanding at year end. Profits and losses are allocated to the members pro rata based on the number of units held. Members are granted one vote per unit held.
E-CONOLIGHT, LLC
NOTES TO FINANCIAL STATEMENTS
December 26, 2010
NOTE K - SHARED SERVICES AGREEMENT
The Company and the seller are subject to a shared service agreement that was entered into on March 29, 2010. Per the terms of the agreement, the seller provides the Company with management and operational services over a period of time. These services include certain general and administrative services, warehouse services and customer service and sales support functions. The seller charges the Company a base amount of 1.85% of the Company’s net revenues for general and administrative services, 1.2% of the Company’s net revenues for warehouse services and 1% of the Company’s net revenue for customer service and sales support functions. The change for general and administrative services decreases if the Company hits certain net revenue levels. The Company expensed $1,043,252 during the period ended December 26, 2010 for those shared services performed. The service term of this agreement is the longer of five years commencing on March 29, 2010 or the period during which the Company is obligated to make contingent purchase price payments in accordance with the asset purchase agreement. This term shall in no event be longer than 12 fiscal years. The Company may terminate the agreement in whole or in part at its option.
NOTE L - SUPPLY AGREEMENT
The Company and the seller are subject to a supply agreement that was entered into on March 29, 2010. The seller agrees to supply the Company with products, related components and accessories from the E-Conolight linear, landscape, and 14-inch floodlight products. The term of the agreement is the longer of seven years or the term of the shared services agreement (see note K). The Company may terminate this agreement by providing written notice at least six months prior to termination.
NOTE M - SUBSEQUENT EVENTS
The Company evaluated its December 26, 2010 financial statements for subsequent events through April 27, 2011, the date the financial statements were available to be issued. The Company is not aware of any additional subsequent events which would require recognition or disclosure in the financial statements.
