Exhibit 99.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gregory Mountain Products, Inc.

 

Notes to Financial Statements

 

(amounts stated in thousands)

____________

2.	Summary of Significant Accounting Policies, continued

Concentration Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. We maintain our cash and cash equivalents with what we believe to be high quality banks. Amounts held in individual banks may exceed federally insured amounts. Our accounts receivable consist of amounts due from customers located throughout the world. We maintain reserves for potential credit losses. Three customers accounted for 54% of accounts receivable at March 31, 2010. Two customers accounted for 60% of accounts receivable at March 31, 2009. Two customers accounted for 61 % and 67 % of net sales for the three months ended March 31, 2010 and 2009.

The Company purchases finished goods backpacks and related lifestyle products from two outsourced manufacturers overseas. The revenues related to purchased inventory is approximately 90% of total company revenues for the three months ended March 31, 2010 and 85% of total company revenues for the three months ended March 31, 2009. Although there are a limited number of suppliers who can perform the outsourced manufacturing process, management believes that other vendors could provide similar products on comparable terms. A change in suppliers would be time consuming, and could cause delays in delivery of product to customers and possible losses in revenue, which could materially and adversely affect operating results.

Accounts Receivable

Accounts receivable consists of amounts billed currently due from customers. The allowance for doubtful accounts represents the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company’s allowance is determined based on historical write-off experience and on specific customer accounts believed to be a collection risk. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and notes payable approximates fair value.

Inventory

Inventory is valued at the lower of cost or market, with cost computed on a first-in, first-out basis (FIFO). Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess or obsolete inventory.

 

F-6

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2.	Summary of Significant Accounting Policies, continued

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization is provided using the straight-line method over the estimated useful life of the assets ranging from 3 to 5 years. Additions and improvements that increase the value or extend the life of an asset are capitalized.

Goodwill and Purchased Intangible Assets

Goodwill is reviewed annually (or more frequently if impairment indicators arise) for impairment. Impairment indicators include the significant decrease in the fair value of an asset, significant adverse changes in the extent or use or physical condition of an asset, significant adverse change in legal or regulatory factors affecting an asset, operating or cash flow losses (or a projection of losses) that demonstrates continuing losses associated with the use of an asset, or a current expectation that, more likely than not, an asset will be sold or disposed of significantly before the end of its previously estimated useful life. Purchased intangible assets that have definite lives are carried at cost less accumulated amortization. Amortization of definite-lived intangibles is computed using the straight-line method over the economic lives of the respective assets, generally 4 to 12 years. Purchased intangible assets that have indefinite lives are not subject to amortization, but are reviewed annually for impairment.

Impairment of Long-Lived Assets

The Company assesses long-lived assets, such as property, plant and equipment, and purchased intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The purchase method of accounting for business combinations requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed. The recoverability of an asset is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company performs impairment tests annually. There were no impairment charges recorded for any periods presented.

Foreign Currency Translation

The functional currency for all of the Company’s operations presented in the accompanying financial statements is in U.S. dollars. The Company transacts in U.S. dollars except for sales made to Canadian customers, which are billed and collected in Canadian dollars at the exchange rate existing at the time of sale. All receivables from Canadian dollars are translated into U.S. dollars at the rates of exchange at the balance sheet date. Foreign currency translation gains and losses are included in other expense, net.

3.	Acquisitions

On March 14, 2008, BAE and the Company reached a definitive agreement whereby the Company purchased the assets and liabilities of GMP’s business from Bianchi for $13,933 in cash and $1,000 seller financing from BAE. The stockholders of the Company contributed $13,950 at the purchase date, and paid BAE $13,933 in March 2008. The note payable to BAE was paid in March 2009 and did not bear any interest. The costs associated to the purchase totaling approximately $336 consisted mainly of legal and other fees. The cash paid, note payable, and costs incurred totaling $15,269 were allocated to the assets acquired and liabilities assumed.

The acquisition was accounted for as a purchase business combination, and accordingly, the results of operations were included in the Company’s financial statements after the acquisition date. Fair values were estimated by management based on estimated replacement costs, third-party valuation, and estimates of future operating results.

The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition:

 

Assets acquired:
Accounts receivable		$	3,886
Inventories			5,124
Current assets			182
Property and equipment			196
Other assets			33
Deferred income tax assets			17
Trademark and patent-related intangibles			4,477
Customer-related intangibles			2,399
Technology-related intangibles			680
Goodwill			304
Total assets acquired			17,298
Liabilities assumed:
Accounts payable and accrued liabilities			(1,752	)
Deferred income tax liabilities			(277	)
Net assets acquired		$	15,269

 

The customer-related intangible assets relate to acquired customer relationships and are being amortized over a fourteen-year life straight-line basis. The technology-related intangible assets relate to certain acquired patents and are being amortized over a four to twelve-year life on a straight-line basis. The trademark and patent-related intangible assets relate to acquired trade names and trademarks have an indefinite useful life. Goodwill, trademark, and patent-related intangibles are being evaluated on an annual basis for impairment.

 

F-10

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Gregory Mountain Products, Inc.

 

Notes to Financial Statements, continued

 

(amounts stated in thousands)

____________

 

4.	Inventories, Net

Inventories consist of the following at March 31:

 

		2010				2009
		Unaudited
Raw materials		$	409			$	709
Work-in-process			83				75
Finished goods			3,828				3,962
Total			4,320				4,746
Less allowance for inventory obsolescence			(404	)			(380	)
		$	3,916			$	4,366

 

5.	Property and Equipment, Net

Property and equipment consist of the following at March 31:

 

		2010				2009
		Unaudited
Machinery and equipment		$	166			$	142
Furniture and fixtures			346				346
Computer equipment and software			564				462
Leasehold improvements			57				24
Subtotal			1,133				974
Less accumulated depreciation and amortization			(606	)			(309	)
		$	527			$	665

 

Depreciation and amortization expense charged to operating expenses was $73 and $62 and depreciation and amortization expense charged to cost of sales was $14 and $14 for the three months ended March 31, 2010 and 2009, respectively.

 

F-11

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Gregory Mountain Products, Inc.

 

Notes to Financial Statements, continued

 

(amounts stated in thousands)

____________

 

6.	Goodwill and Intangibles, Net

Goodwill and intangible assets consist of the following at March 31:

 

		2010				2009
		Unaudited
Goodwill and unamortized intangible assets:
Goodwill		$	309			$	309
Trademark and trade names			4,477				4,477
Subtotal			4,786				4,786
Amortized intangible assets:
Customer relationships			2,399				2,399
Product technology			680				680
Less accumulated amortization			(497	)			(253	)
Subtotal			2,582				2,826
Total		$	7,368			$	7,612

 

Amortization expense for intangible assets was $61 and $61 for the three months ended March 31, 2010 and 2009, respectively. Future amortization expense for intangible assets at March 31, 2010 is as follows:

 

		Amount
Year ending December 31:
2010		$	182
2011			243
2012			225
2013			220
2014			220
Thereafter			1,492
Total		$	2,582

 

F-12

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Gregory Mountain Products, Inc.

 

Notes to Financial Statements, continued

 

(amounts stated in thousands)

____________

 

7.	Accrued Liabilities

Accrued liabilities consist of the following at March 31:

 

		2010				2009
		Unaudited
Accrued compensation and payroll-related		$	622			$	504
Accrued warranty			224				177
Accrued marketing co-op			83				133
Deferred rent			66				75
Accrued customer deposits			32				187
Other			89				22
		$	1,116			$	1,098

 

8.	Notes Payable

The Company has a note payable to a former employee and stockholder in the amount of $1,500 at March 31, 2010 (see Note 12). The note is payable in installments through October 2010 and does not bear interest. The note matures within one year from the date of issuance; therefore, the Company considers the principal amount of $1,500 to approximate its net present value.

9.	Revolving Credit Agreement

On October 1, 2009, the Company renewed its $2,500 revolving credit agreement with Wells Fargo Bank N.A. (Wells Fargo) which now matures on December 31, 2010. The credit facility is secured by a first priority, perfected security interest in all assets of the Company. There are no amounts outstanding under the credit agreement as of March 31, 2010. At the Company’s election, any future amounts borrowed under the revolving line, if any, will bear interest at 2.25% above the Daily One Month LIBOR Rate or at a fixed rate per annum determined by Wells Fargo to be 2% above LIBOR in effect on the first day of the applicable Fixed Rate Term. The credit agreement also provides for the issuance of letters of credit under a letter of credit sub-feature up to $1,000. The Company’s vendors historically have not requested payment guaranteed by a letter of credit.

F-13

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Gregory Mountain Products, Inc.

 

Notes to Financial Statements, continued

 

(amounts stated in thousands)

____________

 

10.	Commitments and Contingencies

Operating Leases

The Company leases facilities and some office equipment under noncancelable operating leases, which mature through 2013. The facility leases include rent escalation and renewal options. Future minimum payments for the next five years under the noncancelable operating leases consist of the following at March 31, 2010:

 

		Amount
Year ending December 31:
2011		$	327
2012			278
2013			164
Total		$	769

 

Rent expense under all operating leases was $123 and $125 for the three months ended March 31, 2010 and 2009, respectively. The Company also sub-leases a production facility from Bianchi with a 90-day notice to terminate.

Purchase Commitments

The Company has entered into purchase obligations, which include non-cancelable purchase commitments with suppliers. Total short-term purchase commitments to suppliers at March 31, 2010 was $3,580. The accounts payable under these commitment, which represent inventories received and in-transit, was $1,515 as of March 31, 2010. The Company reviews purchase agreements, assesses the likelihood of a shortfall in purchases, and determines if it is necessary to record a liability. The Company has no long-term purchase commitments.

11.	Employee Benefit Plans

Defined Contribution Plan

The Company provides a defined contribution plan, in which the Company’s employees are eligible to participate and the Company provides a matching contribution. Total defined contribution expense for the Company’s employees participating in domestic defined contributions plans was $37 and $42 for the three months ended March 31, 2010 and 2009, respectively.

 

F-14

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Gregory Mountain Products, Inc.

 

Notes to Financial Statements, continued

 

(amounts stated in thousands)

____________

 

12.	Related Parties

The Company is a wholly-owned subsidiary of KSS Outdoor Holdings, LLC (KSS). From time to time, the Company has transactions with KSS. As of March 31, 2010 and 2009, the Company has a payable to KSS amounting to $17. On May 7, 2010, KSS was dissolved as a result of the acquisition of GMP by another company. See Note 15.

In June 2009, the Company repurchased the shares of stock owned by the former president for a total consideration of $3,750. The Company paid the former president $1,750 in cash and issued a non-interest bearing promissory note for the balance of $2,000 payable in installments through October 2010. The balance of the note payable was $1,500 as of March 31, 2010.

13.	Geographic Information

The Company operates in one business segment, the design and manufacturing of backpacks and related lifestyle products. The following is a summary of revenues by geographic region at March 31:

 

		2010				2009
		Unaudited
Asia			46	%			53	%
North America			48	%			41	%
Europe			6	%			6	%
Rest of World		<1%				<1%
Total			100	%			100	%

 

All of the Company’s assets are primarily located in the United States.

 

F-15

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Gregory Mountain Products, Inc.

 

Notes to Financial Statements, continued

 

(amounts stated in thousands)

____________

 

14.	Income Taxes

The Company’s provision for (benefit from) income taxes consist of the following at March 31:

 

		2010				2009
		Unaudited
Current:
Federal		$	520			$	672
State			156				198
Total current			676				870
Deferred:
Federal			60				(212	)
State			21				30
Total deferred			81				(182	)
Total provision for (benefit from)
income taxes		$	757			$	688

 

The Company’s effective income tax rate differs from the federal statutory rate (34%) primarily because of operating loss carryforwards in prior period, amortization of goodwill for tax purposes, and certain expenses deductible for financial reporting purposes that are not deductible for tax purposes.

Deferred taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and tax reporting purposes.

 

F-16

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Gregory Mountain Products, Inc.

 

Notes to Financial Statements, continued

 

(amounts stated in thousands)

____________

 

14.	Income Taxes, continued

Below is a summary of deferred tax assets and deferred tax liabilities at March 31:

 

		2010				2009
		Unaudited
Deferred Tax Assets–Current:
Allowance for bad debts		$	33			$	41
Inventory reserve			161				151
Warranty reserve			89				70
Accrued vacation			46				37
Other			136				141
Net Deferred Tax Assets–Current		$	465			$	440
Net Deferred Tax Liability–Noncurrent:
Deferred rent		$	26			$	29
Fixed assets depreciation			(54	)			(111	)
Goodwill and intangible assets amortization			(519	)			(415	)
Net Deferred Tax Liability–Noncurrent		$	(547	)		$	(497	)

 

15.	Subsequent Events

On May 7, 2010, the Company (or GMP) entered into a definitive agreement with Clarus Corporation (Clarus), a publicly held company. Under the terms of the agreement, Clarus agreed to acquire GMP for $45 million subject to certain adjustments.

On May 7, the two members of KSS dissolved the KSS partnership.

On May 7, GMP assumed the liability of KSS (parent company) under the Equity Incentive Plan. Upon the closing of the merger agreement with Clarus, GMP will pay Eligible Employees $370 to be paid 50% in cash and 50% in Clarus’ shares of stock.

Upon the closing of the agreement with Clarus, GMP will terminate its credit agreement with Wells Fargo. Wells Fargo will release its security interest in the assets of GMP.

F-17

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F-18

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		December 31, 2009				March 15, 2008 to December 31, 2008
Net sales		$	25,355			$	19,140
Cost of sales			15,115				13,172
Gross profit			10,240				5,968
Operating expenses:
Selling, general, and administrative			7,355				5,704
Depreciation and amortization			515				341
Total operating expenses			7,870				6,045
Income (loss) from operations			2,370				(77	)
Other income (expense), net			76				(4	)
Income (loss) before income taxes			2,446				(81	)
Provision for (benefit from) income taxes			812				(21	)
Net income (loss)		$	1,634			$	(60	)