EXHIBIT 99.2
ENERSYST DEVELOPMENT CENTER, L.L.C.
FINANCIAL STATEMENTS
AS OF MARCH 31, 2004 (UNAUDITED), FOR THE THREE MONTHS ENDED MARCH 31, 2004
AND 2003 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 2003 AND 2002
TABLE OF CONTENTS
Reports of Independent Auditors.............................................. 1
Financial Statements:
Balance Sheets.......................................................... 3
Statements of Operations................................................ 4
Statements of Changes in Members' Equity................................ 5
Statements of Cash Flows................................................ 6
Notes to Financial Statements........................................... 7
REPORT OF INDEPENDENT AUDITORS
To the Members of
Enersyst Development Center, L.L.C.
We have audited the accompanying balance sheet of Enersyst Development Center,
L.L.C., as of December 31, 2003, and the related statements of operations,
changes in members' equity and cash flows for the year then ended. 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. 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 examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 Enersyst Development Center,
L.L.C. as of December 31, 2003, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Whitley Penn
Dallas, Texas
April 23, 2004
INDEPENDENT AUDITORS' REPORT
Enersyst Development Center, L.L.C.:
We have audited the accompanying balance sheet of Enersyst Development Center,
L.L.C. (the "Company") as of December 31, 2002, and the related statements of
operations, members' equity and cash flows for the year then ended. 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. 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 examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, such financial statements present fairly, in all material
respects, the financial position of Enersyst Development Center, L.L.C. at
December 31, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As described in Note B, effective January 1, 2002, in connection with the
adoption of Statement of Financial Accounting Standards No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS, the Company ceased amortization of goodwill.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
May 31, 2003
ENERSYST DEVELOPMENT CENTER, L.L.C.
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003 2002
------------ ------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 34,573 $ 21,882 $ 45,035
Accounts receivable, less allowance for doubtful
accounts of $21,113 in 2004 and 2003 and
$66,207 in 2002 943,497 930,316 1,141,124
Other current assets 169,803 164,996 20,792
------------ ------------ ------------
Total current assets 1,147,873 1,117,194 1,206,951
Property and equipment, net 681,782 710,614 700,444
Goodwill 5,835,779 5,835,779 5,835,779
Other intangible assets, net 5,347,526 5,539,213 6,245,722
------------ ------------ ------------
Total assets $ 13,012,960 $ 13,202,800 $ 13,988,896
============ ============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $ 73,820 $ 109,436 $ 139,566
Accrued expenses 130,611 103,779 102,826
Line-of-credit 1,075,000 1,100,000 -
Current portion of note payable 5,278,479 5,523,819 1,303,456
------------ ------------ ------------
Total current liabilities 6,557,910 6,837,034 1,545,848
Line-of-credit, member - - 485,000
Notes payable, members 1,402,241 1,377,241 1,277,241
Note payable - - 5,553,169
------------ ------------ ------------
Total liabilities 7,960,151 8,214,275 8,861,258
Commitments and contingencies - - -
Members' equity 5,052,809 4,988,525 5,127,638
------------ ------------ ------------
Total liabilities and members' equity $ 13,012,960 $ 13,202,800 $ 13,988,896
============ ============ ============
See accompanying notes to financial statements.
3
ENERSYST DEVELOPMENT CENTER, L.L.C.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
2004 2003 2003 2002
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Royalties and license fees $ 823,255 $ 945,846 $ 2,581,356 $ 2,599,150
Development and consulting projects 183,792 387,146 1,209,552 1,065,854
Other - - - 13,066
----------- ----------- ----------- -----------
Total revenues 1,007,047 1,332,992 3,790,908 3,678,070
Expenses:
Direct project costs 17,262 80,356 176,669 221,440
Compensation and related costs 402,993 454,566 1,687,328 1,696,097
Selling, general and administrative expenses 181,739 195,780 719,799 824,468
Depreciation and amortization 222,680 204,886 834,788 827,943
----------- ----------- ----------- -----------
Total expenses 824,674 935,588 3,418,584 3,569,948
----------- ----------- ----------- -----------
Income from operations 182,373 397,404 372,324 108,122
Other income (expense):
Interest income - - 975 202
Interest expense (94,697) (108,662) (426,207) (458,344)
Interest expense, members (23,392) (32,810) (96,067) (209,185)
Gain on extinguishment of debt - - - 1,028,758
Other income - - 9,862 -
----------- ----------- ----------- -----------
Total other income (expense) (118,089) (141,472) (511,437) 361,431
----------- ----------- ----------- -----------
Net income (loss) $ 64,284 $ 255,932 $ (139,113) $ 469,553
=========== =========== =========== ===========
See accompanying notes to financial statements.
4
ENERSYST DEVELOPMENT CENTER, L.L.C.
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
NUMBER OF
UNITS AMOUNT
------------- ---------------
Balance at December 31, 2001 102,923 $ 4,567,724
Issuance of membership interests 4,190 90,361
Net income - 469,553
------------- ---------------
Balance at December 31, 2002 107,113 5,127,638
Net loss - (139,113)
------------- ---------------
Balance at December 31, 2003 107,113 4,988,525
Net income (Unaudited) - 64,284
------------- ---------------
Balance at March 31, 2004 (Unaudited) 107,113 $ 5,052,809
============= ===============
See accompanying notes to financial statements.
5
ENERSYST DEVELOPMENT CENTER, L.L.C.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
2004 2003 2003 2002
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $ 64,284 $ 255,932 $ (139,113) $ 469,553
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 30,994 16,431 71,273 74,830
Amortization 191,687 188,455 763,515 753,113
Gain on extinguishment of debt - - - (1,028,758)
Changes in operating assets and liabilities:
Accounts receivable (13,181) (179,373) 210,808 (163,830)
Other current assets (4,807) (224,010) (144,204) (8,793)
Other intangible assets - (57,006) (57,006) -
Accounts payable (35,616) (11,834) (30,130) (36,780)
Accrued expenses 26,832 92,058 953 (58,870)
----------- ----------- ----------- -----------
Net cash provided by operating activities 260,193 80,653 676,096 465
INVESTING ACTIVITIES
Purchases of property and equipment (2,162) (6,232) (81,443) (34,136)
FINANCING ACTIVIITIES
Net borrowings (payments) under line-of-credit (25,000) 1,150,000 1,100,000 -
Net payments under line-of-credit, member - (485,000) (485,000) (115,000)
Proceeds from notes payable, members 25,000 25,000 100,000 1,103,833
Payments on note payable (245,340) (629,116) (1,332,806) (1,011,650)
Issuance of membership interests - - - 90,360
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities (245,340) 60,884 (617,806) 67,543
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 12,691 135,305 (23,153) 33,872
Cash and cash equivalents at beginning of period 21,882 45,035 45,035 11,163
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 34,573 $ 180,340 $ 21,882 $ 45,035
=========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 118,089 $ 141,472 $ 521,860 $ 686,115
=========== ============ =========== ===========
See accompanying notes to financial statements.
6
ENERSYST DEVELOPMENT CENTER, L.L.C.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 (UNAUDITED) AND DECEMBER 31, 2003 AND 2002
A. NATURE OF BUSINESS
Enersyst Development Center, L.L.C. (the "Company") was formed June 25, 1996.
The Company is primarily engaged in the development and licensing of heat
transfer technology for use mainly in commercial foodservice ovens. The
Company's corporate offices are located in Dallas, Texas.
On May 24, 2001 Cairnwood Food Group, LLC ("CFG") acquired a majority interest
in the Company. As of March 31, 2004 and December 31, 2003, CFG had an 85.56%
interest in the Company with employees and former employee members owning the
balance.
B. ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
BASIS OF ACCOUNTING
The accounts are maintained and the financial statements have been prepared
using the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America.
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 certain reported amounts in the financial
statements and accompanying notes. Actual results could differ from these
estimates and assumptions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At March 31, 2004 and
December 31, 2003 and 2002, the Company had no such investments included in cash
and cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable primarily relate to royalties earned but not paid by
customers and are governed by license agreements between the Company and the
licensee. Licensee royalty payments are typically due within forty-five days of
the end of each quarter (one licensee's payments are due semiannually within
forty-five days of the end of each six month period). In the event a licensee
fails to make timely royalty payments the Company is allowed to, upon expiration
of an interim cure period, in addition to seeking equitable payment in full,
terminate such license agreement.
7
B. ACCOUNTING POLICIES - CONTINUED
ACCOUNTS RECEIVABLE - CONTINUED
Credit is extended to non-license related customers on an uncollateralized
basis. The Company maintains allowances for potential credit losses which, when
realized, have been within management's expectations. In the event of complete
non-performance by these customers, the maximum exposure to the Company is the
outstanding accounts receivable balance at the date of non-performance. The
Company had an allowance for doubtful accounts as of March 31, 2004 and December
31, 2003 and 2002 in the amount of $21,113, $21,113 and $66,207, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows: buildings and improvements - 20 years;
all other property and equipment - 3 to 10 years. Expenditures for normal
maintenance and repairs are expensed as incurred. The cost of assets sold or
abandoned and the related accumulated depreciation are eliminated from the
accounts and any gains or losses are recognized in the accompanying statement of
operations of the respective period.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER
INTANGIBLES ASSETS, which addresses the accounting for goodwill and other
intangible assets. Under SFAS No. 142, effective January 1, 2002 goodwill and
intangible assets with indefinite lives are no longer amortized, but reviewed on
an annual basis for impairment.
Other intangible assets consist of patents acquired and deferred financing
costs, which are amortized over 10 years and the terms of the related debt,
respectively. Patent filings and maintenance costs not from acquisitions are
expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment in accordance with the
guidelines of SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS. SFAS No. 144 requires that, when events or circumstances
indicate that the carrying amount of an asset may not be recoverable, the
Company should determine if impairment of value exists. If the estimated
undiscounted future net cash flows are less than the carrying amount of the
assets, an impairment exists and an impairment loss must be calculated and
recorded. If an impairment exists, the impairment loss is calculated based on
the excess of the carrying amount of the asset over the asset's fair value. Any
impairment loss is treated as a permanent reduction in the carrying value of the
assets. Through March 31, 2004 and December 31, 2003, no events or circumstances
have arisen which would require the Company to record a provision for impairment
on its long-lived assets.
8
B. ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION
The Company receives license and royalty fee payments from licensees based on
sales of licensees' related products during the prior quarter or semiannual
periods. The Company recognizes revenues and related expenses based on the sales
dates of the licensees' products. Development and consulting revenues are
recorded based on attainment of scheduled performance milestones.
INCOME TAXES
The Company is organized as a Limited Liability Company for federal income tax
purposes. As a result, income or losses are taxable or deductible to the members
rather than at the corporate level; accordingly, no provision has been made for
federal income taxes in the accompanying financial statements. The Company is
subject to state franchise tax, which is based on income or equity of the
Company.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development expenses for the three months ended March 31, 2004 and 2003 were
$76,000 and $58,000, respectively, and for the years ended December 31, 2003 and
2002 were approximately $220,000 and $250,000, respectively and is included in
selling, general and administrative expenses in the Statements of Operations.
MEMBERSHIP UNIT PROFIT INTEREST OPTION BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion ("APB")
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for its employee membership unit profit interest options. The Company
accounts for membership unit profit interest options based compensation for
non-employees under the fair value method prescribed by SFAS No. 123, ACCOUNTING
FOR STOCK BASED COMPENSATION.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the reporting requirements of SFAS No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, the Company calculates the fair value of
its assets and liabilities which qualify as financial instruments under this
statement and includes this additional information in the notes to the financial
statements when the fair value is different than the carrying value of those
financial instruments. The estimated fair values of accounts receivable and
accounts payable approximate their carrying amounts due to the relatively short
maturity of these instruments. The carrying value of short and long-term debt
also approximates fair value since these instruments bear market rates of
interest. None of the financial instruments are held for trading purposes.
9
B. ACCOUNTING POLICIES - CONTINUED
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO.
4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS.
SFAS No. 13 is amended to eliminate any inconsistency between the required
accounting for sale leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
leaseback transactions. This statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The Company adopted this
standard in its year beginning January 1, 2003, resulting in the Company
reclassifying its 2002 extraordinary gain on extinguishment of debt to other
income (expense) in the financial statements.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS No. 150
requires that certain financial instruments, which under previous guidance could
be accounted for as equity, be classified as liabilities in the accompanying
balance sheet. SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and is otherwise effective for the Company in
the fourth quarter of 2003. Adoption of SFAS No. 150 did not have an impact on
the Company's results of operations or financial condition.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S ACCOUNTING
AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS, which elaborates on the disclosures to be made by a
Guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. Interpretation
No. 45 is effective for guarantees issued or modified after December 31, 2002
and the disclosure requirements in this interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. Adoption of Interpretation No. 45 did not have an impact on the Company's
results of operations or financial condition.
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, ("FIN 46R") which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in variable
interest entities ("VIEs") created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, FIN 46R will be applied
beginning on January 1, 2005. For any VIEs that must be consolidated under FIN
46R that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the
consolidated balance sheet and any previously recognized interest being
recognized as the cumulative effect of a change in accounting principle. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. The Company owns no interests in variable
interest entities; therefore, FIN 46R will not affect the Company's results of
operations or financial condition.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
10
C. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
2004 2003 2002
-------------- ------------- -------------
(UNAUDITED)
Land $ 192,000 $ 192,000 $ 192,000
Building and improvements 434,494 434,494 433,520
Computer hardware and software 116,785 114,623 94,523
Machinery and equipment 92,225 92,225 45,779
Office furniture and equipment 56,476 56,476 55,356
Automobiles and other 13,777 13,777 975
-------------- ------------- -------------
Total property and equipment 905,757 903,595 822,153
Less accumulated depreciation 223,975 192,981 121,709
-------------- ------------- -------------
Property and equipment, net $ 681,782 $ 710,614 $ 700,444
============== ============= =============
Depreciation expense was $30,994 and $16,431 for the three months ended March
31, 2004 and 2003, respectively, and $71,273 and $74,830 for the years ended
December 31, 2003 and 2002, respectively.
D. GOODWILL
Goodwill of $6,081,250 is recorded net of related accumulated amortization of
$245,471 at March 31, 2004 and December 31, 2003 and 2002. The Company's annual
evaluation of goodwill impairment was performed as of December 31, 2003. No
impairment was identified as a result of such evaluation.
E. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
MARCH 31, DECEMBER 31,
2004 2003 2002
-------------- ------------- -------------
(UNAUDITED)
Patents $ 7,440,789 $ 7,440,789 $ 7,440,789
Deferred financing costs 57,006 57,006 -
-------------- ------------- -------------
Total other intangible assets 7,497,795 7,497,795 7,440,789
Less accumulated amortization 2,150,269 1,958,582 1,195,067
-------------- ------------- -------------
Other intangible assets, net $ 5,347,526 $ 5,539,213 $ 6,245,722
============== ============= =============
Future amortization of other intangible assets at December 31, 2003 are as
follows:
2004 $ 775,173
2005 744,079
2006 744,079
2007 744,079
2008 744,079
Thereafter $ 1,787,724
11
E. OTHER INTANGIBLE ASSETS - CONTINUED
Other intangible assets are tested annually for impairment, and no impairment
losses have been identified as a result of such evaluations.
Amortization expense of other intangible assets was $191,687 and $188,455 for
the three months ended March 31, 2004 and 2003, respectively, and $763,515 and
$753,113 for the years ended December 31, 2003 and 2002, respectively.
F. LINE-OF-CREDIT
In March 2003, the Company entered into a $1,250,000 revolving line-of-credit
with a lending institution, subordinate to the Company's note payable to a
different lending institution. As of March 31, 2004 and December 31, 2003,
$1,075,000 and $1,100,000 was outstanding, respectively. The loan bears interest
at the greater of prime plus 1% or the Federal Funds Rate plus 1.5% (5.0% as of
December 31, 2003) with monthly interest only payments due prior to maturity on
December 31, 2004, at which time all outstanding principal and unpaid interest
is due. The line-of-credit is guaranteed by a member.
G. NOTES PAYABLE, MEMBERS
The Company has entered into a note payable to a member, with interest of 6.75%,
and $1,228,833 and $1,203,833 was outstanding as of March 31, 2004 and December
31, 2003, respectively. The note payable is secured by the assets of the
Company, matures August 25, 2006, and is subordinate to the note payable due to
a lending institution, as described in Note H. There is an agreement with the
senior lender to the Company that an additional $25,000 per quarter may be drawn
on this note in order to pay management fees to a related entity of the member,
as described in Note K. Interest only payments are due monthly with all
outstanding principal and unpaid interest due at the maturity date.
The Company has entered into a note payable to a member, with interest of 6.75%,
and $173,408 outstanding as of March 31, 2004 and December 31, 2003. The note
requires interest only payments prior to refinancing or retirement of the senior
lender note. Principal and interest payments are due monthly with all
outstanding principal and unpaid interest due within twenty-four months of
refinancing or extinguishment of the senior lender note.
H. NOTE PAYABLE
The Company has entered into an amended senior note payable to a lending
institution with monthly principal payments due of $109,306 through December 31,
2004, at which time all outstanding principal and unpaid interest is due. As of
March 31, 2004 and December 31, 2003, $5,278,479 and $5,523,819 was outstanding,
respectively, under this note payable. This note is collateralized by all assets
of the Company, which includes personal property, real property, and intangible
assets. A CFG related entity has guaranteed $1 million of this note. This note
bears interest at prime plus 2.0% (6.0% at December 31, 2003). This note
contains covenants pertaining to quarterly EBITDA, monthly minimum tangible net
worth, and monthly financial reporting requirements. The Company is in
compliance with the amended debt covenants at March 31, 2004 and December 31,
2003.
12
I. MEMBERSHIP UNIT PROFIT INTEREST OPTIONS
The Company has issued membership unit profit interest options to employees.
Such units exercised under these options will only participate in distributions
to members after the majority member has been distributed $5,262,794, which is
equivalent to this member's total contributions to the Company. Distributions
can only be made to members after the senior debt has been repaid in full. Such
options are vested upon date of grant, have a $0.01 exercise price per option
and have a contractual life of 10 years, as long as the employee remains
employed by the Company. A summary of the Company's membership unit profit
interest options activity is as follows:
Number of
Membership
Unit Profit
Interest Options
------------------
Balance at December 31, 2001 2,785
Granted 6,701
Exercised -
Forfeited -
------------------
Balance at December 31, 2002 9,486
Granted 2,500
Exercised -
Forfeited -
------------------
Balance at December 31, 2003 11,986
Granted (Unaudited) -
Exercised (Unaudited) -
Forfeited (Unaudited) -
------------------
Balance at March 31, 2004 (Unaudited) 11,986
==================
The Black Scholes value for membership unit profit interest options granted for
pro forma disclosure purposes in accordance with SFAS No. 123 was nominal, and
hence not disclosed.
J. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings in the normal course of
business. Management believes the outcome of these matters will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
K. RELATED PARTY TRANSACTIONS
CONSULTING AGREEMENT
The Company has a consulting agreement with a related party of a member to
provide management consulting services for $200,000 per year. The Company
incurred $50,000 for the three months ended March 31, 2004 and 2003 and $200,000
for the years ended December 31, 2003 and 2002 related to such services, of
which $25,000, $100,000 and $25,000 has been added to notes payable, members
through March 31, 2004 and December 31, 2003 and 2002, respectively.
13
K. RELATED PARTY TRANSACTIONS - CONTINUED
NOTES PAYABLE, MEMBERS
The Company has entered into certain notes payable agreements with members of
the Company as discussed in Note G.
L. RISK CONCENTRATIONS
As of March 31, 2004, the Company had two customers that accounted for
approximately 43% and 29% of the Company's accounts receivable balance. As of
December 31, 2003, the Company had four customers that accounted for
approximately 22%, 19%, 17%, and 14% of the Company's accounts receivable
balance. As of December 31, 2002, the Company had five customers that accounted
for approximately 18%, 17%, 15%, 15%, and 11% of the Company's accounts
receivable balance.
For the three months ended March 31, 2004, the Company had two customers that
accounted for approximately 41% and 20% of revenues. For the three months ended
March 31, 2003, the Company had two customers that accounted for approximately
30% and 21% of revenues. For the year ended December 31, 2003, the Company had
three customers that accounted for approximately 30%, 19%, and 10% of revenues.
For the year ended December 31, 2002, the Company had three customers that
accounted for approximately 32%, 21%, and 10% of revenues.
M. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) employee savings plan (the "Plan") covering
essentially all employees who meet certain minimum age and length of service
requirements. The Plan provides for payment of the employee's vested portion of
the Plan upon retirement, termination, disability or death. The Plan is funded
by employee salary deferral contributions as well as Company matching
contributions which are at the discretion of the members. Company matching
contributions to the plan totaled $2,700, $4,110, $13,747 and $12,478 for the
three months ended March 31, 2004 and 2003 and the years ended December 31, 2003
and 2002, respectively.
N. SUBSEQUENT EVENT (UNAUDITED)
On May 21, 2004, TurboChef Technologies, Inc. (the "Registrant") entered into a
Contribution Agreement (the "Contribution Agreement") with the Company and the
members of the Company (the "Members").
Pursuant to the Contribution Agreement, the Registrant was issued 7,247,081
common membership units of the Company (the "Common Units") in exchange for a
capital contribution in the amount of $7,247,081, and the Members exchanged all
of their units of membership interest of the Company for preferred membership
units of the Company (the "Preferred Units"). The Registrant's capital
contribution was used to retire the Company's outstanding indebtedness.
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N. SUBSEQUENT EVENT (UNAUDITED) - CONTINUED
In addition, the Registrant and the Members entered into a Preferred Unit
Exchange Agreement (the "Exchange Agreement") pursuant to which the Members were
granted the right to exchange their Preferred Units for shares of the
Registrant's common stock, par value $0.01 per share ("Common Stock"). As of May
21, 2004, the Preferred Units were exchangeable for a total of 1,832,924 shares
of Common Stock based on an exchange price of $3.465 per share. The exchange
price is subject to adjustment only in the event of a stock split, stock
dividend, recapitalization or other similar events. The Members also were
granted piggy-back registration rights under the Exchange Agreement with respect
to the shares of Common Stock for which their Preferred Units may be exchanged.
The Members and the Registrant also entered into an Amended and Restated
Operating Agreement of the Company (the "Operating Agreement"). Under the
Operating Agreement, the Registrant will serve as the Company's managing member,
and will be exclusively responsible for the management of the assets, affairs,
and operations of the Company.
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