================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Quarter ended March 31, 1998 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________ COMMISSION FILE NUMBER 0-23478 ------------------------------ TURBOCHEF, INC. (Exact name of Registrant as specified in its Charter) DELAWARE 48-1100390 (State or other jurisdiction of (IRS employer incorporation or organization) identification number) 10500 METRIC DRIVE, SUITE 128 75243 DALLAS, TEXAS (Zip Code) (Address of principal executive offices) Registrant's telephone number: (214) 341-9471 ------------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the Registrant's classes of Co mmon Stock, as of the latest practicable date. Number of Shares Outstanding Title of Each Class at May 8, 1998 ------------------- -------------- Common Stock, $0.01 Par Value 14,571,608 ================================================================================ TURBOCHEF, INC. TABLE OF CONTENTS Form 10-Q Item Page - -------------- ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997.................................... 3 Condensed Statements of Operations (unaudited) for the three months ended March 31, 1998 and 1997............... 4 Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 1998 and 1997............... 5 Notes to Condensed Financial Statements (unaudited)...... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................ 12 Item 2. Changes in Securities.................................... 12 Item 3. Defaults Upon Senior Securities.......................... 12 Item 4. Submission of Matters to a Vote of Security Holders...... 12 Item 5. Other Information........................................ 12 Item 6. Exhibits and Reports on Form 8-K......................... 12 2 PART 1 - ITEM 1 FINANCIAL STATEMENTS TURBOCHEF, INC. CONDENSED BALANCE SHEETS March 31, December 31, --------- ----------- 1998 1997 ---- ---- Assets (Unaudited) Current assets: Cash and cash equivalents $ 1,437,764 1,396,641 Marketable securities available for sale at fair value 8,007,917 7,277,395 Accounts receivable 1,160,646 644,569 Inventories 634,458 934,690 Prepaid expenses 52,072 104,160 ----------- ----------- Total current assets 11,292,857 10,357,455 ----------- ----------- Marketable securities available for sale, at fair value 7,024,756 5,482,064 Property and equipment: Leasehold improvements 110,192 110,062 Furniture and fixtures 363,113 344,507 Equipment 429,519 420,342 ----------- ----------- 902,824 874,911 Less accumulated depreciation and amortization (425,945) (383,948) ----------- ----------- Net property and equipment 476,879 490,963 ----------- ----------- Other assets 40,699 109,283 ----------- ----------- Total assets $18,835,191 16,439,765 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable 447,589 401,013 Accrued expenses 350,953 352,928 Deferred revenue 1,908 21,705 ----------- ----------- Total current liabilities 800,450 775,646 ----------- ----------- Deferred rent 32,680 35,651 Stockholders' equity: Common stock, $.01 par value. Authorized 50,000,000 shares. Issued 14,571,608 and 14,551,294 shares at March 31, 1998 and December 31, 1997, respectively 145,716 145,513 Additional paid-in capital 32,191,670 32,129,601 Accumulated deficit (18,050,969) (17,276,907) Net unrealized gain on marketable securities 4,049,531 964,148 Treasury stock - at cost 17,382 shares (333,887) (333,887) ----------- ----------- Total stockholders' equity 18,002,061 15,628,468 ----------- ----------- $18,835,191 16,439,765 =========== =========== See accompanying Notes to Condensed Financial Statements. 3 TURBOCHEF, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended ------------------ March 31, --------- 1998 1997 ---- ---- Net sales $ 954,004 686,940 Other revenues 750,000 6,237 ----------- ---------- Total revenues 1,704,004 693,177 Costs and expenses: Cost of goods sold 747,678 511,436 Research and development expenses 459,125 268,057 Selling, general and administrative expenses 1,289,919 984,534 ----------- ---------- Total costs and expenses 2,496,722 1,764,027 ----------- ---------- Operating loss (792,718) (1,070,850) ----------- ---------- Other income (expense): Interest income 38,587 106,427 Dividend income 47,015 - Equity in loss of joint venture (65,282) - Other (1,664) 422 ----------- ---------- 18,656 106,849 ----------- ---------- Net loss $ (774,062) (964,001) =========== ========== Loss per common share - basic and diluted $ (0.05) (0.07) =========== ========== Weighted average number of common shares outstanding 14,559,037 13,835,791 =========== ========== See accompanying Notes to Condensed Financial Statements. 4 TURBOCHEF, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- Cash flows from operating activities: Net loss $ (774,062) (964,001) Adjustments to reconcile net loss to net cash used in operating activities: Equity in net loss of joint venture 65,282 - Depreciation and amortization 117,297 27,038 Provision for doubtful accounts 7,500 1,500 Amortization of director compensation 7,473 6,937 Decrease (increase) in accounts receivable (523,577) 110,885 Decrease (increase) in inventories 228,232 (51,700) Decrease (increase) in prepaid expenses 44,616 (99,688) Decrease in other assets - 1,134 Increase in accounts payable 46,576 74,817 Decrease in accrued expenses (1,975) (247,564) Decrease in deferred revenue (19,797) (390) Decrease in sales deposits - (43,700) Decrease in deferred rent (2,971) - ----------- ---------- Net cash used in operating activities (805,406) (1,184,732) ----------- ---------- Cash flows from investing activities: Sales of marketable securities 812,170 1,050,000 Purchase of equipment (27,913) (64,926) Investment in TurboChef Europe - (41,750) ----------- ---------- Net cash provided by investing activities 784,257 943,324 ----------- ---------- Cash flows from financing activities: Exercise of stock options 12,501 42,001 Exercise of stock warrants 49,771 - ----------- ---------- Net cash provided by financing activities 62,272 42,001 ----------- ---------- Net increase (decrease) in cash and cash equivalents 41,123 (199,407) Cash and cash equivalents at beginning of period 1,396,641 477,166 ----------- ---------- Cash and cash equivalents at end of period $ 1,437,764 277,759 =========== ========== See accompanying Notes to Condensed Financial Statements. 5 TURBOCHEF, INC. Notes to Condensed Financial Statements (Unaudited) March 31, 1998 General - ------- The financial statements of TurboChef, Inc. (the "Company") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and have not been audited by independent public accountants. In the opinion of management, all adjustments (which consisted only of normal recurring accruals) necessary to present fairly the financial position and results of operations have been made. Pursuant to SEC rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements unless significant changes have taken place since the end of the most recent fiscal year. The December 31, 1997 balance sheet was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The Company believes that other disclosures contained herein, when read in conjunction with the financial statements and notes included in the Company's Annual Report for the fiscal year ended December 31, 1997 on Form 10-K, are adequate to make the information presented not misleading. It is suggested, therefore, that these statements be read in conjunction with the statements and notes included in the aforementioned Form 10-K. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS), during the fourth quarter of 1997, and all previous references to per share amounts were retroactively restated. The Statement requires basic EPS to be computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings of the entity. Adoption of this statement did not impact previously recorded net loss per common share for the three months ended March 31, 1997. Basic net loss per common share is based on 14,559,037 and 13,835,791 weighted average shares outstanding for the three months ended March 31, 1998 and 1997, respectively. For the three months ended March 31, 1998 and 1997, the Company did not have any incremental shares of potentially dilutive stock as their effect was antidilutive. The Company adopted the provisions of Statement of Financial Accounting Standards No. 130, Comprehensive Income, on January 1, 1998. This statement requires the Company to report comprehensive income and its components with the same prominence as other financial statements in its December 31, 1998 financial statements. Comprehensive income describes the total of all components of comprehensive income, including net income and other comprehensive income. Other comprehensive income refers to all revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. For the three month period ended March 31, 1998, comprehensive income was $3,275,469 of which ($774,062) was net loss and of which $4,049,531 was net unrealized gain on marketable securities. For the three month period ended March 31, 1997, there were no components of other comprehensive income. 6 ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS --------------------------------------------------------------------- OF OPERATIONS ------------- GENERAL From its inception in April 1991 until March 1994, the Company was engaged primarily in research and development, limited production operations and test marketing of its cooking systems. In March 1994, the Company introduced its first commercial product, the Model D-1 cooking system. In June 1995, the Company entered into its first major contract with Whitbread PLC ("Whitbread") and introduced an enhanced product, the Model D-2 cooking system. The Company concentrated its efforts on the Whitbread rollout throughout 1996. Upon the completion of the secondary public offering of Common Stock in June 1996 ("the June 1996 Offering"), the Company became committed to the development of a direct sales organization. By the end of the first quarter of 1997, the Company had substantially developed its U.S. direct sales infrastructure and marketing programs. The revolutionary nature of the TurboChef technologies, coupled with the foodservice industry's general resistance to change, have contributed to a long sales cycle. Consequently, significant increases in domestic sales have not yet materialized. However, the Company is utilizing the information gained from its successful installations and applying this knowledge with other customers in order to duplicate those successes. Furthermore, management is exploring the prospects of engaging a major foodservice equipment distributor for the U.S. market. On September 29, 1997, the Company announced a strategic alliance with Maytag Corporation (the "Maytag alliance"). The alliance is aimed at the development and commercialization of innovative products based on TurboChef's leading-edge technologies in heat transfer, thermodynamics and control systems. The two companies believe that the combination of Maytag's expertise in manufacturing, marketing and distribution in residential and commercial appliance markets, and the Company's proprietary technologies and product development capabilities, can result in the successful commercialization of new products in the future. The alliance entailed a mutual exchange of each company's common stock valued at approximately $10 million and Maytag's payment to TurboChef for certain research and development activities related to targeted product initiatives. As of May 8, 1998, Maytag had paid TurboChef, Inc. an aggregate of $2.1 million for alliance-related activities. The Company has invested heavily in research, prototype development, establishment of manufacturing capacity, and sales and marketing personnel. As a result of these investments, and the heretofore limited revenues generated through sales of cooking systems, the Company has incurred substantial operating losses in each year of its operations (including net losses of $4,662,302, $2,941,413, and $1,585,268 for the years ended December 31, 1997, 1996 and 1995, respectively) resulting in an accumulated deficit of $18,050,969 as of March 31, 1998. The Company will continue to pursue business growth through implementation of the following strategies: i) marketing to U.S. restaurants, hotels, convenience stores and other foodservice operators, ii) establishment of domestic and international distribution through strategic alliances and regional distributorships, iii) joint development and commercialization of new products through the Maytag alliance, and iv) continued development of new hardware, software and food solutions for foodservice operators. The Company's future profitability will depend upon, among other things, the successful 7 implementation of most or all of these initiatives. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. The discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report. RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH 31, 1997 Revenues for the quarter ended March 31, 1998 were $1,704K, an increase of $1,010K, when compared to revenues of $693K for the quarter ended March 31, 1997. This increase is primarily attributable to revenues received pursuant to the Maytag alliance, higher average unit selling prices and revenues generated by an extended warranty program for the Company's largest customer. Cost of sales for the quarter ended March 31, 1998 was $748K, an increase of $237K when compared to $511K for cost of sales in the quarter ended March 31, 1997. This increase is attributable to a higher average unit manufacturing cost and the costs associated with the extended warranty program. Gross profit on total net sales for the quarter ended March 31, 1998 increased $31K to $206K, when compared to gross profit on total net sales of $176K during the quarter ended March 31, 1997. The increase is primarily attributable to increased unit shipments. Gross margin for the quarter ended March 31, 1998 was 22% of total net sales, compared to 26% of total net sales for the quarter ended March 31, 1997. The percentage decrease is primarily attributable to cost on the extended warranty program in excess of revenues. Gross margin on net oven sales increased to 36% during the quarter ended March 31, 1998, compared to 32% for the quarter ended March 31, 1998 due to higher average unit selling prices. Research and development expenses for the quarter ended March 31, 1998 increased $191K, to $459K, as compared to $268K for the quarter ended March 31, 1997. The increase is attributable to R&D activity relating to Maytag alliance projects entailing staff additions and prototype and software development. Selling, general and administrative expenses for the quarter ended March 31, 1998 increased $305K to $1,290K from comparable expenses of $985K for the quarter ended March 31, 1997. The increased expense is due to European business development expenses not incurred during the first quarter of 1997, and other administrative expenses including office expansion and executive recruiting expense. Interest income, net of interest expense for the quarter ended March 31, 1998, was $37K compared to $106K for the quarter ended March 31, 1997. The decrease in income is attributable to decreased cash levels. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements in connection with its product and technology development and marketing efforts have been and will continue to be significant. In addition, capital is required to operate and expand the Company's operations. Since its inception, the Company has been substantially dependent on loans and capital contributions from its principal stockholders, private placements of its 8 securities, the proceeds from the initial public offering of common stock in April 1994 (the "April 1994 IPO") and the June 1996 Offering to fund its activities. Since October 1997, the Company's capital requirements have been met in part by Maytag, which in accordance with the first project agreement has paid to the Company an aggregate of $2.1 million ($250 thousand per month through March 31, 1998 and $300 thousand per month thereafter) as of May 8, 1998 for research and development relating to their interests. In March 1998, the initial project was extended for one year, and Maytag increased the monthly payment from $250 thousand to $300 thousand per month for the term of the extension. The Maytag alliance called for the exchange of each company's stock with a value of approximately $10 million. The Company issued 564,668 shares of common stock to Maytag in return for 293,846 shares of Maytag common stock. According to the terms of the strategic alliance agreement, the Maytag stock owned by the Company is subject to a general restriction placed on selling, pledging, transferring or assigning such securities for a period of two years from the date of the agreement. However, in accordance with the agreement, the Company gained the right to sell, pledge, transfer or assign up to 50% of the shares on March 31, 1998. As of May 8, 1998, the Maytag stock owned by the Company had a market value of approximately $14.5 million. At March 31, 1998, the Company had working capital of $10,492K as compared to working capital of $9,582K at December 31, 1997. The $910K working capital increase from December 31, 1997 resulted primarily from the appreciation of the current portion (50%) of the investment in Maytag common stock, offset by the net operating loss of $774K. For the quarter ended March 31, 1998, accounts receivable turnover increased to 5.0 from 4.4 during the quarter ended March 31, 1997. Cash used in operating activities was $805K for the quarter ended March 31, 1998 as compared to cash used in operating activities of $1,185K for the quarter ended March 31, 1997. The decrease is primarily the result of a $190K decrease in operating losses, an increase in non-cash expenses of $162K, a decrease in inventories of $228K and decreases in prepaid expenses and accounts payable of $45K and $47K respectively. These amounts are offset by a $524K increase in accounts receivable. Cash provided by investing activities for the quarter ended March 31, 1998 was $784K as a result of the sale of marketable securities in the amount of $812K, offset by equipment purchases of $28K. Cash provided by financing activities was $62K for the quarter ended March 31, 1998, which represents the proceeds from exercises of stock options and warrants. At March 31, 1998, the Company had cash and cash equivalents of $1,438K, compared to cash and cash equivalents of $1,397K at December 31, 1997. In June 1996 the Company consummated the June 1996 Offering, an underwritten public offering of 800,000 shares of Common Stock which resulted in aggregate proceeds of approximately $10,301K, net of the underwriter's discount and other offering costs of $1,699K. YEAR 2000 ISSUES The Year 2000 issue, which is common to most businesses, concerns the inability of information systems, primarily computer software programs, to properly recognize and process date-sensitive information as the year 2000 approaches. All critical software and related technologies used by the Company are year-2000 compliant. Thus, management believes that there will be no significant costs required to address the Year 2000 issue and such issue will not materially impact its financial condition nor adversely impact business operations. 9 AUTHORITATIVE PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, which is not expected to significantly change the Company's current disclosures. FORWARD LOOKING STATEMENTS The Company is continuing to utilize the proceeds from the June 1996 Offering, in addition to payments received from the Maytag alliance projects, to intensify its product development activities with the goal of developing innovative and commercially viable products, and reinforce its marketing efforts to expand its commercial cooking system customer base. The Company anticipates, based on its currently proposed plans and assumptions relating to its operations (including assumptions regarding the progress of its research and development efforts and the realization of projected cooking system deliveries) that its current cash and cash equivalent balances, anticipated revenues from operations, and payments received pursuant to the Maytag alliance, will be sufficient to fund its operations and satisfy its contemplated capital requirements for at least the next 24 months. In the event that the Company's plans change, or its assumptions change or prove to be incorrect, or cash balances and anticipated revenues otherwise prove to be insufficient, the Company would be required to revise its plan of operations (which revision would include a significant reduction in operating costs) and/or seek additional financing prior to the end of such period. The Company has no other current arrangements with respect to, or sources of, additional financing. There can thus be no assurance that additional financing will be available to the Company, if and when needed, on commercially reasonable terms, or at all. The Company has used a substantial portion of the proceeds of the June 1996 Offering in an effort to expand its current level of operations and grow the Company's business. However, the Company's future performance will be subject to a number of business factors, including those beyond the Company's control, such as economic downturns and evolving industry needs and preferences, as well as to the level of the Company's competition and the ability of the Company to successfully market its products and effectively monitor and control its costs. The Company believes that increases in revenues sufficient to offset its expenses and result in its profitability could be derived from its currently proposed plans within the next 12 months, if such plans are successfully completed. These plans include: (i) successfully develop and market new products through the Maytag alliance, (ii) utilize the awareness created by the Whitbread relationship and the early successes of TurboChef Europe Ltd. to extend the Company's marketing and sales efforts into other countries within the European Union, (iii) further develop U.S. product sales, (iv) introduce additional new products, (v) establish a dealer sales network and (vi) reduce the Company's manufacturing costs. However, there can be no assurance that the Company will be able to successfully implement any of the foregoing plans, that either its revenues will increase or its rate of revenue growth will continue or that it will ever be able to achieve profitable operations. As of March 31, 1998, the amount of backlog orders believed to be firm was approximately $2.0 million, as compared to approximately $2.0 million as of December 31, 1997. 10 This report and other reports and statements filed by the Company from time to time with the Securities and Exchange Commission (collectively, "SEC Filings") contain or may contain certain forward looking statements and information that are based on the beliefs of the Company's management as well as estimates and assumptions made by, and information currently available to, the Company's management. When used in SEC Filings, the words "anticipate", "believe", "estimate", "expect", "future", "intend", "plan", and similar expressions, as they relate to the Company or the Company's management, identify forward looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the Company's operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the segments of the foodservice industry served by the Company, the costs of product development and other risks and uncertainties, in addition to any uncertainties specifically identified in the text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners, and competitors, legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned. 11 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None Item 2. CHANGES IN SECURITIES. None Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit Number Description -------------- ----------- 10.29 Employment agreement between TurboChef, Inc. and Marion H. Antonini. (b) REPORTS ON FORM 8-K None 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TURBOCHEF, INC. By:/s/ Dennis J. Jameson ------------------------------------- Dennis J. Jameson Executive Vice President, Chief Financial Officer (Principal Financial Officer) Dated May 15, 1998 13