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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 September 30, 1999
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 Technologies, 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, including area code:
(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 Common Stock, as of the latest practicable date.
Number of Shares
Outstanding
Title of Each Class at November 5, 1999
------------------- -------------------
Common Stock, $0.01 Par Value 15,090,373
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TURBOCHEF TECHNOLOGIES, INC.
TABLE OF CONTENTS
Form 10-Q Item Page
- -------------- ----
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998................................................ 3
Unaudited Interim Condensed Statements of Operations for the
three and nine months ended September 30, 1999 and 1998.......... 4
Unaudited Interim Condensed Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998.................... 5
Notes to the Interim Condensed Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 18
Part II. Other Information
Item 1. Legal Proceedings................................................ 19
Item 2. Changes in Securities and Use of Proceeds........................ 19
Item 3. Defaults Upon Senior Securities.................................. 19
Item 4. Submission of Matters to a Vote of Security Holders.............. 19
Item 5. Other Information................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signatures....................................................... 20
2
TurboChef Technologies, Inc.
Condensed Balance Sheets
(Amounts in Thousands, Except Share Data)
September 30, December 31,
------------- ------------
1999 1998
---- ----
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 2,473 $ 164
Marketable securities available for sale, at fair value 5,340 18,292
Marketable securities - pledged, at fair value 6,852 -
Accounts receivable, net of allowance for doubtful accounts
of $79 and $92 at September 30, 1999 and December 31, 1998, respectively 883 914
Inventories, net 121 762
Prepaid expenses 212 41
------------- ------------
Total current assets 15,881 20,173
------------- ------------
Property and equipment:
Leasehold improvements 288 130
Furniture and fixtures 661 475
Equipment 507 456
1,456 1,061
Less accumulated depreciation and amortization (728) (563)
------------- ------------
Net property and equipment 728 498
------------- ------------
Investment in derivatives 1,457 -
Other assets 122 129
Total assets $ 18,188 $ 20,800
============= ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 842 $ 571
Accrued payroll 670 223
Accrued upgrade & warranty costs 1,168 259
Accrued expenses 412 474
Deferred revenue 4 49
Other 21 31
------------- ------------
Total current liabilities 3,117 1,607
Long-term liabilities:
Long-term debt 5,314 -
Accrued interest 256 -
------------- ------------
Total long-term liabilities 5,570 -
Total liabilities 8,687 1,607
Commitments and contingencies - -
Stockholders' equity
Common stock, $.01 par value. Authorized 50,000,000 shares.
Issued 15,090,373 and 14,654,134 shares at September 30, 1999
and December 31, 1998, respectively 151 147
Additional paid-in capital 33,772 32,436
Accumulated deficit (28,521) (21,231)
Accumulated other comprehensive income 5,269 8,292
Notes receivable from employees (719) -
Treasury stock - at cost 32,130 shares in 1999 and 1998 (451) (451)
------------- ------------
Total stockholders' equity 9,501 19,193
------------- ------------
Total liabilities and stockholders' equity $ 18,188 $ 20,800
============= ============
3
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Operations
(Amounts in Thousands, Except Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Product sales $ 540 $ 841 $ 2,566 $ 2,544
Research and development fees - 1,150 1,025 2,800
----------- ----------- ------------ -----------
Total revenues 540 1,991 3,591 5,344
Costs and expenses:
Cost of goods sold 392 590 2,002 2,056
Research and development expenses 940 503 2,633 1,347
Selling, general and administrative expenses 1,962 1,603 5,647 4,304
----------- ----------- ------------ -----------
Total costs and expenses 3,294 2,696 10,282 7,707
----------- ----------- ------------ -----------
Operating loss (2,754) (705) (6,691) (2,363)
----------- ----------- ------------ -----------
Other income (expense):
Interest income 15 20 38 85
Interest expense (126) - (256) -
Dividend income 50 53 155 147
Equity in loss of joint venture - - - (180)
Amortization of derivatives (162) - (486) -
Other income (expense) (38) 2 (50) 16
----------- ----------- ------------ -----------
(261) 75 (599) 68
----------- ----------- ------------ -----------
Net loss $ (3,015) $ (630) $ (7,290) $ (2,295)
=========== =========== ============ ===========
Loss per common share - basic and diluted $(0.20) $(0.04) $ (0.49) $ (0.16)
=========== =========== ============ ===========
Weighted average number of
common shares outstanding 15,090,373 14,653,986 14,947,465 14,597,413
=========== =========== ============ ===========
4
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Cash Flows
(Amounts in Thousands)
Nine Month Ended September 30,
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (7,290) $ (2,295)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 411 136
Amortization of investment in derivatives 486 -
Non-cash compensation expense 26 -
Provision for doubtful accounts 54 -
Increase in accounts receivable (23) (401)
Decrease in inventories 405 146
(Increase) decrease in other assets (174) 51
Increase (decrease) in accounts payable 271 (5)
Increase (decrease) in accrued expenses 1,550 14
(Decrease) increase in other liabilities (55) 232
Net cash used in operating activities (4,339) (2,122)
----------- -----------
Cash flows from investing activities:
Sales/(purchase) of marketable securities - 1,056
Investment in derivatives (1,943) -
Equipment and leasehold improvements (395) (97)
Investment in TurboChef Europe - (40)
Net cash provided by (used in) investing (2,338) 919
activities
----------- -----------
Cash flows from financing activities:
Borrowings under long-term debt 8,392 -
Exercise of stock options 768 12
Issuance of stock warrants 153 -
Exercise of stock warrants 392 166
Notes receivable (719) -
Net cash provided by financing activities 8,986 178
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,309 (1,025)
Cash and cash equivalents at beginning of period 164 1,397
Cash and cash equivalents at end of period $ 2,473 $ 372
=========== ===========
5
TURBOCHEF TECHNOLOGIES, INC.
Notes to Interim Condensed Financial Statements
(Information relating to the three and nine month periods
ended September 30, 1999 are unaudited)
September 30, 1999
1) General
TurboChef Technologies, Inc. ("the Company") is a technology development
firm that focuses on residential and commercial appliances. Currently, it is
engaged in designing, developing, marketing and licensing its proprietary rapid
cook systems and technology. These systems use microprocessors to precisely
control the distribution of energy used to cook food over time and across space.
Consequently, they achieve higher cooking speeds and/or quality levels than are
achievable with conventional cooking technologies. In addition, the
microprocessors give the cooking systems the ability to communicate with users
and service personnel over computer networks. Management believes that the
Company operates in one primary business segment.
The Company's commercial products and technologies have been validated
through utilization and testing by both the Company and a variety of foodservice
operators around the world. The Company is in the process of bringing its
technology to residential customers in North America through its Strategic
Alliance Agreement ("Maytag Alliance" or the "Alliance") with Maytag Corporation
("Maytag"). It is also exploring alliance relationships to introduce both the
commercial and residential technologies throughout the world. The Company plans
to build upon its core technology competency, to expand its technology portfolio
by developing other innovative products and increase market penetration through
joint venture, strategic alliance and/or licensing or other arrangements with
companies already engaged in the mass marketing and/or manufacture of
foodservice products.
The Company has completed the transition of its North American Sales and
Marketing responsibilities to G.S. Blodgett Corporation ("Blodgett"), a wholly
owned subsidiary of Maytag, engaging in the manufacturing and sales of
commercial foodservice equipment. In addition, Blodgett has also adopted the
responsibility of manufacturing of the Company's commercial products. The Maytag
Alliance will enable the Company to focus on its core competency of technology
development while utilizing the strengths of well-established leaders within the
commercial and residential appliance industries to manufacture, market, and
distribute the Company's products in North America. Upon its successful
implementation, this alliance, and others like it, will provide the Company with
royalties from the sale of products utilizing its patented technologies and
allow the Company to focus its financial resources on the development of new
products as well as new markets.
2) Interim Condensed Financial Statements
--------------------------------------
The financial statements of TurboChef Technologies, Inc. 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
6
have taken place since the end of the most recent fiscal year. The December 31,
1998 balance sheet was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles
("GAAP"). 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, 1998 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 September 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
Basic net loss per common share is based on 15,090,373 and 14,653,986
weighted average shares outstanding for the three months ended September 30,
1999 and 1998, respectively. For the nine months ended September 30, 1999 and
1998 basic net loss per common share is based on 14,947,465 and 14,597,413
weighted average shares outstanding, respectively. For both the three and nine
month periods ended September 30, 1999 and 1998, the Company did not report 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 nine month period
ended September 30, 1999, comprehensive income was ($10,313,000) of which
($7,290,000) was net loss and of which ($3,023,000) was the change in net
unrealized gain on marketable securities. For the nine-month period September
30, 1998, comprehensive income was $772,000 of which ($2,295,000) was net loss
and of which $3,067,000 was the change in net unrealized gain on marketable
securities.
Investments in marketable securities at September 30, 1999 and December 31,
1998 consisted of Maytag common stock. These securities are classified as
available-for-sale under Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and are stated
at fair value. Unrealized holding gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific identification
basis.
3) Notes Receivable from Employees
-------------------------------
In February, March and April 1999, the Company loaned an aggregate of
$37,500, $72,500 and $600,000, respectively, to three of its employees and two
of the Company's directors. The loaned amounts were used by such employees and
directors to exercise 284,000 (15,000 in February 1999, 29,000 in March 1999 and
240,000 in April 1999) stock options at an exercise price of $2.50 per share.
All such loans are full-recourse and are secured by the underlying securities
and the general assets of the respective borrower. Each loan has a term of five
years and is payable, along with accrued interest, in February, March and April
2004. The notes are recorded as a reduction to Stockholders' Equity. The notes
bear interest at a rate of 4.8%. The market rate of interest on March 31, 1999
was 7.0%, based upon margin rates obtained through various discount brokers.
The difference between interest earned by the Company
7
on the notes and the market rate of interest is recorded as compensation
expense. Total compensation expense related to notes receivable from such
employees and directors was $8,000 for the nine months ended September 30, 1999.
4) Derivative Financial Instruments
--------------------------------
As part of its strategic alliance efforts, the Company invested in equity
securities of Maytag Corporation. These securities are subject to fluctuations
from market value changes in stock prices. To mitigate this risk, the Company
hedged its investment in Maytag securities by purchasing, on January 14, 1999,
put options to sell the 293,846 shares of Maytag common stock owned by the
Company. The purchase of the put options required an initial cash outlay (the
"premium" amount) of $1.9 million. The premium is amortized over three years,
the life of the investment. The purchased put options protect the Company from
a decline in the market value of the security below a minimum level of
approximately $57.00 per share (the put "strike" price) on January 14, 2002. The
total value of the put options at risk is equal to the unamortized premium,
which was $1,457,000 as of September 30, 1999. The Company's purchased put
options are accounted for as a hedge of its investment in the Company's Maytag
stock in accordance with GAAP. Hedge accounting under GAAP requires the
following criteria to be met: (i) the item to be hedged is exposed to price risk
(ii) the options position reduces the price exposure and (iii) the options
position is designated as a hedge. No options have been purchased to cover the
Company's investment in Maytag stock after January 14, 2002.
At September 30, 1999, the per share market value of the Company's Maytag
stock was less than the per share strike price of the purchased put options.
The gain on the put options is equal to the difference between the strike price
of the options and the market value of the Maytag stock (approximately $5.5
million). This gain on the pledged shares (approximately $3.1 million) has been
recorded as a reduction to the Company's long term debt and can be found in the
Liabilities section of the Company's 1999 Condensed Balance Sheet. The gain on
the available for sale shares (approximately $2.4 million) has been recorded as
an increase in Accumulated Other Comprehensive Income and can be found in the
Stockholders' Equity section of the Company's 1999 Condensed Balance Sheet.
The Company could be exposed to losses related to the above financial
instrument should its counterparty default. This risk is mitigated through
credit monitoring procedures.
5) Accrued Expenses
----------------
On September 1, 1999, the Company entered into an agreement to upgrade and
warranty 262 cooking systems installed with Whitbread PLC. The Company received
approximately $1.4 million from Whitbread PLC to complete the upgrade and
warranty the cooking systems for a three-year period, beginning in September
1999. The cooking system upgrades will include design changes that should
substantially increase the life and durability of the cooking systems. The
cooking system upgrades are expected to be complete by January 2000. The $1.4
million has been recorded as an accrued liability and is being reduced as
expenses relating to the upgrade and warranty are incurred. At this time, the
Company believes that the fees charged to Whitbread PLC will be sufficient to
cover the total cost of the upgrades and any charges arising during the three-
year warranty period.
8
6) Secured Borrowings
------------------
On January 14, 1999, the Company established a revolving credit facility
with Banque AIG, London Branch (an affiliate of American International Group,
Inc. ("AIG Facility")). The AIG Facility provides for the Company to pledge its
Maytag shares in the form of a "Variable Stock Transaction" and to receive cash
advances against the value of the Maytag shares. In January 1999, the Company
pledged 72,000 shares of its Maytag stock and received advances from its credit
facility in the amount of $3.4 million. This advance bears an imputed interest
rate of 5.8% and is due in January 2002. In April, June and September 1999, the
Company pledged 35,000, 33,000 and 25,000 shares, respectively, and received
additional advances of $1.7 million, $1.6 million and $1.2 million,
respectively. These advances bear imputed interest rates of 6.3%, 6.9% and
7.4%, respectively, and are due in January 2002. AIG has received a first
priority secured interest in the pledged shares of the Company's Maytag stock.
As of November 5, 1999, the Company was in compliance with all of its debt
covenants. As of May 14, 1999, Maytag has granted the Company the ability to
sell or pledge 100% of the Maytag shares. Previously, 50% of the shares were
not available until September 26, 1999. Accordingly, the Company has up to $6.1
million in advances available through the AIG Facility as of November 5, 1999.
In addition, the Company has established a letter of credit through its bank to
borrow up to the lesser of $315,000 or 75% of the market value of the Company's
6,923 pledged shares of Maytag stock at market rates of interest. Interest
expense relating to its secured borrowings was $111,000 for the quarter ended
September 30, 1999.
7) Unsecured Borrowings
--------------------
On July 23, 1999, the Company entered into an agreement with the Gas
Research Institute (GRI) to develop natural gas-fueled versions of the Company's
commercial and residential cooking systems. The agreement with GRI calls for
the Company to receive $2 million in funding over a six-month period, beginning
in July 1999. In addition to the funding, the Company is allowed access to
GRI's extensive patent portfolio and years of experience with natural gas
related products. In return, GRI will receive a royalty ranging from .0625% to
.125% on sales of the Company's commercial and residential cooking systems, up
to a maximum of $4 million. GRI has also received 50,000 warrants to purchase
the Company's common stock at $13.87 per share. The estimated fair market value
of the warrants is $153,000 and has been included in the Additional Paid In
Capital section of the Company's 1999 Condensed Balance Sheet.
In accordance with SFAS No. 68, "Research and Development Arrangements"
(FAS 68), funding received pursuant to this agreement will be accounted for as
unsecured debt. Payments under this obligation total $4 million and interest is
imputed, based on the estimated repayment period of the debt. Royalty payments
made to GRI will be applied to the imputed interest and principal balances.
According to the current sales and associated royalty repayment forecasts, the
Company will have paid GRI a total of $4 million within the next seven years.
Based upon these forecasts, the imputed interest rate of this debt is
approximately 20.57%. Interest expense relating to this unsecured borrowing
agreement was $15,000 for the quarter ended September 30, 1999.
The agreement grants GRI the option to provide the Company with an
additional $2 million in funding. The additional funding would effectively
double the percentage of royalties and maximum royalty that GRI is currently
scheduled to receive as well as provide them with an additional 50,000 warrants.
This option must be exercised prior to December 31, 1999.
9
8) Authoritative Pronouncements
----------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement is now effective for fiscal
years beginning after June 15, 2000. Previously, the Company would have had to
adopt the Statement no later than January 1, 2000. Under the new guidelines,
the Company will be required to adopt this Statement no later than January 1,
2001. SFAS No. 133 requires companies to report derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. Under
FASB 133, the Company's derivative investments would be marked to market on a
quarterly basis and any gain or loss would be recorded within the Company's
Condensed Statements of Operations. On September 30, 1999, the fair market
value of the Company's derivative instruments was $5,634,000.
9) Subsequent Events
-----------------
In October 1999, the Company entered into a Commercial License Agreement
with Maytag Corporation ("Maytag") that broadens Maytag's distribution rights
with respect to commercial cooking products utilizing the Company's rapid cook
technologies. Pursuant to the terms of the agreement, Maytag now has exclusive
rights to market and sell throughout North America and certain worldwide rights
to sell to North American based chains with international locations. This
exclusivity extends until March 2002, with certain applications extending until
March 2003.
In consideration for these rights, Maytag has agreed to pay the Company per
unit royalties in the 10% range of targeted wholesale prices. In the event that
actual gross margins exceed target levels, the Company will share equally in the
incremental margin. Maytag has also agreed to establish $5.75 million as the
minimum royalty threshold over the first two years of exclusivity and provide
the Company with up to $5.5 million in funding over the next eight months, for
the development of prototype units relating to this agreement.
Item 2: Management Discussion and Analysis of Financial Condition and Results
---------------------------------------------------------------------
of Operations
-------------
General
TurboChef Technologies, Inc. ("the Company") was incorporated on April 3,
1991. The Company is a technology development firm that intends to be the
recognized leader in innovation for residential and commercial appliances.
Currently, it is engaged in designing, developing and marketing proprietary
"rapid-cook" systems. Prior to its name change in July 1998, the Company
operated under the name TurboChef, Inc.
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 began development of a direct sales
10
organization. By the end of the first quarter of 1997, the Company had
substantially developed a U.S. direct sales and European sales infrastructure
and marketing programs. However, the revolutionary nature of the Company's
technologies, coupled with large restaurant chain operators' historical
resistance to change and the Company's lack of brand strength has limited
commercial sales.
The Company believes its long-term success is dependent on its core
competencies of developing new technologies and products for the foodservice and
residential appliance industries. Consequently, the Company has sought to
establish alliances with major firms with strengths in manufacturing, sales,
marketing and distribution. An alliance of this nature was successfully
established in September 1997, when the Company announced a Strategic Alliance
with Maytag Corporation to jointly develop new products incorporating the
Company's technologies. The Alliance entailed a mutual exchange of each
company's common stock valued at approximately $10 million and Maytag's payment
to the Company for certain research and development activities related to
targeted product initiatives. The Company also announced in July 1998 that the
Maytag Alliance had been expanded to establish a cooperative effort to market
and sell commercial cooking products in North America. During the first quarter
of 1999, the Company and G.S. Blodgett Corporation ("Blodgett"), a wholly owned
subsidiary of Maytag, engaging in the manufacturing and sales of commercial
foodservice equipment, began arranging for the transition of the manufacturing
of the Company's commercial unit to Blodgett's facilities. This transition was
completed during the third quarter of 1999. In addition to Blodgett's role as a
manufacturer of the Company's commercial products, Blodgett has now begun to
market and distribute the Company's commercial cooking systems throughout North
America.
In October 1999, the Company expanded its Strategic Alliance with Maytag
and entered into a Commercial License Agreement that broadens Maytag's
distribution rights with respect to commercial cooking products utilizing the
Company's rapid cook technologies. Pursuant to the terms of the agreement,
Maytag now has exclusive rights to market and sell throughout North America and
certain worldwide rights to sell to North American based chains with
international locations. This exclusivity extends until March 2002, with
certain applications extending until March 2003.
In consideration for these rights, Maytag has agreed to pay the Company per
unit royalties in the 10% range of targeted wholesale prices. In the event that
actual gross margins exceed target levels, the Company will share equally in the
incremental margin. Maytag has also agreed to establish $5.75 million as the
minimum royalty threshold over the first two years of exclusivity and provide
the Company with up to $5.5 million in funding over the next eight months, for
the development of prototype units relating to this agreement.
The Maytag Alliance will enable the Company to focus on its core competency
of technology development while utilizing the strengths of well-established
leaders within the commercial and residential appliance industries to
manufacture, market, and distribute the Company's products in North America.
In July 1999, the Company entered into an agreement with the Gas Research
Institute (GRI) to develop natural gas-fueled versions of the Company's
commercial and residential cooking systems. GRI, established in 1976, manages
cooperative research and development programs for its 327 members and the
natural gas industry. GRI conducts research and development that benefits the
entire industry and its customers; and targeted initiatives in which consortia
and individual organizations partner with GRI to develop or apply technologies
to improve their competitiveness and benefits to customers. Over 400 gas-
related products and 600 patents have come from GRI-led initiatives.
11
The agreement with GRI calls for the Company to receive $2 million in
funding over a six-month period, beginning in July 1999. In addition to the
funding, the Company is allowed access to GRI's extensive patent portfolio and
years of experience with natural gas related products. In return, GRI will
receive a royalty ranging from .0625% to .125% on sales of the Company's
commercial and residential cooking systems, up to a maximum of $4 million. In
addition, GRI has been granted 50,000 warrants to purchase the Company's common
stock at $13.87 per share. For additional information regarding the accounting
treatment of this agreement, please refer to the "Notes to Interim Condensed
Financial Statements" section of this document.
The Company will continue to pursue business growth through implementation
of the following strategies: (i) joint development and commercialization of
residential and commercial products in North America through the Maytag
Alliance, (ii) pursuit of strategic alliances and license agreements outside
North America, (iii) continued marketing to European and Japanese restaurants,
hotels, convenience stores and other foodservice operators, (iv) continued
development of new hardware, software and food solutions for residential and
commercial applications utilizing the Company's patented technologies and (v)
the development of new technologies. The Company's future profitability will
depend upon, among other things, the successful implementation 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 September 30, 1999 Compared to the
Quarter Ended September 30, 1998
Revenues for the quarter ended September 30, 1999 were $540,000, compared
to revenues of $1,991,000 for the quarter ended September 30, 1998. This
decrease is primarily attributable to the completion of the first phase of
research and development projects and expiration of the related fees received
pursuant to the Maytag Alliance. Revenues from the direct sales of commercial
cooking systems also declined, even though actual unit sales increased in the
quarter ended September 30, 1999. This is a result of the transition of the
North American Sales & Marketing responsibilities to Maytag.
Cost of sales for the quarter ended September 30, 1999 were $392,000, a
decrease of $198,000 when compared to $590,000 for cost of sales in the quarter
ended September 30, 1998. This decrease is principally due to the transition
from the direct sales of commercial cooking systems to a licensing arrangement
with Maytag, resulting in the elimination of cost of sales for such units, and a
decrease in the costs associated with the Company's extended warranty program.
Gross profit on direct cooking system sales for the quarter ended
September 30, 1999 decreased $188,000 to $136,000 when compared to gross profit
on direct cooking system sales of $324,000 during the quarter ended September
30, 1998. The decrease is due the transition of the North American Sales &
Marketing responsibilities to Maytag, resulting in royalty income to the
Company.
Research and development expenses for the quarter ended September 30, 1999
increased $437,000, to $940,000, as compared to $503,000 for the quarter ended
September 30, 1998. The increase is due to significant additions of engineering
and technical personnel to support the Company's product development
requirements primarily associated with Maytag Alliance projects, the enhancement
of the Company's core technology and the development of the commercial counter
top platforms. Furthermore, the Company established an accelerated life cycle
testing facility for the durability and reliability testing of the Company's
products.
12
Selling, general and administrative expenses for the quarter ended
September 30, 1999 increased $359,000, to $1,962,000 from comparable expenses of
$1,603,000 for the quarter ended September 30, 1998. The increase over the third
quarter of 1998 is due to additions to the Company's senior management team, the
expansion of the European Sales and Marketing Division, costs incurred in the
establishment of the Lloyds of London offensive and defensive patent insurance
policies and costs associated with the Company's ongoing efforts to develop
international alliances.
Other expense was $261,000 for the quarter ended September 30, 1999,
compared to other income of $75,000 for the quarter ended September 30, 1998.
The increase in expense is primarily due to the amortization of the derivative
investment in a "put-option" on the Maytag stock owned by the Company ($162,000)
and accrued interest on the Company's long-term credit facility ($111,000). For
additional information regarding the Company's derivative securities and credit
facility, refer to the "Liquidity and Capital Resources" and "Authoritative
Pronouncements" sections of this document.
Results of Operations for the Nine Months Ended September 30, 1999 Compared to
the Nine Months Ended September 30, 1998
Revenues for the nine months ended September 30, 1999 were $3,591,000,
compared to revenues of $5,344,000 for the nine months ended September 30, 1998.
This decrease is primarily attributable to the completion of the first phase of
research and development projects and expiration of the related fees received
pursuant to the Maytag Alliance. Revenues from the direct sales of commercial
cooking systems also declined, even though actual unit sales increased in the
nine months ended September 30, 1999. This is a result of the transition of the
North American Sales & Marketing responsibilities to Maytag under a license
agreement resulting in royalty income to the Company.
Cost of sales for the nine months ended September 30, 1999 was $2,002,000,
a decrease of $54,000 when compared to $2,056,000 for the cost of sales in the
nine months ended September 30, 1998. The decrease is principally due a decrease
in the costs associated with the Company's extended warranty program and the
transition from the direct sales of commercial cooking systems to a licensing
arrangement with Maytag, resulting in the elimination of cost of sales for such
units. These decreases were partially offset by an increase in the per unit
manufacturing and related costs associated with direct sales of the Company's
cooking systems.
Gross profit on direct cooking system sales for the nine months ended
September 30, 1999 decreased $180,000 to $673,000, when compared to gross profit
on product sales of $853,000 during the nine months ended September 30, 1998.
The decrease is due the per unit increase in manufacturing and related costs
associated with direct sales of the Company's cooking systems and the transition
of the North American Sales & Marketing responsibilities to Maytag, resulting in
royalty income to the Company.
Research and development expenses for the nine months ended September 30,
1999 increased $1,286,000, to $2,633,000, as compared to $1,347,000 for the nine
months ended September 30, 1998. The increase is due to significant additions of
engineering and technical personnel to support the Company's product development
requirements associated primarily with the Maytag Alliance projects, the
enhancement of the Company's core technology and the development of the
commercial counter top platforms. Furthermore, the Company established an
accelerated life cycle testing facility for the durability and reliability
testing of the Company's products.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 increased $1,343,000, to $5,647,000 from comparable expenses
of $4,304,000 for the nine months ended September 30, 1998. The increase over
the first nine months of 1998 is due to additions to the Company's senior
management team, the expansion of the European Sales and Marketing Division,
costs incurred in the establishment of the Lloyds of London offensive and
defensive patent insurance policies and the costs associated with the Company's
ongoing efforts to develop international alliances.
Other expense was $599,000 for the nine months ended September 30, 1999,
compared to other income of $68,000 for the nine months ended September 30,
1998. The increase in expense is primarily
13
due to the amortization of the derivative investment in a "put-option" on the
Maytag stock owned by the Company ($486,000) and accrued interest on the
Company's long-term credit facility ($241,000). This was partially offset by a
decrease in equity losses from the Company's former European joint venture,
TurboChef Europe ($180,000). For additional information regarding the Company's
derivative securities and credit facility, refer to the "Liquidity and Capital
Resources" and "Authoritative Pronouncements" sections of this document.
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 securities, the proceeds from the initial public
offering of common stock in April 1994 (the "April 1994 IPO") and the June 1996
Secondary Offering to fund its activities.
Since October 1997, the Company's capital requirements have been met in
part by Maytag. In accordance with the Maytag Alliance, the Company has been
paid aggregate research and development fees of $5.9 million ($250,000 per month
from October 1997 through March 1998, $300,000 from April through July 1998,
$425,000 from August through January 1999 and $300,000 through March 1999) for
technology transfer initiatives by the Company. In March 1998, the initial
project was extended for one year and Maytag increased the monthly payment from
$250,000 to $300,000 per month for the term of the extension. In July 1998, a
commercial sales agreement was announced and the monthly payment increased to
$425,000 for nine months. The increase to $425,000 ended in January 1999. The
remaining monthly payments of $300,000 ended in March 1999.
In October 1999, the Company entered into a Commercial License Agreement
that broadens Maytag's distribution rights with respect to commercial cooking
products utilizing the Company's rapid cook technologies. Pursuant to the terms
of the agreement, Maytag now has exclusive rights to market and sell throughout
North America and certain worldwide rights to sell to North American based
chains with international locations. This exclusivity extends until March 2002,
with certain applications extending until March 2003. In consideration for
these rights, Maytag has agreed to pay the Company per unit royalties in the 10%
range of targeted wholesale prices. In the event that actual gross margins
exceed target levels, the Company will share equally in the incremental margin.
Maytag has also agreed to establish $5.75 million as the minimum royalty
threshold over the first two years of exclusivity and provide the Company with
up to $5.5 million in funding over the next eight months, for the development of
prototype units relating to this agreement.
The Maytag Alliance is ongoing, and provides for the opportunity to
establish additional residential and commercial product development projects in
the future. Accordingly, future revenues from the Maytag Alliance will depend
upon the establishment of additional fee based research and development projects
with Maytag and royalties from the successful commercialization and sales of the
products that embody the Company's technologies. However, if additional projects
are not initiated with Maytag there is no assurance that the Company would be
able to find alternate sources of funding on acceptable terms for further
research and development of current and future products. This could have a
significant adverse impact on the Company's current and future operations.
14
In July 1999, the Company entered into an agreement with the Gas Research
Institute (GRI) to develop natural gas-fueled versions of the Company's
commercial and residential cooking systems. GRI, established in 1976, manages
cooperative research and development programs for its 327 members and the
natural gas industry. GRI conducts research and development that benefits the
entire industry and its customers; and targeted initiatives in which consortia
and individual organizations partner with GRI to develop or apply technologies
to improve their competitiveness and benefits to customers. Over 400 gas-
related products and 600 patents have come from GRI-led initiatives.
In January 1999, the Company terminated an existing revolving credit
agreement with its bank and entered into an agreement with Banque AIG, London
Branch (an affiliate of American International Group, Inc. ("AIG Facility")).
The AIG Facility provides for the Company to pledge its Maytag shares in the
form of a "Variable Stock Transaction" and to receive cash advances against the
value of the Maytag shares. All advances mature within three years and bear
interest at LIBOR plus 0.75%, on the date of the advance. At the end of the
three-year term, the Company may satisfy any outstanding obligation by
surrendering Maytag shares equal to the fair value of the obligation or with
cash. The transaction allows the Company to benefit from all appreciation in the
Maytag share price over the three-year period and provides down-side protection
to the Company in the form of a "put option" for the 293,846 shares of Maytag
stock. The put option establishes a minimum realizable value for the Maytag
shares of approximately $57 per share on January 14, 2002.
As of November 5, 1999, the Company had pledged 165,000 shares of the
Maytag stock in connection with the AIG Facility and received advances totaling
$7.9 million. In addition, Maytag has granted the Company the ability to sell or
pledge 100% of the Maytag shares, effective May 14, 1999. Previously, 50% of the
shares were not to be available until September 26, 1999. Consequently, the
Company has up to $6.1 million in advances available through the AIG Facility as
of November 5, 1999.
In February 1999, the Company entered into an agreement with its bank to
support general corporate requirements. The credit agreement is set to expire
in February 2000. The agreement is secured by 6,923 shares of Maytag common
stock owned by the Company. The Company can borrow up to the lesser of $315,000
or 75% of the market value of the Maytag stock at market rates of interest.
At September 30, 1999, the Company had working capital of $12,764,000 as
compared to working capital of $18,566,000 at December 31, 1998. Of the
$12,764,000 in working capital, $6,530,000 has been pledged to secure the
Company's long term debt obligations. The $5,802,000 working capital decrease
is primarily due to a decrease in the value of the Company's Maytag stock and an
increase in cash and cash equivalents provided by the AIG Facility.
Cash used in operating activities was $4,339,000 for the nine months ended
September 30, 1999 as compared to cash used in operating activities of
$2,122,000 for the nine months ended September 30, 1998. The net loss in the
first nine months of 1999 included $977,000 of non-cash charges, as compared to
$136,000 in 1998. Cash used in investing activities for the nine months ended
September 30, 1999 was $2,338,000, consisting of an investment in derivatives of
$1,943,000 and equipment purchases & leasehold improvements of $395,000. Cash
provided by financing activities was $8,986,000 for the nine months ended
September 30, 1999, of which $7,878,000 was obtained through advances from the
Company's credit facility, $667,000 was obtained through an unsecured financing
agreement with GRI and $441,000 was obtained through the exercise of stock
options and warrants. At September 30, 1999, the Company had cash and cash
equivalents of $2,473,000, compared to cash and cash equivalents of
15
$164,000 at December 31, 1998.
Year 2000 Issues
The Company, like other businesses, is facing the Year 2000 issue. The Year
2000 issue arises from the past practice of utilizing two digits (as opposed to
four) to represent the year in some computer programs and software. If
uncorrected, this could result in computational errors as dates are compared
across the century boundary. Since the software used in the Company's patented
cooking system does not utilize an internal calendar, the Company believes that,
for the most part, its products will be unaffected by Year 2000 issues.
Through November 5, 1999, the Company has had all of its internal software
and hardware tested. At this time, all of the Company's software and hardware
is Year 2000 compliant or has been made compliant.
While Year 2000 costs incurred to date have not been material, the Company
believes it will continue to incur costs related to Year 2000 readiness
throughout 1999. Furthermore, the Company believes that future costs associated
with achieving Year 2000 readiness will not be material, however, there is no
guarantee that the Company's operations will not be materially impacted by these
costs.
The failure of the Company's third party vendors to be Year 2000 ready
could prevent or delay the manufacturing or shipping products, providing
customer support and completing transactions, all of which could have a material
adverse affect on the Company's business, operating results and financial
condition. The Company's commercial oven manufacturer, G S Blodgett, has
completed its Year 2000 assessments and has informed the Company that all of its
systems are fully Year 200 compliant. The Company does not believe that any
Year 2000 issue, outside of their control, will cause any significant delays in
the manufacturing of the Company's commercial cooking system.
Authoritative Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement is effective and will be
adopted by the Company on January 1, 2001. SFAS No. 133 requires companies to
report derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Under FASB 133, the Company's
derivative investments would be marked to market on a quarterly basis and any
gain or loss would be recorded within the Company's Condensed Statements of
Operations. On September 30, 1999, the fair market value of the Company's
derivative instruments was $5,634,000.
Forward Looking Statements
The Company has utilized the proceeds from the June 1996 Offering, and has
used the proceeds received from the Maytag Alliance, to strengthen its
management team and support its product development activities. The Company has
completed the current phase of targeted research and development and the
associated per month payments ended in January and March 1999, respectively.
The Maytag Alliance, however, is ongoing, and provides for the opportunity to
establish additional residential and commercial product development projects in
the future. Future revenues from the Maytag Alliance
16
will depend upon the establishment of additional fee based research and
development projects with Maytag and royalties from the successful
commercialization and sales of the products that embody the Company's
technologies.
The Company's goals are to continue its development of innovative and
commercially viable products, to support the Maytag Alliance efforts and to
establish additional strategic alliances and license agreements outside North
America. To ensure financing for corporate activities, in January 1999 the
Company entered into the AIG Facility. The AIG Facility provides for the
Company to pledge its Maytag shares in the form of a "Variable Stock
Transaction" and to receive cash advances against the value of the Maytag
shares. All advances mature within three years and bear interest at LIBOR plus
0.75%, on the date of the advance. At the end of the three-year term, the
Company may satisfy any outstanding obligation by surrendering Maytag shares
equal to the fair value of the obligation or with cash. The transaction allows
the Company to benefit from all appreciation in the Maytag share price over the
three-year period and provides down-side protection to the Company in the form
of a "put option" for the 293,846 shares of Maytag stock. The put option
establishes a minimum realizable value for the Maytag shares of approximately
$57 per share. As of November 5, 1999, the Company had pledged 165,000 shares
of the Maytag stock and received advances totaling $7.9 million. The Company has
up to $6.1 million in additional advances available on November 5, 1999. In
addition, in February 1999 the Company entered into an agreement with its bank
to support general corporate requirements. This credit agreement is set to
expire in February 2000 and is secured by 6,923 shares of Maytag common stock
owned by the Company. The Company can borrow up to the lesser of $315,000 or 75%
of the market value of the Company's 6,923 pledged shares of Maytag stock at
market rates of interest.
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 could be
derived from its currently proposed plans within the next 12 to 18 months, if
such plans are successfully completed. These plans include: (i) joint
development and commercialization of residential and commercial products in
North America through the Maytag Alliance, (ii) pursuit of strategic alliances
and license agreements outside North America, (iii) continued marketing to
European and Japanese restaurants, hotels, convenience stores and other
foodservice operators, and (iv) continued development of new hardware, software
and food solutions for residential and commercial applications. 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.
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, market acceptance of the Company's products, the performance and needs
of the segments of the foodservice industry served by the Company, the costs
17
of product development, the ability to successfully establish additional
alliances 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.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
In January 1999, the Company invested approximately $1.9 million to
purchase a "put option" that covered all of the Company's Maytag stock. The
function of the put option is to guarantee a minimum value of the Company's
Maytag stock for a three-year period. This put option is an integral part of
the AIG credit facility as it established a minimum borrowing base from which
the Company could draw upon from time to time. The market value of the put
option will be based upon the current price of Maytag stock and the amount of
time remaining on the option. The Company is currently amortizing this
investment on a straight-line basis, over a three-year period. The maximum
potential exposure that the Company has, with respect to the put option, is $1.9
million, the initial cost of the investment. For further information regarding
the Company's credit facility see the "Liquidity and Capital Resources" and
"Notes to Condensed Financial Statements" sections of this document.
18
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds.
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
10.36 Research and Development Contract dated July 29, 1999
by and between Gas Research Institute and TurboChef
Technologies, Inc. (1)
10.37 Commercial License Agreement dated October 28, 1999
by and between Maytag Corporation and TurboChef
Technologies, Inc. (1)
(1) Filed herewith in redacted form pursuant to Rule
24b-2 promulgated under the Securities Exchange Act
of 1934, as amended (the "Act"). Filed separately in
unredacted form subject to a request for confidential
treatment pursuant to Rule 24b-2 under the Act.
(b) Reports on Form 8-K
None
19
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 TECHNOLOGIES, INC.
By:/s/ Dennis J. Jameson
---------------------
Dennis J. Jameson
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Dated November 12, 1999
20