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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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)
Issuer's telephone number:
(214) 341-9471
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
_________________________
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to this
form 10-K. YES [ ] NO [ ]
Aggregate Market Value of voting stock held by non-affiliates
of the Registrant at
March 15, 1998: $45,755,535
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 March 15, 1998
------------------- -----------------
Common Stock, $0.01 Par Value 14,571,608
_________________________
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy materials for its 1998
annual meeting of stockholders are incorporated by reference in Part III hereof.
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TURBOCHEF, INC.
TABLE OF CONTENTS
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Form 10-K Item Page
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Part I.
Item 1. Business.............................................. 2
Item 2. Properties............................................ 18
Item 3. Legal Proceedings..................................... 19
Item 4. Submission of Matters to a Vote of Security Holders... 19
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 20
Item 6. Selected Financial Data............................... 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 22
Item 8. Financial Statements and Supplementary Data........... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 29
PART III.
Item 10. Directors and Executive Officers of the Registrant.... 30
Item 11. Executive Compensation................................ 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 30
Item 13. Certain Relationships and Related Transactions........ 30
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................ 31
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PART I
ITEM 1. BUSINESS
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GENERAL
TurboChef, Inc. (the "Company") is a foodservice technology company engaged
in designing, developing and marketing high-speed "cooking systems" and in
applying its proprietary technologies to other foodservice products, processes
and concepts for customers seeking a competitive advantage in the foodservice
market. These cooking systems incorporate specially designed proprietary heat
transfer hardware with a computerized programmable operating system, which
controls the cooking process, and is capable of accepting software updates from
a remote site via computer modem. Now that the Company's products and
technologies have been validated (through utilization and extensive testing by
both the Company and a variety of foodservice operators) and its research and
development capabilities have been proven, the Company intends to build upon its
technology base to expand its product offerings, while aggressively pursuing
joint venture, strategic alliance and/or licensing or other arrangements with
companies already engaged in the mass marketing and/or manufacture of
foodservice equipment and products in order to expand its market penetration.
The Company's cooking systems, which are marketed under the name TurboChef,
employ the Company's proprietary cooking technologies to quickly, efficiently
and evenly transfer, disperse and control the heat used in the cooking process
and the Company's proprietary computerized control platform to monitor that
process and automatically adjust cook settings during the cooking cycle. These
technologies provide foodservice operators the flexibility to "cook-to-order" a
variety of food items at speeds which the Company believes are faster than those
permitted by conventional commercial ovens and grills, microwave ovens, and
other currently available high-speed ovens. Among the various types of foods
which can be cooked in a TurboChef cooking system are an 8-ounce salmon filet in
less than 80 seconds, a 16-inch deluxe par-baked pizza in 90 seconds or less, a
"bone-in" quarter chicken in 2 minutes or less, and an 18-ounce beef tenderloin
in approximately 3 minutes. In addition, because of the TurboChef cooking
system's moisture retention, browning and crisping capabilities, the Company
believes that the characteristics of most food items cooked in a TurboChef
cooking system (including their flavor, texture and appearance) are not only
superior in quality to those achieved using other high-speed ovens, or microwave
ovens, but are also equal in quality, or, in the case of many food items (such
as rack of lamb, beef Wellington and most fish and seafood items) superior in
quality, to those achieved using conventional ovens and grills.
The Company was incorporated on April 3, 1991, as a Kansas corporation and
was reincorporated on August 17, 1993, as a Delaware corporation. The Company
was privately held until April 7, 1994. The Company's principal corporate
offices are located at 10500 Metric Drive, Suite 128, Dallas, Texas 75243 and
its telephone number is (214) 341-9471.
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COMPANY OPPORTUNITIES AND STRATEGY
The Company believes that the demand for speed and convenience in
connection with food preparation and service, as well as the resultant demand
for innovative food preparation processes and other competitively distinguishing
foodservice concepts, will continue to increase. While the Company anticipates
that the quick-service category of the foodservice industry will continue to be
the fastest growing category within such industry, the Company also believes
that certain full-service restaurants will attempt to aggressively compete with
quick-service restaurants for those customers that demand fast service and a
broad menu selection. As a consequence of the foodservice industry's emphasis
on speed, the Company believes that innovative foodservice technology companies,
as well as the high-speed commercial oven sector of the foodservice equipment
industry, will be presented with attractive growth opportunities. By providing
foodservice operators with the ability to quickly serve a variety of food items
cooked to high quality standards, the Company also believes that its foodservice
technologies and products have uniquely positioned the Company to capitalize on
these perceived opportunities.
The Company intends to seize these opportunities by offering products, such
as the TurboChef cooking system, which will enable participants in the
foodservice industry to distinguish their menu offerings and service times from
those of competitors and thereby achieve a competitive advantage. By working
closely with its customers, the Company intends to develop cooking system
hardware, software and food preparation processes which are customized to meet
their particular needs. For example, the development of the Model D-2 cooking
system was in response to the requirements of Whitbread PLC ("Whitbread"), the
Company's largest customer, which operates over 6,500 pub, convenience,
restaurant, hotel and leisure locations across the United Kingdom, including the
Beefeater, Pizza Hut, TGI Friday's, Marriott and Brewers Fayre brands. Through
March 15, 1998, Whitbread has purchased 451 TurboChef cooking systems, 300 of
which have been placed into their Beefeater restaurant concept.
Expansion in the restaurant industry has in the past been achieved, to a
large extent, through the building of new free-standing restaurants. However,
as construction, real estate and labor costs have increased and suitable
locations have become more difficult to find, many restaurant chains have slowed
their domestic expansion of traditional outlets and targeted alternative venues,
such as hotels, supermarkets, retail stores and sports arenas, thus presenting
an additional opportunity for the Company by expanding the potential market for
the Company's products and technologies. The Company anticipates that such
locations may seek to increase their sales of prepared foods as a means of
attracting new customers to their sites and as a means of encouraging existing
customers to prolong their shopping excursions at such sites. For example, a
number of retailers, such as Home Depot, K-Mart and WalMart, and certain grocery
stores have recently placed small outlets of branded fast food chains, such as
McDonald's, Burger King, Little Caesar's and Pizza Hut, in their stores. The
Company believes that it is well positioned to address what it perceives to be
this shifting marketing approach within the fast food industry. Specifically,
by integrating, within a mobile cart or kiosk, the TurboChef cooking system with
a variety of modular components, foodservice supplies and equipment, foodservice
operators will be able to take advantage of the TurboChef cooking system's small
size and cooking versatility to offer an expansive food menu at remote
locations. The Company is
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seeking to broaden the potential market for its cooking system by providing
customers with assistance in connection with this concept.
The Company also anticipates that various entities, such as public and
private institutions (including hotels), that do not engage primarily in the
foodservice business may seek to provide their customers or guests with the
ability to obtain quick, prepared foods on their premises in order to remain
competitive in their own industries. In order to do so on a cost-effective
basis, they may employ equipment and concepts of the type provided by the
Company. For example, the Company was selected by Choice Hotels International
("Choice Hotels"), an international operator of over 4,000 hotels in 33
countries, as its sole commercial cooking system supplier for the modular Choice
Picks branded food court service system being offered (as an alternative to
full-service restaurants) to all of Choice Hotel's Clarion, Quality, Comfort,
Friendship, Sleep, Econolodge and Rodeway hotels. The Choice Picks food court is
comprised of a number of individual brand modules containing all of the
equipment, storage, signage and preparation area required to serve various
branded food products. Brands prepared in a Choice Picks food court include
Nathan's Famous(R), Pizzeria Uno(R) and Healthy Choice(R). Accordingly, the
Company intends to continue to develop relationships with the developers of
alternative foodservice location concepts in order to support their marketing
efforts on concepts which utilize TurboChef cooking systems. Through March 15,
1998, Choice Hotel's operators have purchased 44 TurboChef cooking systems.
In keeping with this strategy of forming alliances in non-traditional
venues, the Company in April 1997 entered into a strategic alliance with HFS
Incorporated (now called Cendant Corporation). Cendant is the largest hotel
franchisor in the world, franchising the Days Inn(R), Ramada(R), Howard
Johnson(R), Knights Inn(R), Super 8(R), Travelodge(R), Villager Lodge(R), and
Wingate Inns(R) brands. HFS (Cendant) had sought a way to add foodservice at
its limited service properties and improve the foodservice offerings at other
properties with minimal capital outlay and investment in labor. This evolved in
response to trends indicating travelers prefer quality meals available to them
on-site rather than leaving the hotel property to obtain a meal. The TurboChef
cooking system can enable these hotels to provide high-quality food through
room service in 15 minutes or less. As of March 15, 1998, 14 HFS (Cendant)
franchisees have commenced initial field testing of the TurboChef system with
the purchase of 17 units. Others are in the process of evaluating the results of
these initial installations, completing their own internal development of
proprietary menus or evaluating other foodservice brand partners, before
proceeding with the purchase of a TurboChef cooking system. The Company believes
that Cendant views its technologies as key components of their hotel foodservice
strategy and expects continued revenues from this relationship, although it is
not possible to predict the timing and number of system purchases that might
occur.
Finally, the Company recognizes the demographic shift of recent years in
American families. Traditionally, the husband was the primary breadwinner and
would arrive home in time for dinner at 5pm, while the wife generally did not
work outside the home and would prepare dinner for the entire family each
evening. The shift to two-income families, coupled with longer working hours,
children's activities and increased commute times have threatened to render the
traditional family dinner obsolete. Families have shifted to eating at fast-
food restaurants, buying pre-packaged frozen foods that can be prepared quickly
in a microwave oven, or eating
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so-called "junk-food." Often, food quality and nutrition is sacrificed, and the
interaction between family members once prevalent at the evening meal is lost.
The Company believes that this changing demographic presents a growth
opportunity. Using a residential version of TurboChef technologies, a family
could enjoy a quality meal in a fraction of the time required to prepare a meal
in the traditional manner. As a response, the Company developed and completed a
prototype of a residential unit in June 1996. Subsequently, the Company sought
major consumer appliance manufacturers with whom to establish an alliance to
explore the application of TurboChef technologies in a residential environment.
In September 1997, this search culminated with the signing of a strategic
alliance agreement with Maytag Corporation to jointly develop new products using
the Company's technologies.
TECHNOLOGIES AND PRODUCTS
The Maytag Alliance allows the Company to refocus on its core competencies
of developing new technologies and innovative products for the foodservice
industry, while gaining access to Maytag's substantial expertise and
capabilities in commercializing, manufacturing, marketing and distributing
residential and commercial products. In addition, Maytag has agreed to make
certian payments to fund research and development efforts for mutually agreed
upon project initiatives. This Alliance places a significant amount of
dependence upon Maytag's overall infrastructure capabilities and financial
support. However, the Company believes that having a development partner with
Maytag's qualities that is pursuing innovation as an important element of its
long term growth strategy, better positions TurboChef to continue developing
innovative products and technologies and to have them successfully
commercialized and marketed to consumers worldwide.
TurboChef Cooking Technologies
The Company's TurboChef cooking systems are based on the Company's
proprietary cooking system, which is, in turn, based on the Company's
proprietary high-speed cooking technologies. Following are key aspects of the
Company's unique cooking system:
. Heat Transfer into Air. The Company's cooking technologies utilize a
"thermal mass" within the cooking system to quickly and efficiently transfer
heat into rapidly moving air. The amount of heat provided during a given
cooking cycle is small compared to the total amount of heat stored within the
thermal mass. As a result, the cooking system's temperatures are maintained
close to desired maximum cooking temperatures, even during the stand-by mode
between cooking cycles, in order to avoid a cooling down of the system, which
would delay the cooking process.
. Heat Transfer from Air to Food Products. The Company's cooking system
transfers heat from the rapidly moving air to a food product placed in the
system's "cooking cavity." The heated air enters the cooking cavity from the
top and strikes the upper surface of the food, breaking through its cool
surrounding "boundary layer." The heated air is then drawn across the upper
surface of the food, redirected and pulled along the underside of the food by
positive pressure from above and negative pressure from below, causing it to
remain in a constant heat transfer relationship with the food. The rapidly
moving heated air surrounds the food product like a "moving wrap", continuously
removing the cool surrounding boundary layer. As a result, the entire surface
of the food browns and crisps simultaneously, as the food product is heated at
approximately the same temperature across its entire surface.
. Control of Heat Transfer. The Company's cooking system is able to adjust the
cooking temperature at the food surface during the cooking process by varying
the velocity of the air which forms the moving wrap surrounding the food. As a
result, with the system's variable cook setting process, a foodservice operator
is afforded a significant amount of cooking temperature flexibility even though
the temperature of the system's heat source remains relatively constant.
. Control of Cooking Durations. The Company's precision cooking system also
adjusts cooking durations, on line, based on the temperature measurements taken
by the system during
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each cooking cycle. As a result, greater cooking consistency is achieved even
though the pre-cooked temperature of the food items placed in the cook chamber
may vary.
Traditional cooking methods utilize various cooking technologies, including
conduction (transferring heat directly from a conductive surface, such as a
frying pan, to food); natural convection (transferring heat from air to food,
such as in a typical home oven); forced convection (using a fan to circulate hot
air around food); air impingement (a form of convection which forces heated air
onto food at high velocities); induction (heating by means of electric current
flowing through food); microwave radiation (cooking by heat generated from
microwaves); and infrared radiation (thermal radiation from light waves, such as
a toaster or broiler). Other newer and higher speed methods of cooking include
combination ovens, which combine two or more of the traditional cooking methods,
such as microwave and traditional air impingement, and ovens which utilize
infrared light from a quartz lamp. The Company believes that each of these
cooking methods is generally subject to limitations involving substantial
cooking times, lower cooked product quality and/or limited menu capabilities.
The Company believes that its cooking system and technologies offer the
following competitive advantages over other heat transfer methods:
. Cooking Speed. Food items can be cooked faster by the TurboChef cooking
system than by other cooking methods; most single-portion food items can be
cooked in less than 90 seconds.
. Quality. Because of the system's moisture retention, browning and crisping
capabilities, the characteristics of most food items cooked through the use of
the Company's cooking system (including flavor, texture and appearance) are
equal or superior to those achieved using other cooking methods.
. Versatility. The Company's heat transfer methods are not dependent upon the
use of specific ingredients or product formulations to cook quickly or evenly.
. Cooking Control and Flexibility. The Company's cooking system enables the
cooking of a variety of food types in the same unit, one immediately after the
other, at different temperatures at the food surface. Other cooking methods
typically cannot cook as many types of foods to the same quality standards.
Moreover, under certain circumstances, the TurboChef cooking system has the
capability of simultaneously cooking several different types of food by
utilizing and coordinating the common portion of their overlapping cooking
temperatures and times.
. Consistency. Numerous cooking parameters are constantly monitored within the
Company's cooking system and are adjusted automatically to promote consistent
cooking results.
THE TURBOCHEF COOKING SYSTEMS
The Company's high-speed commercial TurboChef cooking systems are intended
to allow foodservice operators the flexibility to "cook-to-order" a variety of
food items at speeds which are faster than those permitted by conventional
commercial ovens and grills, microwave ovens, and other currently available
high-speed ovens. The TurboChef cooking system employs
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the Company's proprietary cooking technologies to quickly and efficiently
transfer heat into rapidly moving air, which is then directed at and drawn
around the food product in a manner designed to efficiently and evenly disperse
and control the heat transferred from the air into the food. During the cooking
process, heat in a TurboChef cooking system may also be transferred to the food
item through the use of microwaves, either in conjunction with, or independent
from, the cooking system's rapidly moving heated air. The Company's proprietary
computerized control platform monitors the cooking process and automatically
adjusts cook settings during the cooking cycle. In addition, the TurboChef
cooking system incorporates easy-to-use programmable settings which provide
foodservice operators with the option of pre-setting and customizing their own
cook settings.
To use a TurboChef cooking system, the operator opens the door to the
cooking cavity, places the food product on the cooking surface, closes the door,
presses the pre-set button corresponding to the food product and then presses
the "start" button. When the cooking cycle is complete, an audio signal and a
visual message prompt the operator to remove the food. The current commercially
produced TurboChef cooking system contains a cooking cavity capable of holding a
food product measuring up to 16 inches in diameter and 4 inches in height. The
current direct selling price of a TurboChef cooking system generally ranges
between $13,500 and $15,500. The Company also offers a full service lease which
includes the cooking system hardware, operating system software, ChefComm(TM)
software, an extended warranty and technology upgrades for approximately $500.00
per month, with a minimum commitment of sixty (60) months.
The cooking capacity of a TurboChef cooking system is limited by the size
of its cooking cavity but augmented by its speed. Conventional commercial ovens
and grills can usually prepare a larger number of individual items concurrently
and may cook items which are larger in size than can currently be prepared in a
TurboChef cooking system. However, since the cooking times required by
conventional ovens and grills are substantially longer than those required by a
TurboChef cooking system, a foodservice operator using such equipment must
generally either (i) cook a large number of items in advance of customer orders,
in order to satisfy potential demand on a timely basis during peak serving
periods, or (ii) have its customers wait for service, with the waiting time most
likely extending beyond the range of generally acceptable service times for the
fast food segment of the foodservice industry. Food items which are pre-cooked
rather than cooked-to-order are typically "held" until purchased, often
resulting in product degradation and increased food costs due to product
spoilage. A TurboChef cooking system avoids these inherent limitations of
conventional commercial ovens and grills since the rapid cooking speed achieved
by the TurboChef cooking system allows more products to be cooked-to-order by
the foodservice operator. Moreover, under certain circumstances the TurboChef
cooking system has the capability of simultaneously cooking up to five different
types of food by utilizing the "lowest common denominator" or overlapping
cooking temperatures and times.
Thus, through the use of a TurboChef cooking system, the Company believes
that traditional full-service restaurants can offer the convenience and speed of
foodservice typically associated with fast food restaurants -- without
sacrificing the "restaurant quality" of the food served -- and fast food
restaurants can offer more varied menus and a food quality more typically
associated with full-service restaurants -- without compromising their "quick
service" speeds.
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Furthermore, non-traditional foodservice operators can provide restaurant
quality hot food in a limited space without major investments in equipment and
labor. Moreover, these technologies provide both full service and fast-food
restaurant operators with the means of "up-grading" their menu offerings, both
in terms of food items offered and in terms of cooked food quality and
consistency, without a corresponding increase in their labor or operating costs.
In fact, the use of the TurboChef cooking system also provides both full-service
and quick-service restaurants with a means of enhancing their profitability by
reducing certain costs associated with the cooking process.
The TurboChef cooking system, which is as easy to use as a conventional
microwave oven, can be operated by both skilled and unskilled personnel with
minimal training. As a result, foodservice operators can reduce their labor
costs both by utilizing less skilled personnel to perform cooking functions that
normally require skilled, and more expensive labor, and by using the reduced
cooking times associated with the TurboChef cooking system to improve the
productivity of their skilled food preparers. In addition, the Company has
determined that product yields for certain foods can be increased as the
moisture loss and/or food shrinkage typically associated with the cooking of
such food items can be reduced when a TurboChef cooking system is used.
Finally, certain kitchen equipment costs can be reduced or eliminated (e.g. the
cooking system typically does not require the ventilating equipment normally
needed with commercial ovens and grills and, because of the TurboChef cooking
system versatility, i.e. its ability to bake, broil and grill, the need for
other types of cooking equipment can be reduced) and electricity costs can be
reduced since the TurboChef cooking system gives off less heat than commercial
grills and ovens, thereby reducing the amount of ventilated air required to
maintain kitchen temperatures at acceptable levels.
OTHER PRODUCTS AND APPLICATIONS
OPERATIONS ENHANCEMENT SYSTEMS. In connection with marketing the TurboChef
cooking system to traditional full-service and fast food restaurants, the
Company is developing a series of operations enhancement systems, each of which
incorporates the use of the TurboChef cooking system. The CHEFCOMM(TM) system is
a centralized cook setting system, which, through the use of a computer modem,
can reprogram TurboChef cooking systems installed in various restaurant
locations from a single central site, thereby enabling foodservice operators to
easily modify their cook settings, and thus their menu selections, on a system-
wide basis. A prototype verison of ChefComm(TM) has been completed, and the
Company is currently developing enhancements and improvements to the program.
The Company is also exploring development of other productivity systems to
accompany the TurboChef cooking system.
PROPOSED TECHNOLOGY EXTENSIONS - ADDITIONAL COMMERCIAL APPLICATIONS. The Company
is also developing a unique application of its cooking system specifically for
convenience store use. This convenience store cooking system will be designed
to cook "on demand" popular fast foods such as breakfast sandwiches in 20
seconds, hamburgers in 30 seconds and pizza in 40 seconds. As a result, one
TurboChef cooking system will enable a wide variety of competitive fast food
offerings from inside a convenience store. A first generation prototype of this
"consumer-operated" cooking system was introduced at the North American
Association of Food Equipment Manufacturers (NAFEM) bi-annual exhibit in New
Orleans in September 1997. Development of
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this prototype was in response to interest from The Southland Corporation,
parent of the 7-Eleven convenience store chain, which had placed a purchase
order calling for the development of a reduced size unit with a "self-serve"
operating configuration. While progress has been made in the development of this
unit, the Company elected to direct most of its engineering resources to the
Maytag alliance projects. The Company expects its engineering emphasis to remain
on the Maytag projects and does not anticipate significant revenues from sales
of a convenience store oven model in 1998.
THE MAYTAG ALLIANCE
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 entails a mutual exchange of each
company's common stock valued at approximately $10 million and provides for the
parties to engage in various R & D and commercialization projects. The first
project, initiated in October, 1997, called for Maytag's payment to TurboChef of
$250 thousand per month for six months for targeted R & D efforts focused on its
interests. In March 1998, the Company and Maytag extended this project for
another twelve-month period. In addition, Maytag agreed to increase the R & D
payment to $300 thousand per month.
MARKETING AND SALES
GENERAL
Historically, the Company has focused its limited resources on successfully
developing new technologies and innovative products for the foodservice
industry, with a secondary emphasis on aggressively marketing such products.
However, in late 1996 the Company implemented an initiative to establish a U.S.
sales infrastructure. This initiative entailed the addition of an executive
level sales representative and the establishment of sales support and customer
service teams. In addition, the Company attempted to bolster its marketing reach
in 1997 through increased participation in trade shows, production and
distribution of new sales brochures, direct mail, and advertising in trade
magazines. The primary focus of the U.S. sales and marketing strategy in 1997
was building awareness and gaining experience within as many foodservice venues
as possible.
While the Company achieved certain successes in directly marketing its
products in 1997, particularly in obtaining product trials with a wide variety
of potential customers, the Company did not derive an acceptable level of
product sales from these efforts. Consequently, although the Company expects to
continue to market directly to certain domestic and international accounts, such
as fast food and full service restaurant chains, the Company intends to
aggressively pursue joint venture, strategic alliance and/or licensing,
co-branding or other arrangements with companies already engaged in the mass
marketing and/or manufacture of foodservice equipment and products in order to
expand its market penetration. For example, through the Maytag alliance the
Company intends to substantially enhance its marketing capabilities by offering
its products through Maytag's extensive marketing and distribution network. The
Company also intends to utilize various mass market distribution channels, such
as independent distributors, to assist the Company in the marketing of its
products to independent restaurants, cafeterias, public and private institutions
and non-traditional foodservice operators and may grant exclusive marketing
rights to certain of such distributors within specified territories (except for
any accounts reserved by the Company) so long as minimum purchase and other
requirements are satisfied.
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The Company is attempting to market new products and technologies which
change the way in which foods can be cooked in the commercial foodservice
market. As a result, the Company's sales cycle, which generally commences at
the time a prospective customer demonstrates an interest in purchasing a
TurboChef cooking system and ends upon the execution of a purchase order with
that customer, will not only vary by customer, but could extend for periods of
nine months or more, depending upon the time required by the customer to test
and evaluate the TurboChef cooking system. In addition, multi-system sales to
restaurant chains generally take even longer as the Company's products and
technologies represent an entirely new method for the preparation and serving of
food and often require a restructuring of a customer's entire operational
strategy. For instance, the Company's initial contract with Whitbread, its
principal customer, was not finalized until after more than a year of continuous
testing, negotiating and organizational planning had first been completed.
As of March, 15, 1998, the Company had sold 710 cooking systems that are
being utilized in 45 different foodservice concepts around the world including
fast food and casual dining restaurants, hotels, convenience stores, movie
theaters, super markets and entertainment centers. There are 449 TurboChef
cooking systems sold in the United Kingdom, 174 in the US and 87 in 16 other
countries including Japan, Germany, Sweden and Canada.
The Company has been working closely with Whitbread for several years in
adapting and applying TurboChef's foodservice technologies and concepts to
Whitbread's particular proposed applications. Whitbread is an industry leader in
the use of off-site commissaries to perform the preparatory work for food served
in its restaurants. Through these centralized preparatory commissaries,
Whitbread, particularly in its Beefeater division, which operates 300 casual
dining pub restaurants, has been able to, among other things, increase labor
efficiency, expand menu offerings and reduce labor costs within existing kitchen
space. The use of TurboChef cooking systems enables Whitbread to derive
additional benefits from its "commissary concept", including, improving food
quality and cooking yields, reducing waste and providing product consistency.
Whitbread has purchased 451 TurboChef cooking systems, which have been
installed in most of their 300 unit Beefeater chain, as well as in several of
their other restaurants and resorts. In February 1997, the third contract with
Whitbread was signed. During 1997, Whitbread took delivery of 106 units under
this third contract, primarly to explore the application of the Company's
technologies to other foodservice concepts. For the year ended December 31,
1997, approximately 37% of the Company' s revenues were derived from sales to
Whitbread, as compared to 75% and 69% for the years ended December 31, 1996 and
December 31, 1995, respectively. It is not possible at this point to predict
how many more units Whitbread intends to purchase; however, Whitbread does
consider the Company to be an important strategic partner in executing its
business development plans.
TARGET MARKETS
The Company currently intends to focus its U.S. marketing efforts on the
following commercial markets:
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<PAGE>
. FOODSERVICE OPERATORS DESIRING MENU EXTENSION. A TurboChef cooking system
can accommodate operators seeking to "upgrade" their menu offerings, both in
terms of food items offered and in terms of cooked food quality and consistency,
without any significant additional investment, as well as those desiring to
extend their menus, such as hamburger restaurants desiring to serve pizza, or to
introduce new products on a regular basis as part of their marketing strategy.
. FOODSERVICE OPERATORS DESIRING TO ACHIEVE OPERATING EFFICIENCIES. The
TurboChef cooking system enables operators to significantly reduce food waste
caused by over preparation and food shrinkage caused by cooking products for
extended periods. Labor costs can also be reduced when utilizing the TurboChef
system because of the minimal training required to operate the system and the
ease of implementing menu changes.
. FOODSERVICE OPERATORS SEEKING MARKET EXPANSION THROUGH FASTER SERVICE.
Operators seeking to expand the customer base for their existing product line by
emphasizing speed of service, as well as those desiring to expand their service
to accommodate time-constrained or "walk-in/carry-out" customers, can utilize
the cooking speed and quality provided by the Company's technologies to serve
these markets. A TurboChef cooking system allows restaurants to cook-to-order
products they currently serve, but within cook times which the Company believes
are acceptable to the time-constrained or "walk-in/carry-out" customers.
. OTHER POINTS OF FOODSERVICE DISTRIBUTION. Other foodservice venues, such as
corporate cafeterias, sports arenas, hotel lobbies, schools, airports, parks and
recreation facilities, can employ the Company's technologies to cook a variety
of foods quickly.
. NEW NON-TRADITIONAL FOODSERVICE DISTRIBUTION. The Company's technologies can
provide the convenience store industry, as well as the operators of other high
traffic, non-traditional foodservice locations (such as malls, grocery stores,
discount stores and warehouse clubs) with the ability to develop foodservice
programs which can offer products to their customers similar to those offered in
traditional fast food restaurants.
INTERNATIONAL SALES AND MARKETING
The Company established offices in the United Kingdom (UK) and Japan during
1997 to explore other business opportunities in Europe and Asia. In addition,
the Company established a joint venture in Ireland with a large food
manufacturer.
. TurboChef Europe. In 1997, the Company entered into a joint venture with one
of Europe's largest food manufacturers, The Queally Group, and formed TurboChef
Europe Limited. The objective of this alliance is to utilize the combined
resources of the two parties to market the Company's cooking technologies
through the establishment of distribution agreements with regional foodservice
equipment distributors throughout Western Europe. As of March 15, 1998,
TurboChef Europe had purchased approximately 50 units.
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<PAGE>
. Japan. In January 1997, the Company established a business development
office in Japan to evaluate opportunities in the Japanese market. The Company
is exploring establishment of the strategic alliances required to provide
necessary manufacturing, sales, service and food development to support the
introduction of TurboChef technologies to the region. While initial response to
cooking demonstrations has been encouraging, at this point it is not yet
possible to determine the sales prospects for the Company's products in Japan.
. United Kingdom. During 1997, a business development office was established
in the UK to evaluate sales opportunities in the UK to foodservice operators who
are not direct competitors of Whitbread.
The Company's marketing plans are subject to change as a result of a number
of factors, including progress or delays in the Company's development efforts,
changes in the foodservice or foodservice equipment markets, the nature of
marketing arrangements which may become available to the Company and competitive
factors.
Production and Supply
Throughout most of 1997, the Company relied on two contract manufacturers
to build its cooking systems, Sylvester's Inc. ("Sylvester's"), based in
Louisville, Mississippi, and Techniform, Inc. ("Techniform"), based in
Waterford, Ireland. However, in December 1997 the Company elected to
consolidate production at Techniform. The Company believes by consolidating
production it can gain economies of scale and achieve greater consistency in the
quality of cooking systems produced. Techniform has the current capacity to
produce approximately 40 cooking systems per month, which is sufficient to meet
the Company's near-term delivery requirements. The Company has not, however,
entered into a long-term contract with Techniform, intending instead to continue
its practice of placing cooking system manufacturing orders with Techniform from
time to time, in the ordinary course of business, as its needs require. While
the Company believes that Techniform's production quantities can be increased to
as high as 150 cooking systems per month, there can be no assurance of such
production increase or that any increased production would be sufficient.
The Company has been and will continue to be dependent on third parties for
the supply and manufacture of all of its component and electronic parts,
including both standard components and specially-designed component parts, such
as the printed circuit computer boards and wiring harnesses used in the
TurboChef cooking systems. The Company generally does not maintain supply
agreements with such third parties but instead purchases components and
electronic parts pursuant to purchase orders in the ordinary course of business.
The Company is substantially dependent on the ability of its manufacturers and
suppliers to, among other things, meet the Company's design, performance and
quality specifications. Failure by the Company's manufacturers and suppliers to
comply with these and other requirements could have a material adverse effect on
the Company.
The Company has required that its contract manufacturers follow generally
accepted industry standard quality control procedures. In addition, the Company
maintains its own quality assurance personnel and testing capabilities to assist
its contract manufacturers with their
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<PAGE>
respective quality programs and to perform periodic audits of manufacturing
facilities and finished products to ensure the integrity of the quality
assurance procedures. Component parts furnished to the Company by its suppliers
and manufacturers are generally covered by a one-year limited warranty and
contract manufacturers furnish a limited warranty for any of their manufacturing
or assembly defects.
The Company's manufacturing cycle, which is the period from the execution
of a purchase order until actual shipment of the product to the customer,
generally ranges from two to six weeks for small volume cooking system sales and
up to one or two months longer for initial shipments to commence under large
multi-cooking system purchase contracts. Pursuant to the Company's warranty
policy, the Company will accept the return of a cooking system if the cooking
system does not perform according to product specifications. For certain
potentially large customers which wish to test and evaluate a cooking system
prior to purchase, the Company occasionally offers one or more units at a
reduced price for such evaluation.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1997, 1996 and 1995, the Company
incurred costs related to research and development activities in the amounts of
$1,220,585, $681,161, and $424,325, respectively. The Company intends to
continue various research and development activities undertaken since the
Company's inception in an effort to satisfy the changing needs of its customers
and potential customers. These efforts include the continuing development of
improvements and enhancements to the performance of the Company's TurboChef
restaurant cooking systems (its Model D series); completion of development
efforts relating to a residential cooking system model incorporating the
Company's proprietary high-speed cooking technologies; completion of development
efforts relating to the Company's proposed Model E series consumer-operated
TurboChef cooking system for use in convenience stores and other retail outlets,
customization of the Company's proprietary software systems (incorporated in the
technological platform of its products), if and as needed for the successful
integration of the Company's products and services with its customers' existing
foodservice operating systems; and the Company's continuing efforts to exploit
other of the many potential market applications for the TurboChef technologies.
The Company believes that the versatility of its established technological
platform will enable it to deliver a variety of innovative foodservice products
to its customers and that future research and development costs will generally
be incurred in connection with expanding the commercial applications of its
technologies for targeted, customer-requested applications. In addition, to the
extent the Company is engaged to develop products for its customers, the Company
may require such customers to fund all or a portion of the related research and
development costs.
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<PAGE>
COMPETITION
The cooking and warming segment of the foodservice equipment market is
characterized by intense competition. The Company competes with numerous well-
established manufacturers and suppliers of conventional commercial ovens, grills
and fryers (including those which cook through the use of conduction,
convection, induction, air impingement, infrared and/or microwave heating
methods). In addition, the Company is aware of others who are developing, and in
some cases have introduced, new ovens based on high-speed heating methods and
technologies. Although the Company is not aware of any competitive products,
either being marketed or under development, which it believes are functionally
equivalent to the TurboChef cooking system (i.e. that can produce the variety of
food items, cooked to the same high quality standards, at the same speeds),
there can be no assurance that other companies with the financial resources and
expertise that would encourage them to attempt to develop competitive products
do not have or are not currently developing functionally equivalent products, or
that functionally equivalent products will not become available in the near
future. Most of the Company's competitors possess substantially greater
financial, marketing, personnel and other resources than the Company and have
established reputations relating to the development, manufacture, marketing and
service of cooking equipment. Among the Company's major competitors in the
cooking and warming segment of the foodservice equipment market are: The
Middleby Corporation and certain of its subsidiaries; the commercial foodservice
equipment division of Welbilt Corporation, including, Lincoln Foodservice
Products, Inc.; Quadlux, Inc.; Vulcan-Hart Corporation, a subsidiary of Premark
International, Inc.; the Blodgett Oven Company, Inc., a subsidiary of G. S.
Blodgett Corp. (which is now owned by Maytag); Groen, Inc., a subsidiary of
Dover Corporation; and Franklin Products, Inc.
The Company competes on the basis of product performance, innovative
technologies, product features, quality, reliability and service. However,
because other commercial oven and grill products currently offered by
competitors of the Company are available at prices which may be substantially
below the price of a TurboChef cooking system, potential customers may elect,
during general economic downturns or otherwise, to purchase such lower priced
products.
The market for the Company's products and technologies is characterized by
changing technology and evolving industry standards. The Company's ability to
compete successfully will depend, in large part, on its ability to continually
enhance and improve its existing products, complete development and introduce to
the marketplace in a timely manner its proposed products, adapt its products to
the needs of its customers and potential customers, successfully develop and
market new products and continue to improve operating efficiencies and lower
manufacturing costs. There can be no assurance that the Company will be able to
compete successfully, that competitors will not develop technologies or products
that render the Company's products obsolete or less marketable, or that the
Company will be able to successfully enhance its products, develop new products
or lower costs, when and as needed.
REGULATION AND ACCREDITATION
The Company is subject to regulations administered by various federal,
state, local and international authorities (including those limiting radiated
emissions from the Company's
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<PAGE>
cooking system products) which impose significant compliance burdens on the
Company. Failure to comply with these regulatory requirements may subject the
Company to civil and criminal sanctions and penalties. While the Company
believes that it, as well as its currently available TurboChef cooking systems,
are in compliance in all material respects with all laws and regulations
applicable to the Company and such products, including those administered by the
United States Food and Drug Administration, the Federal Communication Commission
and the European Community Council, there can be no assurance of such
compliance. The Company intends to test, from time to time, the cooking systems
manufactured in order to confirm continued compliance with applicable regulatory
requirements. Management believes that compliance with these laws and
regulations will not require substantial capital expenditures or have a material
adverse effect on the Company's future operations.
New legislation and regulations, as well as revisions to existing laws and
regulations (at the federal, state and local levels, in the United States and/or
in foreign markets) affecting the foodservice equipment industry may be proposed
in the future. Such proposals could affect the Company's operations, result in
material capital expenditures, affect the marketability of the Company's
existing products and technologies and/or could limit or create opportunities
for the Company with respect to modifications of its existing products or with
respect to its new or proposed products or technologies. In addition, an
expanded level of operations of the Company in the future could require the
Company to modify or alter its methods of operation at costs which could be
substantial and could subject the Company to increased regulation, and expansion
of the Company's operations into additional foreign markets may require the
Company to comply with additional regulatory requirements.
The Company has received certification from Underwriter's Laboratories,
Inc. ("UL(R)") as to compliance of the Company's Model D-2 TurboChef cooking
system with applicable UL(R) requirements relating to product safety
accreditation standards and with the applicable requirements of the National
Sanitation Federation ("NSF") relating to cleanability and sanitation
accreditation standards. UL(R) and NSF are agencies which have established
certain standards for a variety of categorized products and can be engaged to
inspect a manufacturer's products for compliance with the applicable standards.
Certification by each agency authorizes the marking of any such product with the
agency's labels, which indicates that the product is approved by the agency for
such use. Such certifications, which require periodic renewal, only represent
compliance with established standards and are not legally required. However,
failure by the Company to comply with these accreditation standards in the
future could have a material adverse effect on the Company's marketing efforts.
In addition, the Company has met the requirements necessary to apply the "CE"
mark (which indicates compliance with the European Community Council directive
relating to electromagnetic compatibility and low voltage) to its Model D-2
TurboChef cooking systems. As an equipment manufacturer, the Company is allowed
to "self-certify" compliance with this directive and have a third party attest
to the results. The Company is required by law to meet this European Community
Council directive in order to apply the "CE" mark and thereby sell its cooking
systems in the European Union.
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<PAGE>
WARRANTY AND SERVICE
The Company offers to purchasers a one-year limited warranty covering the
TurboChef cooking system's workmanship and materials, during which period the
Company or its authorized service representative will make repairs and replace
parts which become defective due to normal use. The Company is also making
available for purchase by the customer an extended limited warranty for up to an
additional four years. There will be an additional charge for this extended
warranty which will cover the same service elements as the initial one year
warranty.
Although the cost of servicing TurboChef cooking systems has not been
material to date and the Company believes that it has experienced warranty costs
in accordance with generally accepted industry standards, there can be no
assurance that future warranty expenses will not have an adverse effect on the
Company. In those areas where TurboChef cooking systems are located, the
Company has established relationships with independent factory authorized
service representatives which provide installation and repair services and carry
a parts inventory. In addition, the Company intends to establish a national and
global parts and service network of independent factory authorized service
representatives, capable of supporting a significant increase in TurboChef
cooking system installations.
INSURANCE
The Company is engaged in a business which could expose it to possible
liability claims from others, including from foodservice operators and their
staffs, as well as from consumers, for personal injury or property damage due to
design or manufacturing defects or otherwise. The Company maintains a general
liability insurance policy (which includes products liability coverage) that is
subject to a $1,000,000 per occurrence limit with a $2,000,000 aggregate limit
and a $5,000,000 umbrella liability insurance policy to cover claims in excess
of the limits of its liability insurance, which the Company believes is adequate
coverage for the type of products currently marketed. In addition, the Company
believes that its third party manufacturers currently maintain similar levels of
liability insurance.
PATENTS AND PROPRIETARY RIGHTS
The Company holds three United States patents which cover certain
fundamental aspects of the Company's high-speed cooking technologies and the
Company has pending patent applications or patents corresponding to one or more
of these United States patents filed in 7 countries (including the various
countries of the European Patent Convention as a single filing entity). These
United States patents expire in 2010-2013. The Company further holds one pending
United States patent application on a catalytic converter for use in such high-
speed cooking technologies. The Company also holds one United States patent
relating to the Company's "par-baked" pizza dough setting technology, which
patent expires in 2014. The patent laws of other countries may differ from those
of the United States as to the patentability of the Company's technologies and
products and the degree of protection afforded. The Company believes that its
patents and patent applications provide it with a competitive advantage.
Accordingly, in the event the Company's products and technologies gain market
acceptance, patent protection would be important to the Company's business.
There can be no assurance as to the breadth or degree of protection which
existing or future patents, if any,
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<PAGE>
may afford the Company, or that any patent applications will result in issued
patents, or that the Company's patent rights will be upheld if challenged, or
that competitors will not develop similar or superior methods or products
outside the protection of any patents issued to the Company.
The Company believes that product and brand name recognition is an
important competitive factor in the foodservice equipment industry. Accordingly,
the Company promotes the TurboChef name in connection with its marketing
activities. The Company holds a United States trademark for the TurboChef name
and a service mark registration for its slogan, "Changing the Way Good Food Is
Served(R)". The Company also holds United States service marks on Turbocart(R)
and Turbokiosk(R). The Company has filed trademark applications in the United
States for PreSet(TM) and ChefComm(TM), and has filed trademark applications in
Japan for ChefComm and "Changing the Way Good Food Is Served."
The Company also relies on trade secrets and proprietary know-how, and
typically enters into confidentiality and non-competition agreements with its
employees and appropriate suppliers and manufacturers, to protect the concepts,
ideas and documentation relating to its proprietary technologies. However, such
methods may not afford the Company complete protection. There can be no
assurance that others will not independently obtain access to the Company's
trade secrets and know-how or independently develop products or technologies
similar to those of the Company. Since the Company believes that its proprietary
technologies are important to its business, failure to protect such information
could have a material adverse effect on the Company.
EMPLOYEES
As of March 15, 1998, the Company employed 39 persons, all of whom are
full-time employees, including its three executive officers. Of its employees,
sixteen are engaged in technological development, two are engaged in
manufacturing and technical service, nine are engaged in foodservice concept and
product development, three are engaged in sales and marketing, and nine are
engaged in administration. None of the Company's employees are represented by
labor unions. The Company considers its relations with its employees to be good.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 15, 1998, were as follows:
NAME AGE POSITION(S)
---- --- -----------
Jeffrey B. Bogatin..................... 49 Chairman of the Board of Directors
Philip R. McKee........................ 41 President, Chief Executive Officer
Dennis J. Jameson...................... 44 Executive Vice President, Chief
Financial Officer, Secretary
and Treasurer
JEFFREY B. BOGATIN, a co-founder of the Company, has been Chairman of the
Board of the Company since its inception. He was also Treasurer of the Company
until June 1996. Since 1975, Mr. Bogatin has served as President of Whitemarsh
Industries, Inc., which is engaged in manufacturing and importing ladies apparel
and making venture capital investments.
PHILIP R. MCKEE, a co-founder of the Company, has been President, Chief
Executive Officer and a director of the Company since its inception. He was also
Secretary of the Company until January 1994. From May 1989 until November 1991,
Mr. McKee was President of MicroGold, Inc., a food product manufacturing
company, and from January 1986 until April 1989, he served as President of
Tracer, Inc., a technology development and operations company.
DENNIS J. JAMESON was elected Executive Vice President and Chief Financial
Officer of the Company in December 1995, Treasurer in June 1996 and Secretary in
January 1997. From November 1988 to May 1995, he served as a director, Senior
Vice President Finance and Administration, and Chief Financial Officer of Black-
eyed Pea Restaurants, Inc. in Dallas, Texas, which operated casual dining and
quick service Mexican restaurants located primarily in the Southwest and
Southeast.
ITEM 2 PROPERTIES
----------
The Company owns no real estate. The Company leases approximately 11,000
square feet of space at 10500 Metric Drive, Dallas, Texas, which it uses for
executive offices, technology development, sales and marketing, limited assembly
and other purposes, under a lease agreement which expires on May 31, 2000. The
Company also leases approximately 3,000 square feet of space at 5151 Beltline
Road, Dallas, Texas in which its sales and marketing staff resides pursuant to a
lease that is scheduled to expire on April 15, 2000.
In addition, the Company leases approximately 5,500 square feet of general
office space at 745 5th Avenue, New York, New York, pursuant to a lease that is
scheduled to expire on December 20, 2000.
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The Company believes that its facilities are generally well maintained, in
good operating condition and adequate for its current needs.
ITEM 3 LEGAL PROCEEDINGS
-----------------
Neither the Company nor any of its subsidiaries is a party to any pending
legal proceedings, other than ordinary routine litigation incidental to its
business, none of which is material.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's common stock has been traded on the NASDAQ SmallCap Market
("NASDAQ") under the symbol "TRBO" since the Company's initial public offering
in April 1994. Prior to that time, there was no public market for the Company's
common stock. The following table sets forth the high and low bid quotations for
the common stock for the periods indicated (as adjusted to give retroactive
effect to the Company's 2-for-1 stock split effected on December 29, 1995) as
reported by NASDAQ. The NASDAQ per share quotations represent inter-dealer
prices without adjustment for retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
PERIOD HIGH LOW
------ ------ ------
Year Ended December 31, 1997
First Quarter 19 1/8 11 7/8
Second Quarter 16 3/4 12 5/8
Third Quarter 16 3/4 10 1/8
Fourth Quarter 15 3/4 7
Year Ended December 31, 1996
First Quarter 14 3/4 11 1/2
Second Quarter 19 1/2 13
Third Quarter 12 7 5/8
Fourth Quarter 22 1/4 8 1/4
As of March 15, 1998, there were approximately 109 holders of record of the
Company's common stock.
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<PAGE>
DIVIDENDS
The Company has not paid cash dividends on the common stock since its
organization and does not expect to pay any cash dividends on the common stock
in the foreseeable future. The Company instead intends to continue a policy of
retaining earnings for the Company's operations and planned expansion of its
business. Any future cash dividends would depend on future earnings, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors.
ITEM 6 SELECTED FINANCIAL DATA
-----------------------
The following summary of selected financial data has been derived from the
more detailed Financial Statements and Notes thereto of the Company contained
elsewhere in this report or previous reports.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 4,222,486 $ 2,802,364 $ 1,228,111 $ 249,883 $ 13,306
Net Loss $ (4,662,302) $ (2,941,413) $ (1,585,268) $ (3,181,519) $ (3,408,884)
Net Loss per Share-basic and
diluted $ (.33) $ (.22) $ (.13) $ (.29) $ (.78)
Weighted Average Number of
Shares Outstanding 14,032,796 13,339,431 12,451,786 11,120,282 4,374,944
BALANCE SHEET DATA:
Working Capital $ 9,581,809 $ 8,522,752 $ 1,083,190 $ 1,029,070 $ (1,330,470)
Total Assets $ 16,439,765 $ 9,743,288 $ 2,217,870 $ 1,966,047 $ 695,161
Total Liabilities $ 811,297 $ 810,131 $ 769,857 $ 1,735,973 $ 3,622,705
Accumulated Deficit $ (17,276,907) $ (12,614,605) $ (9,673,192) $ (8,087,924) $ (4,906,405)
Stockholders' Equity $ 15,628,468 $ 8,933,157 $ 1,448,013 $ 230,074 $ (2,927,544)
</TABLE>
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Item 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
---------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
Since its inception in April 1991, the Company has been engaged primarily
in research and development, limited production operations and test marketing of
its cooking systems. The developmental nature of the Company continued through
the March 1994 introduction of its first commercial product, the Model D-1
cooking system. This emphasis on research and development continued into its
first major contract with Whitbread PLC ("Whitbread") in June 1995, when the
Company 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 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. This sales group consisted of an executive level sales
representative and the establishment of sales support, demonstration and
implementation technical staff. Knowing that the process of carrying out
numerous face-to-face demonstrations, developing customized implementation
strategies for each potential customer and conducting the exhaustive testing
required by each prospect results in an extended sales process, the Company has
taken a long-term view of the sales development process. The revolutionary
nature of the TurboChef technologies, coupled with the foodservice industry's
general resistance to change, have also contributed to a long sales cycle.
Customers currently taking cooking system deliveries on a regular basis include
Whitbread, various franchisees of Cendant Corporation (formerly HFS
Incorporated), Choice Hotels International and TurboChef Europe Limited. In
addition, the Company is actively engaged in tests within regional and national
chains of quick service and casual dining restaurants, hotels, convenience
stores, supermarkets and movie theaters.
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 $17,276,907 as of December
31, 1997.
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.
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<PAGE>
The Company intends to pursue business growth through implementation of the
following strategies: i) continued 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
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 YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 were $4,222,486, an increase
of $1,420,122, when compared to revenues of $2,802,364 for the year ended
December 31, 1996. This increase is primarily attributable to revenues
generated by the Maytag alliance, greater cooking system unit sales, higher
average selling prices and revenues generated by an extended warranty program
established for the Company's largest customer.
Cost of sales for the year ended December 31, 1997 was $2,842,833, an
increase of $536,125 when compared to $2,306,708 for cost of sales in the prior
year. This increase is attributable to greater cooking system unit sales,
additional costs generated by the extended warranty program, and charges taken
during the third and fourth quarters for inventory obsolescence due to design
enhancements to the Model D-2 and CUB cooking systems, an increase in the
reserve for future warranty expenses, and the disposal of remaining Model D-1
cooking system inventory.
Gross profit on sales for the year ended December 31, 1997 increased
$137,048 to $619,239, when compared to gross profit on sales of $482,191 during
the prior year. Gross margin for the year ended December 31, 1997 was 18% of
sales, compared to 17% of sales for the year ended December 31, 1996. Excluding
the effect of inventory and warranty charges in 1997 and 1996, gross margin was
27% for 1997, compared to 20% in 1996, reflecting higher average selling prices
and reduced manufacturing costs for the Model D-2 cooking system in 1997.
Research and development expenses for the year ended December 31, 1997
increased $539,424, to $1,220,585 from $681,161 for the year ended December 31,
1996. The increase was due to the Company's ongoing efforts to expand and
enhance its technologies and product offerings through several key initiatives.
Included in these initiatives was construction of a prototype self-serve cooking
system for convenience store and vending applications, a reduced
-23-
<PAGE>
size commercial cooking system, enhancements to the Model D-2 cooking system,
and continued development and enhancement of a residential oven prototype.
Selling, general and administrative expenses for the year ended December
31, 1997 increased $1,969,482, to $4,981,115 from comparable expenses of
$3,011,633 for 1996. Consistent with the business plan outlined by the Company
in connection with the June 1996 Offering, the increased expense is primarily
due to the Company's efforts in 1997 in developing a U.S. sales infrastructure.
This initiative incorporated several senior level staff additions as well as the
establishment of a customer service team, and increased travel and trade show
participation. Also contributing to the increase in selling, general and
administrative expenses are costs associated with international business
development in the UK and Japan not incurred in 1996.
Interest income net of interest expense for the year ended December 31,
1997 was income of $269,116 compared to $269,164 for the year ended December 31,
1996.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995
Revenues for the year ended December 31, 1996 were $2,802,364, an increase
of $1,574,253, when compared to revenues of $1,228,111 for the year ended
December 31, 1995. This increase is primarily attributable to greater cooking
system unit sales to Whitbread in 1996 compared to 1995 and increased sales of
replacement parts. The 1996 revenues also include $12,000 from a customer of
the Company for licensing of the Company's proprietary dough-setting process.
Cost of sales for the year ended December 31, 1996 was $2,306,708, an
increase of $1,320,577 when compared to $986,131 for cost of sales in the prior
year. This increase is attributable to greater cooking system unit sales,
greater sales of replacement parts, adjustments for inventory made obsolete by
the migration from the D-1 to the D-2 model and the establishment of a reserve
for future warranty expense. The increases are partially offset by a reduction
in the per unit manufacturing cost in 1996.
Gross profit on sales for the year ended December 31, 1996 increased
$308,191 to $482,191, when compared to gross profit on sales of $174,000 during
the prior year. The increase is a result of the greater system unit sales,
primarily to Whitbread.
Gross margin for the year ended December 31, 1996 was 17% of sales,
compared to 15% of sales for the year ended December 31, 1995. The percentage
increase is attributable to a reduced per unit manufacturing cost which resulted
from increased production volume and cost reduction engineering in 1996, offset
by the incremental costs associated with the establishment of a warranty reserve
and the write-off of obsolete D-1 inventory in 1996. The effect of the
inventory adjustments resulting from the D-1 inventory obsolescence was to
decrease gross margin by approximately 3% of sales in 1996.
-24-
<PAGE>
Research and development expenses for the year ended December 31, 1996
increased $256,836, to $681,161 from $424,325 for the year ended December 31,
1995. The increase was due to the Company's ongoing efforts to advance its
technologies and product offerings through construction of a residential
prototype, the completion of a reduced size commercial system prototype and the
development of significant technological improvements to the D-2 commercial
model.
Selling, general and administrative expenses for the year ended December
31, 1996 increased $1,495,516, to $3,011,633 from comparable expenses of
$1,516,117 for 1995. The increased expense is attributable to the planned
addition of key personnel in the sales and manufacturing areas, the additional
travel to serve international customers and the establishment of two new
contract manufacturing facilities. Also contributing to the increase in these
expenses are non-recurring charges in the third and fourth quarters of 1996 of
approximately $683,000. These non-recurring charges consist primarily of the
cost of the field upgrade of Whitbread cooking systems with performance
enhancing technological improvements and the write-off of start up costs
associated with the termination of a contract manufacturer.
Interest income net of interest expense for the year ended December 31,
1996 was income of $255,725 compared to expense of $18,806 for the year ended
December 31, 1995. The increase in income is attributable to the income received
on the investment of the net proceeds from the June 1996 Offering.
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
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 $1.5 million ($250 thousand per month) as of March
1998 for research and development relating to their interests. In March 1998,
this project was extended for one year, and Maytag agreed to increase the
payment 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 can sell,
pledge, transfer or assign up to 50% of the shares after March 31, 1998. As of
March 15, 1998, the Maytag stock owned by the Company had a market value of
$14.1 million.
-25-
<PAGE>
At December 31, 1997, the Company had working capital of $9,581,809 as
compared to working capital of $8,522,752 at December 31, 1996. The $1,059,057
working capital increase from December 31, 1996 resulted primarily from the
current portion (50%) of the investment in Maytag common stock in accordance
with the Maytag alliance and the associated appreciation of that investment,
offset by the net operating loss of $4,662,302. For the year ended December 31,
1997, accounts receivable turnover was 7.3 compared to 7.2 during the year ended
December 31, 1996.
Cash used in operating activities was $4,514,250 for the year ended
December 31, 1997 as compared to cash used in operating activities of $2,825,475
for the year ended December 31, 1996. The increase is primarily the result of a
$1,720,889 increase in operating losses, and an increase in inventories of
$274,173 offset by a $173,901 decrease in prepaid expenses. Cash provided by
investing activities for the year ended December 31, 1997 was $5,070,132 as a
result of net sales of marketable securities of $7,309,431 offset by purchases
of marketable securities of $1,795,330 and equipment purchases of $327,218.
Cash provided by financing activities was $363,593 for the year ended December
31, 1997, which represents the net proceeds from exercises of stock options and
warrants. At December 31, 1997, the Company had cash and cash equivalents of
$1,396,641, compared to cash and cash equivalents of $477,166 at December 31,
1996.
-26-
<PAGE>
On March 15, 1995, Jeffrey B. Bogatin, the Chairman of the Board and a
principal stockholder of the Company, exchanged outstanding indebtedness and
accrued interest thereon, in the aggregate amount of $1,144,730, for 457,892
shares of Common Stock (a conversion rate of $2.50 per share) and, in connection
with such exchange, also received an option to purchase 600,000 shares of Common
Stock at $2.50 per share. The established conversion and option exercise prices
were approximately 74% above the market price of the Company's Common Stock on
the date of the transaction.
In June 1995, Mr. Bogatin, together with Philip R. McKee, a principal
stockholder and the President and Chief Executive Officer of the Company, made
contributions to the capital of the Company in the aggregate amount of
$1,000,000. Mr. Bogatin exercised options to purchase 80,000 shares of Common
Stock at $2.50 per share, for total proceeds to the Company of $200,000, and Mr.
McKee purchased 118,518 shares of restricted Common Stock from the Company at
$6.75 per share, for total proceeds to the Company of $800,000.
During December 1995, Mr. Bogatin made an additional $300,000 contribution
to the capital of the Company by exercising options to purchase 120,000 shares
of Common Stock at $2.50 per share, and Mr. McKee advanced to the Company the
sum of $285,000. The note issued to Mr. McKee evidencing such borrowing bore
interest at the rate of 6.5% per annum and was repaid in full (an aggregate of
$288,139, including accrued interest) on February 28, 1996.
On March 30, 1996, Mr. Bogatin and Mr. McKee loaned the Company the sums of
$200,000 and $85,000, respectively. These loans were evidenced by promissory
notes bearing interest at the rate of 6.5% per annum. Each of these notes was
payable on demand. These loans were made to satisfy certain eligibility
requirements in order for the Company's Common Stock to continue to be listed on
NASDAQ. These notes were repaid in full (an aggregate of $288,796, including
accrued interest) prior to the consummation of the June 1996 Offering.
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 $10,301,000, net of the underwriter's
discount and other offering costs of $1,699,491.
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.
AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards No. 128 "Earnings per Share," No. 129 "Disclosures of
Information about
-27-
<PAGE>
Capital Structure," No. 130 "Reporting Comprehensive Income" and No. 131
"Disclosures about Segments of an Enterprise and Related Information."
Statements 128 and 129 are required to be adopted in 1997 and Statements 130 and
131 are required to be adopted in 1998. Statement 130 will require the Company
to report comprehensive income and its components with the same prominence as
other financial statements. Statements 129 and 131 are 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 to expand its operations, including, among other things, continuing its
product development activities and marketing efforts and to set-up additional
third-party production operations for the manufacture of the Company's cooking
systems. 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 its ability to reduce
cooking system production costs) 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 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.
-28-
<PAGE>
As of December 31, 1997, the amount of backlog orders believed to be firm
was approximately $2.0 million, as compared to approximately $4 million as of
December 31, 1996. The Company anticipates that the majority of this backlog
will be filled during the current year.
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.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements are set herein commencing on page F- 1 of this
report.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
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<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this item is contained in the definitive proxy
materials of the Company to be filed in connection with its 1998 Annual Meeting
of Stockholders, except for the information regarding executive officers of the
Company which is contained in Part I of this Annual Report on Form 10-K. The
information required by this item contained in such definitive proxy material is
incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
----------------------
The information required by this item is contained in the definitive proxy
materials of the Company to be filed in connection with its 1998 Annual Meeting
of Stockholders, which information is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this item is contained in the definitive proxy
materials of the Company to be filed in connection with its 1998 Annual Meeting
of Stockholders, which information is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is contained in the definitive proxy
materials of the Company to be filed in connection with its 1998 Annual Meeting
of Stockholders, which information is incorporated herein by reference.
-30-
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements
2. List of Financial Statement Schedules (None)
3. List of Exhibits
EXHIBIT NO. DESCRIPTION
3.1 Restated Certificate of Incorporation. (1)
3.2 Restated By-Laws. (1)
4.1 Form of Certificate for Common Stock (1)
10.1 Form of Stock Option Agreement between stockholders of the
Company and certain other persons dated as of August 10, 1993. (1)
10.2 Stock Option Plan, as amended. (1)
10.3 Shareholders and Registration Rights Agreement among
the Company, Jeffrey B. Bogatin and Philip R. McKee
dated May 15, 1993, together with Amendment to
Shareholders and Registration Rights Agreement dated
as of December 31,1993. (1)
10.4 Stock Purchase Agreement with Donald J. Gogel dated April
17, 1993, together with Amendment to Stock Purchase
Agreement dated as of December 31, 1993. (1)
10.5 Consulting Agreement with Whale Securities Co., L.P.
dated April 14, 1994. (2)
10.6 Warrant Agreement with Whale Securities Co., L.P.
dated April 7, 1994. (2)
10.7 Amendment No. 1 dated as of June 12, 1996 to the Warrant
Agreement between the Company and Whale Securities Co., L.P.
dated as of April 14, 1996. (6)
-31-
<PAGE>
10.8 Warrant Agreement between the Company and Whale
Securities Co., L.P. dated as of June 17, 1996. (7)
10.9 Leasing Agreement with Tower 56 Partners dated January 8, 1993. (1)
10.10 Second Extension of Term Agreement with Tower 56
Partners dated December 1, 1995. (5)
10.11 Lease Agreement with The Fidelity Mutual Life Insurance
Company, in Rehabilitation, dated August 24, 1995. (5)
10.12 Lease Agreement with The Fidelity Mutual Life Insurance
Company, in Rehabilitation, dated March 21, 1996. (4)
10.13 Agreement with Jeffrey B. Bogatin converting debt into equity dated as
of March 15, 1995. (3)
10.14 Option Agreement between the Company and Acadia International
Limited dated as of March 31, 1995. (5)
10.15 Promissory Note dated December 29, 1995, issued to Philip R.
McKee by the Company. (5)
10.16 Promissory Note dated March 30, 1996 issued to Philip R.
McKee by the Company. (4)
10.17 Promissory Note dated March 30, 1996 issued to Jeffrey B.
Bogatin by the Company. (4)
10.18 Purchase Contract between the Company and Whitbread PLC
dated June 30, 1995. (4)
10.19 Purchase Contract between the Company and Whitbread PLC
dated December 27, 1995. (4)
10.20 Purchase Order from The Southland Corporation dated
December 13, 1996. (8)
10.21 Purchase Contract between the Company and Whitbread PLC
dated February 18, 1997. (8)
10.22 Employment Agreement with Philip R. McKee dated March 1, 1996. (1)
10.23 Letter Agreement dated February 6, 1996 by and among
Jeffrey B. Bogatin, Philip R. McKee and the Company. (4)
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<PAGE>
10.24 Letter Agreement between the Company and Joseph F.
Fogliano dated June 26, 1996. (6)
10.25 Lease Agreement with Prestonwood Tower dated March 19, 1997. (7)
10.26 Strategic Alliance Agreement dated as of September 26, 1997, by and
between TurboChef, Inc. and Maytag Corporation. (8)
10.27 Lease Agreement with Jonathan Woodner dated April 15, 1997. (9)
10.28 First Extension of the Project Research Agreement dated March 4, 1998
by and between TurboChef, Inc. and Maytag Corporation (9)
11 Statement Re: Computation of Per Share Earnings is not necessary
because the computation of per share earnings on both a basic and
diluted basis can be clearly determined from this report.
21 Subsidiaries of the Company. (9)
- ---------------
(1) Filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-75008), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1994, and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994, and incorporated herein by
reference.
(4) Filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-2992), and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995, and incorporated herein by
reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996, and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, and incorporated herein by
reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, and incorporated herein by
reference.
(9) Filed herewith.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Philip R. McKee
Philip R. McKee
President, Chief Executive Officer
and Director
Dated March 28, 1998
-34-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
Name Title Date
/s/ Jeffrey B. Bogatin Chairman of the Board and March 28, 1998
Jeffrey B. Bogatin Director
/s/ Philip R. McKee President, Chief Executive Officer March 28, 1998
Philip R. McKee and Director (Principal Executive
Officer)
/s/ Dennis J. Jameson Executive Vice President, Chief March 28, 1998
Dennis J. Jameson Financial Officer (Principal
Financial Officer)
/s/ Donald J. Gogel Director March 28, 1998
Donald J. Gogel
/s/ Joseph F. Fogliano Director March 28, 1998
Joseph F. Fogliano
-35-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 F-3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Financial Statements F-8
All financial statement schedules are omitted since the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
TurboChef, Inc.:
We have audited the accompanying balance sheets of TurboChef, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide 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 TurboChef, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
January 30, 1998, except as to note 13,
which is as of March 4, 1998
F-2
<PAGE>
TURBOCHEF, INC.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,396,641 477,166
Marketable securities available for sale, at fair value (note 3) 7,277,395 7,309,431
Accounts receivable net of allowance for doubtful accounts of
$16,000 at December 31, 1997 and 1996 644,569 583,023
Inventories 934,690 686,272
Prepaid expenses 104,160 276,991
------------ -----------
Total current assets 10,357,455 9,332,883
------------ -----------
Marketable securities available for sale, at fair value (note 3) 5,482,064 -
Property and equipment:
Leasehold improvements 110,062 64,334
Furniture and fixtures 344,507 132,640
Equipment 420,342 350,719
------------ -----------
874,911 547,693
Less accumulated depreciation and amortization (383,948) (242,579)
------------ -----------
Net property and equipment 490,963 305,114
------------ -----------
Other assets (note 4) 109,283 105,291
------------ -----------
Total assets $ 16,439,765 9,743,288
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 401,013 340,575
Accrued expenses 352,928 415,091
Sales deposits - 43,700
Deferred revenue 21,705 10,765
------------ -----------
Total current liabilities 775,646 810,131
------------ -----------
Deferred rent 35,651 -
------------ -----------
Stockholders' equity (notes 6 and 9):
Common stock, $.01 par value. Authorized 50,000,000
shares. Issued 14,551,294 and 13,785,244 shares at
December 31, 1997 and 1996, respectively 145,513 137,852
Additional paid-in capital 32,129,601 21,577,249
Accumulated deficit (17,276,907) (12,614,605)
Net unrealized gain on marketable securities (note 3) 964,148 -
Treasury stock - at cost, 17,382 and 8,315 shares at December 31,
1997 and 1996, respectively (333,887) (167,339)
------------ -----------
Total stockholders' equity 15,628,468 8,933,157
Commitments (note 7)
------------ -----------
$ 16,439,765 9,743,288
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
TURBOCHEF, INC.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 3,462,072 2,788,899 1,160,131
Other revenues (note 1(a)) 760,414 13,465 67,980
----------- ---------- ----------
Total revenues 4,222,486 2,802,364 1,228,111
----------- ---------- ----------
Costs and expenses:
Cost of goods sold 2,842,833 2,306,708 986,131
Research and development expenses (note 11) 1,220,585 681,161 424,325
Selling, general and administrative expenses 4,981,115 3,011,633 1,516,117
----------- ---------- ----------
Total costs and expenses 9,044,533 5,999,502 2,926,573
----------- ---------- ----------
Operating loss (4,822,047) (3,197,138) (1,698,462)
----------- ---------- ----------
Other income (expense):
Interest income 269,116 269,164 12,589
Interest expense (notes 5 and 6) - (13,439) (31,395)
Forfeited sales deposit - - 132,000
Dividend income 47,015 - -
Equity in loss of joint venture (note 4) (156,386) - -
----------- ---------- ----------
159,745 255,725 113,194
----------- ---------- ----------
Net loss $(4,662,302) (2,941,413) (1,585,268)
----------- ---------- ----------
Loss per common share - basic and diluted $(.33) (.22) (.13)
=========== ========== ==========
Weighted average number of common shares
outstanding 14,032,796 13,339,431 12,451,786
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
TURBOCHEF, INC.
Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Shares of
common
stock Additional
(notes 5, 6 Common paid-in Accumulated
and 9) stock capital deficit
------------ --------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 11,857,334 $118,573 8,199,425 (8,087,924)
Exchange of indebtedness and accrued
interest by a major stockholder 457,892 4,579 1,140,151 -
Exercise of stock options 200,000 2,000 498,000 -
Issuance of stock to officer ($6.75 per share) 118,518 1,185 798,815 -
Exchange of indebtedness and accrued
interest by Acadia Ltd. 233,334 2,334 356,143 -
Net loss - - - (1,585,268)
------------ --------- ---------- ------------
Balance, December 31, 1995 12,867,078 128,671 10,992,534 (9,673,192)
Secondary public offering ($15.00 per
share) net of offering cost
of $1,699,491 800,000 8,000 10,292,509 -
Sale of warrants - - 80 -
Issuance of stock in payment of
director's fee 2,000 20 27,730 -
Exercise of stock options 116,166 1,161 264,396 -
Purchase of treasury stock (8,315 shares) - - - -
Net loss - - - (2,941,413)
------------ --------- ---------- ------------
Balance, December 31, 1996 13,785,244 137,852 21,577,249 (12,614,605)
Exercise of warrants 87,815 878 284,514 -
Issuance of stock in payment of director's
fee 1,960 20 29,871 -
Exercise of stock options 111,607 1,116 243,633 -
Issuance of common stock 564,668 5,647 9,994,334 -
Net unrealized gain on marketable securities - - - -
Purchase of treasury stock (9,067 shares) - - - -
Net loss - - - (4,662,302)
------------ --------- ---------- ------------
Balance, December 31, 1997 14,551,294 $145,513 32,129,601 (17,276,907)
============ ========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Net
unrealized
gain on
marketable Treasury stockholders'
securities stock equity
---------- --------- --------------
<S> <C> <C> <C>
Balance, December 31, 1994 - 230,074
Exchange of indebtedness and accrued
interest by a major stockholder - - 1,144,730
Exercise of stock options - - 500,000
Issuance of stock to officer ($6.75 per share) - - 800,000
Exchange of indebtedness and accrued
interest by Acadia Ltd. - - 358,477
Net loss (1,585,268)
---------- --------- --------------
Balance, December 31, 1995 - - 1,448,013
Secondary public offering ($15.00 per
share) net of offering cost
of $1,699,491 - - 10,300,509
Sale of warrants - - 80
Issuance of stock in payment of
director's fee - - 27,750
Exercise of stock options - - 265,557
Purchase of treasury stock (8,315 shares) - (167,339) (167,339)
Net loss - - (2,941,413)
---------- --------- --------------
Balance, December 31, 1996 - (167,339) 8,933,157
Exercise of warrants - - 285,392
Issuance of stock in payment of
director's fee - - 29,891
Exercise of stock options - - 244,749
Issuance of common stock - - 9,999,981
Net unrealized gain on marketable securities 964,148 - 964,148
Purchase of treasury stock (9,067 shares) - (166,548) (166,548)
Net loss - - (4,662,302)
---------- --------- --------------
Balance, December 31, 1997 964,148 (333,887) 15,628,468
========== ========= ==============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
TURBOCHEF, INC.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- ------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(4,662,302) (2,941,413) (1,585,268)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net loss of joint venture 156,386 - -
Depreciation and amortization 171,659 104,099 86,562
Provision for doubtful accounts - 16,000 -
Amortization of director compensation 28,820 13,875 -
Interest expense added to principal - - 21,070
Increase in accounts receivable (61,546) (26,724) (509,013)
Decrease (increase) in inventories (274,173) (147,189) 275,397
Decrease (increase) in prepaid expenses 173,901 (164,334) 18,058
Decrease (increase) in other assets (48,161) 2,856 (205)
Increase (decrease) in accounts payable 60,438 (63,718) 202,150
Increase (decrease) in accrued expense (62,163) 379,777 (2,136)
Increase in deferred revenue 10,940 10,765
Decrease in accrued interest - - (1,011)
Decrease in sales deposits (43,700) (1,550) (86,750)
Increase in deferred rent 35,651 - -
Other - (7,919) -
---------------- ---------- -----------------
Net cash used in operating activities (4,514,250) (2,825,475) (1,581,146)
---------------- ---------- -----------------
Cash flow from investing activities:
Purchase of marketable securities (1,795,330) (7,309,431) -
Proceeds from sale of marketable securities 7,309,431 - -
Investment in joint venture (116,751) - -
Purchase of equipment (327,218) (147,797) (48,705)
Purchase of other assets - (45,350) -
---------------- ---------- -----------------
Net cash provided by (used in) investing
activities 5,070,132 (7,502,578) (48,705)
---------------- ---------- -----------------
Cash flows from financing activities:
Proceeds from notes payable - - 140,000
Proceeds from notes payable to stockholders - 285,000 285,000
Repayments of notes payable to stockholders - (570,000) (21,232)
Exercise of stock options 78,201 98,218 500,000
Exercise of warrants 285,392 - -
Issuance of common stock - 12,000,000 800,000
Proceeds from sale of warrants - 80 -
Offering costs - (1,650,962) (48,529)
---------------- ---------- -----------------
Net cash provided by financing activities 363,593 10,162,336 1,655,239
---------------- ---------- -----------------
</TABLE>
(Continued)
F-6
<PAGE>
2
TURBOCHEF, INC.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ------------------ --------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents $ 919,475 (165,717) 25,388
Cash and cash equivalents at beginning of year 477,166 642,883 617,495
---------- -------- ---------
Cash and cash equivalents at end of year $1,396,641 477,166 642,883
========== ======== =========
Supplemental disclosures of noncash activities:
Noncash investing activity - net unrealized gain on
marketable securities $ 964,148 - -
========== ======== =========
Noncash financing activities:
Exchange of indebtedness and accrued interest for
common stock $ - - 1,503,207
========== ======== =========
Interest payable added to principal $ - - 74,012
========== ======== =========
Issuance of stock in payment of director's fee $ 29,891 27,750 -
========== ======== =========
Issuance of stock to Maytag $9,999,981 - -
========== ======== =========
Supplemental disclosure of cash flow information -
interest paid $ - 13,439 11,337
========== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) General
-------
TurboChef, Inc. (the Company) was incorporated on April 3, 1991. The
Company is a foodservice technology company engaged primarily in
designing, developing and marketing high-speed ovens. From its inception
through February 1994, the operations of the Company were principally
limited to conducting research and development, limited production
operations and test marketing of prototype high-speed commercial cooking
systems. In March 1994, the Company commenced commercial manufacturing
and initial marketing of the first restaurant version of the TurboChef
cooking systems. Prior to the last quarter of 1994, the Company was
considered to be in the development stage. The Company believes its
primary market is with traditional full-service restaurants operating
both domestically and internationally. (See note 11 for information
regarding concentration of business risks.)
In April 1994, the Company completed an underwritten initial public
offering (IPO) of 2,600,000 shares of its common stock resulting in
aggregate proceeds of approximately $5,237,000, which is net of the
underwriter's discount and other IPO offering costs totaling $1,263,000.
In June 1996, the Company consummated an underwritten public offering
(June 1996 Offering) of 800,000 shares of its common stock resulting in
aggregate proceeds of approximately $10,301,000, which is net of
underwriter's discount and other offering costs totaling $1,699,491.
In September 1997, TurboChef and Maytag Corporation (Maytag) entered
into a "Strategic Alliance Agreement" (Alliance) for the purpose of the
development and commercialization of innovative products based on new
technologies in the areas of heat transfer and thermodynamics. In
connection with the Alliance, the Company issued 564,668 shares of
common stock with a fair value of approximately $10,000,000 for a
similar value of Maytag common stock (see note 3). In addition, the
Company will receive reimbursement from Maytag for research and
development expenses incurred in connection with the first research and
development project of $250,000 per month for a term of six months. The
total amount of reimbursements received as of December 31, 1997 was
$750,000 which has been included in "other revenues" in the accompanying
1997 statement of operations.
(b) Cash Equivalents
----------------
Cash equivalents of $1,091,000 and $386,000 at December 31, 1997 and
1996, respectively, consist of U.S. Treasury securities which mature in
less than three months. For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(Continued)
F-8
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
(c) Investments in Marketable Securities
------------------------------------
Investments in marketable securities at December 31, 1997 and 1996
consist of U.S. Government Agency securities and corporate equity
securities. 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, net of the related tax
effect, 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.
(d) Inventories
-----------
Inventories are valued at the lower of cost or market and primarily
consist of completed cooking systems and replacement parts. The Company
determines cost for cooking systems by the specific cost method.
(e) Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are amortized using the
straight-line method over the shorter of the expected term of the
related lease or estimated useful life of the asset.
(f) Sales Deposits
--------------
Sales deposits consist of amounts received from customers for future
purchases of cooking systems. Deferred amounts will be recognized as
revenue as cooking systems are shipped to the customer.
(g) Revenue Recognition
-------------------
The Company records revenue as earned, which occurs when the product is
shipped. Reserves for sales returns and allowances are recorded in the
same accounting period as the related revenues. As of December 31, 1997
and 1996, there were no reserves established as sales returns and
allowances were not significant.
(h) Other Assets and Related Amortization Expense
---------------------------------------------
Other assets consist primarily of the cost of obtaining patents.
Amortization is computed on the straight-line method over ten years.
(Continued)
F-9
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
(i) Research and Development
------------------------
Research and development costs consist of all costs incurred in
planning, design and testing of the high-speed commercial cooking
system, including salary costs related to research and development, and
are expensed as incurred.
(j) Product Warranty
----------------
The Company's cooking systems are under warranty against defects in
material and workmanship for a period of one year. Anticipated future
warranty costs are recorded in the period cooking systems are sold.
(k) Income Taxes
------------
The Company accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(l) Loss Per Share
--------------
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 years ended
December 31, 1997, 1996 and 1995.
Basic net loss per common share is based on 14,032,796, 13,339,431 and
12,457,786 weighted average shares outstanding for the years ended
December 31, 1997, 1996 and 1995, respectively. For the years ended
December 31, 1997, 1996 and 1995, the Company did not have any
incremental shares of potentially dilutive stock as their effect was
antidilutive.
(Continued)
F-10
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
(m) Stock Option Plans
------------------
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, and related interpretations.
Compensation expense is recorded on the date of grant only if the market
price of the underlying stock exceeds the exercise price. Since the
Company grants substantially all stock options with an exercise price
equal to or greater than the current market price of the stock on the
grant date, no compensation expense is recorded. On January 1, 1996, the
Company adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). Under SFAS 123,
the Company may elect to recognize expense for stock-based compensation
based on the fair value of the awards, or continue to account for stock-
based compensation under APB 25 and disclose in the financial statements
the effects of SFAS 123 as if the recognition provisions were adopted.
The Company has elected not to adopt the recognition provision of SFAS
123 and will continue to account for stock-based compensation under APB
25.
(n) Use of Estimates
----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(o) Financial Instruments
---------------------
The carrying amount of cash and cash equivalents, marketable securities
available for sale (U.S. Government Agency Securities), accounts
receivable, note payable to shareholder, accounts payable and accrued
expenses approximates fair value due to the short maturity of these
instruments.
(p) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, on January 1, 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
(Continued)
F-11
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
(q) Reclassifications
-----------------
Certain amounts in prior periods financial statements have been
reclassified to conform to current year presentation.
(2) Liquidity
---------
Although the Company has historically incurred significant losses, the
Company anticipates that its current cash and cash equivalent balances will
be sufficient to fund its operations and satisfy its contemplated capital
requirements for at least the next 24 months.
(3) Investment Securities
---------------------
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available-for-sale by major security type and
class of security at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
holding holding Fair
December 31, 1997: Cost gains losses value
---------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
U.S. Government Agency
Securities $ 1,795,330 - - 1,795,330
Equity securities (Maytag) 9,999,981 964,148 - 10,964,129
----------- ------- ------------ ----------
$11,795,311 964,148 - 12,759,459
=========== ======= ============ ==========
December 31, 1996 - U.S.
Treasury Securities $ 7,309,431 - - 7,309,431
=========== ======= ============ ==========
</TABLE>
All maturities of debt securities at December 31, 1997 are due within one
year. The equity securities are generally subject to a general restriction
placed on selling, pledging, transferring or assigning such securities for a
period of 21 months from December 31, 1997; however, the Company does have
the ability, in accordance with the Alliance, to cause 50% of such
securities to be sold, pledged, transferred or assigned, subject to certain
requirements, after March 31, 1998.
Proceeds from the sale of investment securities available for sale were
$7,309,431 in 1997 and resulted in no gain or loss.
(Continued)
F-12
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
(4) Investment in Joint Venture
---------------------------
During 1997, the Company contributed $116,751 for a 50% interest in a joint
venture created for the purpose of establishing distributorships and direct
sales relationships with certain Western European countries. The Company's
share of the net loss of the joint venture for the year ended December 31,
1997 was $156,386.
(5) Note Payable
------------
In November 1994, the Company and Acadia International Limited, a
corporation incorporated under the laws of the British Virgin Islands
("Acadia"), entered into an agreement to jointly develop a new consumer-
operated TurboChef oven (the Model E-1 TurboChef oven) for use in retail
locations (the "Acadia Agreement"). Pursuant to the Acadia Agreement, Acadia
committed to invest up to $1,200,000 in the Model E-1 project, over a period
of 16 months, for which it was ultimately to receive between a 20% and 30%
(depending on various circumstances) ownership interest in AcadiaChef, Inc.
("AcadiaChef"), the entity formed in connection with this joint venture to
commercialize the proposed Model E-1 oven. Each of the Company and Acadia
had the option, however, of terminating the Acadia Agreement prior to such
time, whereupon Acadia's investment would be returned, as outlined below,
and its interest in AcadiaChef and the E-1 project would be eliminated. As
of March 31, 1995, the Company had completed an initial prototype of the
Model E-1 TurboChef oven and Acadia had invested a total of $350,000 in the
project pursuant to the terms of the Acadia Agreement. The Company elected
at such time to terminate its arrangement with Acadia. Pursuant to the terms
of the Acadia Agreement, upon such termination, Acadia had the option of (i)
having its investment returned to it, in cash plus interest accrued thereon
at the rate of 10% per annum, and receiving an option to purchase 350,000
shares of common stock at $1.50 per share (the market price of the common
stock on the date of the Acadia Agreement), or (ii) converting the principal
amount of its investment into 233,334 shares of common stock, based on a
conversion rate of $1.50 per share, and receiving an option to purchase
525,000 shares of common stock at $2.50 per share. Instead, the Company was
able to reach an agreement with Acadia in June 1995, with an effective date
of March 31, 1995, whereby Acadia converted its $350,000 investment,
foregoing the accrued interest thereon, into an aggregate of 233,334 shares
of common stock and received an option to purchase 262,500 shares of common
stock at $2.50 per share, exercisable after March 31, 1996 and expiring
March 31, 2002. As of December 31, 1997, no options have been exercised.
(6) Certain Transactions With Stockholders
--------------------------------------
(a) Notes Payable
-------------
On March 15, 1995, a major stockholder of the Company exchanged
outstanding indebtedness and accrued interest thereon, in the aggregate
amount of $1,144,730 for 457,892 shares of common stock (a conversion
rate of $2.50 per share) and, in connection with such exchange, also
received an option to purchase 600,000 shares of the common stock
(Continued)
F-13
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statement
at $2.50 per share. The established conversion option exercise prices
were approximately 74% above the market price of the Company's common
stock on the date of the transaction.
On December 29, 1995, a shareholder and officer of the Company advanced
to the Company the sum of $285,000. The note evidencing such borrowing
bore interest at the rate of 6.5% per annum and was repaid in full (an
aggregate of $288,139, including accrued interest) on February 28, 1996.
On March 30, 1996, a major shareholder and an officer of the Company
loaned the Company the sums of $200,000 and $85,000, respectively. These
loans were evidenced by promissory notes bearing interest at the rate of
6.5% per annum. Each of these notes was payable on demand. These loans
were made to satisfy certain eligibility requirements in order for the
Company's common stock to continue to be listed on NASDAQ. These notes
were repaid in full (an aggregate of $288,796, including accrued
interest) prior to the consummation of the June 1996 Offering.
(b) Stock Issuance
--------------
In June 1995, an officer of the Company made a contribution to the
capital of the Company in the amount of $800,000 by purchasing directly
from the Company 118,518 shares of the restricted common stock of the
Company at $6.75 per share.
(c) Stock Option Exercise
---------------------
During 1995, a major stockholder of the Company exercised options to
purchase 200,000 shares of the common stock of the Company at $2.50 per
share.
(7) Lease Commitments
-----------------
The Company is obligated under certain noncancelable leases for office space
and equipment, the majority of which have remaining terms of less than one
year. Obligations for office space which extends beyond one year are
$352,502 in 1998, $329,910 in 1999, and $243,744 in 2000. Rent expense was
$322,668, $148,197 and $122,033 for the years ended December 31, 1997, 1996
and 1995, respectively.
(Continued)
F-14
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
(8) Income Taxes
------------
Actual income tax benefit differs from the "expected" income tax benefit
(computed by applying the U.S. federal corporate tax rate of 34% to loss
before income taxes) for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax benefit $(1,585,183) (1,000,080) (538,991)
Research and development credit (46,829) (38,681) (22,253)
Other 132,012 4,761 17,444
Change in the valuation allowance for
losses for which there is no
expected tax benefit 1,500,000 1,034,000 543,800
----------- ---------- --------
$ - - -
=========== ========== ========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
December 31
-----------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Intangibles principally due to differences in amortization $ - 5,000
Research and development credit carryforwards 158,000 111,000
Net operating loss carryforwards 5,183,000 3,714,000
----------- ----------
Total gross deferred tax assets 5,341,000 3,830,000
Less valuation allowance (5,322,000) (3,822,000)
----------- ----------
Net deferred tax assets 19,000 8,000
----------- ----------
Deferred tax liabilities:
Intangibles principally due to differences in amortization (3,000) -
Equipment principally due to difference
in depreciation (10,000) (8,000)
Other (6,000) -
----------- ----------------
Total gross deferred tax liabilities (19,000) (8,000)
----------- ----------
Net $ - -
----------- ----------
</TABLE>
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Due to the historical operating results of the Company,
management is unable to conclude on a more likely than not basis that
deferred income tax assets will be realized.
(Continued)
F-15
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
At December 31, 1997, the Company has net operating loss carryforwards and
research and development credit carryforwards for federal income tax
purposes of $15,245,000 and $158,000, respectively, which are available to
offset future federal taxable income, if any, through 2012.
(9) Stockholders' Equity
--------------------
(a) Authorized Shares
-----------------
In June 1997, the Board of Directors of the Company approved a proposal
to increase the number of authorized shares of common stock from
20,000,000 shares to 50,000,000 shares.
(b) Stock Options
-------------
Pursuant to agreements dated as of August 10, 1993, certain major
stockholders of the Company granted options to purchase an aggregate of
161,504 shares of the Company's common stock owned by such stockholders,
at a price of $1.25 per share, to nine persons employed or retained by
either the Company or another entity which had performed engineering and
development work for the Company (see note 9). In November 1993, 13
persons previously employed by such other entity became employees of the
Company. The options are exercisable over a period commencing April 7,
1994 and ending August 10, 1998 subject to certain exceptions. As of
December 31, 1997, options to purchase 109,516 shares of common stock
have been exercised.
The Company adopted the 1994 Stock Option Plan ("the Stock Option
Plan"), which was amended in March 1994, June 1995, February 1997 and
June 1997, pursuant to which stock options covering an aggregate of
3,150,000 shares of the Company's common stock may be granted. Options
awarded under the Stock Option Plan (i) are generally granted at
exercise prices which equate to or are above quoted market price on the
date of the grant; (ii) generally become exercisable over a period of
one to four years; and (iii) generally expire five to seven years
subsequent to award.
At December 31, 1997 there were 611,334 shares available for grant under
the Plan. The per share weighted-average fair value of stock options
granted during 1997, 1996 and 1995 was $5.25, $6.21 and $1.25,
respectively, on the date of grant using the Black Scholes option-
pricing model with the following weighted-average assumptions: Risk-free
interest rate, ranging from 5.77% to 6.56%; expected life, seven years;
expected dividend yield, 0% and volatility, 45% for 1997, and risk-free
interest rate, 6%; expected life, five years; expected dividend yield,
0% and volatility, 50% for 1996 and 1995.
The Company applies APB Opinion 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below.
(Continued)
F-16
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported $(4,662,302) (2,941,413) (1,585,268)
Loss per common share - basic
and diluted (.33) (.22) (.13)
Pro forma (5,825,725) (3,520,927) (1,672,360)
Loss per common share - basic
and diluted (.42) (.28) (.13)
</TABLE>
Pro forma net loss reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options vesting period of up to four years and compensation cost for
options granted prior to January 1, 1995 is not considered.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
Shares price
--------- -------
<S> <C> <C>
Options granted 1,084,666 $ 3.65
Options exercised (200,000) 2.50
Options cancelled (59,000) 1.75
--------- ------
Options outstanding at December 31, 1995 1,500,666 3.36
Options granted 949,000 11.02
Options exercised (116,166) 2.29
Options cancelled (292,667) 7.99
--------- ------
Options outstanding at December 31, 1996 2,040,833 6.32
Options granted 424,500 9.61
Options exercised (111,607) 2.19
Options cancelled (242,833) 9.17
--------- ------
Options outstanding at December 31, 1997 2,110,893 $ 6.87
========= ======
</TABLE>
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.50 - $15.625
and 4.5 years, respectively.
At December 31, 1997 and 1996, the number of options exercisable was
1,146,970 and 1,095,826, respectively, and the weighted-average
exercise price of those options was $2.88 and $3.08, respectively.
(Continued)
F-17
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
In addition, the Company has issued options to purchase 262,500 shares
of common stock of the Company at $2.50 per share to Acadia (see note
5).
(c) Stock Issuances
---------------
During 1996, the Company issued 2,000 shares of stock to a director in
payment of director fees. The stock was valued at $13.875 per share
which approximates the fair value of the stock at the issuance date.
During 1997, the Company issued 1,960 shares of stock to a director in
payment of director fees. The stock was valued at $15.25 per share which
approximates the fair value of the stock at the issuance date.
During 1997, the Company issued 564,668 shares of stock to Maytag in
exchange for 293,846 shares of Maytag's common stock under the terms of
the "Strategic Alliance Agreement." The Company stock was valued at
$17.71 per share and the Maytag stock was valued at $34.03 per share
both of which approximates the fair value of the respective stocks at
the issuance date.
(d) Stock Warrants
--------------
In connection with the initial public offering, the Company sold the
underwriters warrants to purchase 260,000 shares at $3.25 per share of
which 87,815 warrants were exercised in 1997. In June 1996, the Company
sold the underwriters of the secondary public offering warrants to
purchase 80,000 shares at $24.00 per share.
(10) Selling, General and Administrative Expenses
--------------------------------------------
In the third and fourth quarters of 1996, the Company incurred aggregate
charges in the amount of $467,000 for the field upgrade of systems sold to
a major customer with performance enhancing technological improvements and
charged operations for such charges.
(11) Related Party Transactions
--------------------------
Since inception of the Company, an entity (which was founded and is
principally owned by the Company's former Vice President - Engineering) has
performed engineering and development work for the Company. During the
years ended December 31, 1997, 1996 and 1995, the Company paid the entity
fees of $255,728, $345,358 and $110,603, respectively, relating primarily
to research and development charges incurred on behalf of the Company.
(Continued)
F-18
<PAGE>
TURBOCHEF, INC.
Notes to Financial Statements
(12) Concentration of Business Risks
-------------------------------
For the years ended December 31, 1997, 1996 and 1995, revenues from a
customer in the United Kingdom represented $1,575,864 or 37%, $2,108,485 or
75% and $842,000 or 69%, respectively, of the total revenues of the
Company. The loss of this customer, in the absence of significant
additional customers, would have a material adverse effect on the Company.
For the year ended December 31, 1997, revenues from Maytag (see Note 1)
represented $750,000, or 18%, of the total revenues of the Company. The
termination of this alliance could have a material adverse effect on the
Company.
(13) Subsequent Event
----------------
On March 4, 1998, the Company extended the first research and development
project associated with the Maytag Alliance for an additional term of one
year. In addition, the reimbursements from Maytag for research and
development expenses were increased to $300,000 per month.
F-19
<PAGE>
745 ASSOCIATES
c/o LaSalle Partners (New York) Limited Partnership
745 Fifth Avenue
New York, NY 10151
May 9, 1997
Jonathan Woodner Co.
745 Fifth Avenue
New York, NY 10151
Re: Lease, dated as of February 14, 1989 (the
"Lease"), between 745 Associates ("Landlord") and
Jonathan Woodner Co. ("Tenant"), covering the
entire ninth (9th) floor (the "Premises") in the
building known as 745 Fifth Avenue, New York, New
York 10151 (the "Building").
Ladies and Gentlemen:
In accordance with your request with respect to that certain
Sublease between Tenant and TurboChef; Inc. ("Subtenant"), dated April 15, 1997
(the "Sublease"), Landlord hereby grants permission to Tenant to enter into the
Sublease at the Premises between Tenant and Subtenant, a copy of which Sublease
is annexed hereto and made a part hereof as Exhibit A, provided, however, that
such subletting and Landlord's grant of permission with respect thereto shall be
subject to the following terms and conditions:
1. Neither this letter agreement, nor the Sublease, nor any
acceptance of rent by Landlord from Subtenant, shall operate to waive, modify,
release or in any manner affect Tenant's liability under the Lease. No other
sublease of all of or any part of the Premises affected by the Lease or the
Sublease shall be made by Tenant or Subtenant, as the case may be, without the
prior written approval of Landlord, except as provided in the Lease.
2. If, at any time prior to the expiration of the term of
the Sublease, the term of the Lease shall terminate or be terminated as a result
of any default under the Lease or by operation of law or for any other reason,
the Sublease and the term granted thereby shall terminate and, on or prior to
the date of such termination of the Sublease, Subtenant, at Subtenant's sole
cost and expense, shall quit and surrender the sublet space to Landlord, in the
manner and condition required pursuant to the Lease.
3. Notwithstanding anything to the contrary contained in
Paragraph 2, if, at any time prior to the expiration of the term of the
Sublease, the term of the Lease shall terminate
<PAGE>
or be terminated for any reason, Subtenant agrees, at the election and upon
demand of Landlord or any other owner of the real property, or of the holder of
any mortgage in possession of the real property or the Building, or of any
lessee under the lease to which the Sublease shall be subject and subordinate,
to attorn, from time to time to Landlord or any such owner, holder or lessee,
upon the then executory terms and conditions set forth in the Sublease for the
remainder of the term demised in the Sublease. The foregoing provisions of this
paragraph shall enure to the benefit of any such owner, holder or lessee, shall
apply notwithstanding that, as a matter of law, the Sublease may terminate upon
the termination of the Lease, shall be self-operative upon any such demand, and
no further instrument shall be required to give effect to said provisions. Upon
demand of Landlord or any such owner, holder or lessee, Subtenant agrees,
however, to execute, from time to time, instruments in confirmation of the
foregoing provisions of this paragraph, in which Subtenant shall acknowledge
such attornment and shall set forth the terms and conditions of its tenancy.
Nothing contained in this paragraph shall be construed to impair any right
otherwise exercisable by Landlord or any such owner, holder or lessee.
4. Except as expressly set forth in the Sublease, the
Sublease is subject and subordinate in all respects to the Lease and to all of
the terms, covenants and conditions thereof. Nothing contained herein shall
limit the rights of Landlord under the Lease, or create any direct right of
Subtenant against Landlord or with respect to the portion of the Building
covered by the Sublease. In the event that there shall be any conflict between
the terms, covenants and conditions of this letter agreement and the terms,
covenants and conditions of the Sublease, then the terms, covenants and
conditions of this letter agreement shall prevail in each instance.
5. Tenant shall be responsible for the legal fees incurred
by Landlord in connection with Landlord's review of the Sublease, as well as the
preparation, execution and delivery of this letter agreement, which fees shall
be paid by Tenant directly to Landlord's counsel, Schulte Roth & Zabel LLP,
simultaneously with the execution and delivery hereof.
6. Landlord, Tenant and Subtenant do hereby mutually
acknowledge and agree that (i) the term "cooking", as used in Paragraph 7 of the
Sublease, shall mean the utilization of Subtenant's cooking technologies and any
new related technologies to fast cook raw and uncooked foods (generally in two
minutes or less) for sales demonstration purposes, (ii) in agreeing to grant
permission to the Sublease, Landlord has relied upon Tenant's representation
that the use of the Premises for the demonstration of Subtenant's products, and
the cooking of food utilizing those products, will not emit outside of
Subtenant's Premises any noise, vibration, fumes or odor, (iii) if such food
odors, fumes, noises, or vibrations are emitted outside Subtenant's Premises,
Tenant and Subtenant will take all steps, as reasonably prescribed by Landlord,
to prevent any such odors, noises and vibration from being emitted from the
Subtenant's Premises or entering into other portions of the Building, and (iv)
failure by Tenant or Subtenant to observe or perform any terms and conditions of
this Paragraph 6 shall be deemed to be a default under the Lease and Landlord
shall have the right to exercise any and all rights, privileges and remedies
given to Landlord by and pursuant to the provisions of Articles 18 and 19 of the
Lease. Nothing contained herein shall modify~ or diminish Subtenant's
obligations to Tenant pursuant to Article 6 of the Sublease.
2
<PAGE>
7. Except as herein expressly modified, the Lease is hereby
ratified in all respects.
If this letter agreement accurately reflects your
understanding and agreement as to the matters hereinabove set forth, please sign
this letter agreement and have Subtenant sign this letter agreement where
indicated below and return four (4) executed copies to the undersigned.
Very truly yours,
LANDLORD: 745 ASSOCIATES
a New York General Partnership
By: Hexalon Real Estate, Inc., Its
Managing General Partner
By: /s/ James W. Smith,III
------------------------------
Name: James W. Smith, III
Title: Vice President
ACCEPTED AND AGREED TO
THIS DAY OF MAY, 1997
JONATHAN WOODNER CO., Tenant
By: /s/ Andrea Woodner
-------------------------
Name: Andrea Woodner
Title: Co-President
ACCEPTED AND AGREED TO
THIS DAY OF MAY, 1997
TURBOCHEF, INC., Subtenant
By: /s/ Jeffrey B Bogatin
--------------------------
Name: Jeffrey B. Bogatin
Title: Chairman
3
<PAGE>
SUBLEASE
========
AGREEMENT OF SUBLEASE ("Sublease"), made as of the 15th day of April,
1997, by and between Jonathan Woodner Co., a Delaware Corporation (hereinafter
referred to as "Sublessor"), having an office at 745 Fifth Avenue, 9th Floor,
New York, New York 10151 and TurboChef, Inc., a Delaware corporation
(hereinafter referred to as "Sublessee"), having an address at 745 Fifth Avenue,
New York, New York 10151.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to a certain lease dated February 14, 1989 ("Lease"),
by and between 745 Associates, a New York general partnership, as landlord
("Landlord"), and Sublessor, as tenant, Landlord leased to Sublessor certain
space (the "Demised Premises") in the building ("Building") located at 745 Fifth
Avenue, New York, New York; and
WHEREAS, Sublessor desires to sublease to Sublessee and Sublessee
desires to sublet from Sublessor a portion of the Demised Premises which is more
particularly set forth as the area cross-hatched in red on Exhibit A which is
attached hereto and made a part hereof (the "Subleased Premises"), and Sublessee
desires to take and hire the Subleased Premises from Sublessor;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. Lease. Sublessee hereby acknowledges receipt of a copy of the Lease
with certain portions not material to this Sublease intentionally excluded, a
copy of which is annexed hereto as Exhibit B. The terms and conditions of the
Lease are incorporated by reference into this Sublease and made a part hereof as
if herein set forth at length, Sublessor being substituted for "Landlord" under
the Lease, Sublessee being substituted for "Tenant" under the Lease and the
Subleased Premises being substituted for the "Premises" under the Lease; except
the parties agree that the following provisions of the Lease are not so
incorporated herein by reference: Sections 2.01, 2.02, 2.04, 15.18, 18.01,
23.01, 29.10H., Articles 27, 32, 36, 37, 41 and 42. Notwithstanding the
foregoing, any inconsistencies between the terms of this Sublease and the Lease
which shall result from the foregoing incorporation shall be resolved in favor
of this Sublease; provided however, that if such construction of terms would
cause Sublessor to be in default under the terms of the Lease, then such
inconsistency shall be resolved in favor of the Lease. To the extent that the
definitions of the Lease incorporated by reference herein differ from or are
inconsistent with the definitions contained in this Sublease, the definitions
set forth in this Sublease shall prevail.
<PAGE>
2. Demise and Term. (A) Sublessor hereby leases to Sublessee and
Sublessee hereby takes and hires from Sublessor the Subleased Premises for the
term and upon the terms and conditions set forth herein, subject to the
provisions of Article 15 of the Lease, and contingent upon the written consent
of the Landlord to (i) this Sublease pursuant to Section 15.18 of the Lease
including the Landlord's consent to the use of the Subleased Premises set forth
in paragraph 7 hereof ("Consent to Sublease") and (ii) Sublessee's Initial
Plans and Specifications (as hereinafter defined; Landlord's consent to same
being hereinafter referred to as the "Consent to Sublessee's Initial Plans and
Specifications").
(B) The term ("Term") of this Sublease shall commence on April 15,
1997 ("Commencement Date"), except as otherwise provided herein, and end on
December 20, 2000 ("Expiration Date"), unless sooner terminated pursuant to the
provisions of this Sublease or the Lease. Sublessor warrants and represents that
the term of the Lease extends beyond the Expiration Date. Promptly after
execution and delivery of this Sublease, Sublessor shall request the Consent to
Sublease and the Consent to Sublessee's Initial Plans and Specifications
(provided Sublessee has submitted Sublessee's Initial Plans and Specifications
to Sublessor in full compliance with Section 9 hereof and Article 5 of the Lease
upon the execution hereof). In the event that on or before April 15, 1997
Sublessor shall not have obtained the Consent to Sublease and the Consent to
Sublessee's Initial Plans and Specifications, Sublessor shall extend the
Commencement Date of this Sublease until such time as the two Consents have been
obtained. In the event that on or before May 15, 1997 Sublessor shall not have
obtained the Consent to Sublease and the Consent to Sublessee's Initial Plans
and Specifications, both Sublessor and Sublessee shall have the right to cancel
this Sublease upon five (5) days written notice to the other, and thereupon this
Sublease shall cease and terminate as if the date of such cancellation was the
Expiration Date as herein defined. Notwithstanding the foregoing, Sublessee
shall not have the right to possession of the Subleased Premises until Landlord
has signed the Consent to Sublease and the Consent to Sublessee's Initial Plans
and Specifications and Sublessor has received the Security in the full amount
required under Section 25 of this Sublease.
3. Rent. The rents reserved under this Sublease for the Term, shall be
and consist of:
(A) "Fixed Rent" in the amount of (a) One Hundred Ninety-One
Thousand Six Hundred Ninety-Seven Dollars ($191,697.00) per annum, for the
period beginning on August 1, 1997, payable in equal monthly installments of
Fifteen Thousand Nine Hundred Seventy-Four Dollars and Seventy-Five Cents
($15,974.75); which monthly sums shall be payable in advance on the first day of
each month without demand, set-off or deduction.
(B) "Additional Rent" consisting of all such other sums of money as
shall become due from, and payable by, Sublessee to Sublessor hereunder (for
default in payment of which Sublessor shall have the same remedies as for
default in payment of Fixed Rent);
2
<PAGE>
all to be paid to Sublessor at its address hereunder referred to, or such other
place, or to such agent and at such place, as Sublessor may designate by notice
to Sublessee, in lawful money of the United States of America. The terms "rent",
"rents" and "rental," as used herein, shall include Fixed Rent and Additional
Rent.
4. Proportionate Share: Escalations.
As used herein, "Sublessee's Proportionate Share" shall mean 27.01%.
Sublessee covenants and agrees to pay to Sublessor, as Additional Rent,
Sublessee's Proportionate Share of (i) one-twelfth (1/12) of an amount equal to
Landlord's estimate of the amount of increase in Tenant's Tax Payment (as
defined in the Lease) for the then current Comparison Year (as defined in the
Lease), plus one-twelfth (1/12) of the excess, if any, of Tenant's Tax Payment
for the prior Comparison Year over Tenant's Tax Payment for the Base Tax Year
(as hereinafter defined), which amounts shall be payable monthly by Sublessee to
Sublessor, (ii) the excess, if any, of Tenant's Tax Payment for each Comparison
Year over Tenant's Tax Payment for the Base Tax Year (the Base Tax Year shall
mean for purposes of this Sublease the average of the New York City fiscal year
July 1, 1996 - June 30, 1997 and the New York City fiscal year July 1, 1997 -
June 30, 1998); it being agreed that any amounts payable on account of the
applicable Comparison Year pursuant to clause (i) shall be applied to amounts
payable pursuant to this clause (ii), (iii) one-twelfth (1/12) of an amount
equal to Landlord's estimate of Tenant's Operating Payment (as defined in the
Lease) for the then current Comparison Year in excess of Tenant's Operating
Payment for the 1997 calendar year, which shall be payable monthly by Sublessee
to Sublessor and (iv) the excess, if any, of Tenant's Operating Payment for each
Comparison Year over Tenant's Operating Payment for the 1997 calendar year; it
being agreed that any amounts payable on account of the applicable Comparison
Year pursuant to clause (iii) shall be applied to amounts payable pursuant to
this clause (iv); and all of the foregoing provisions of clauses (i)-(iv) herein
shall be calculated subject to and in accordance with the applicable provisions
of Article 28 of the Lease (except that Tenant's covenant to pay Landlord under
the applicable provisions of Article 28 shall remain Tenant's (Sublessor's)
thereunder, Sublessee to pay Sublessor in accordance with the terms herein;
provided, however, in the event of any ambiguity in calculating Sublessee's
payments hereunder, the provisions of Article 28 shall control as to such
calculations). Sublessee shall make all payments required to be made pursuant to
this Paragraph 4 within ten (10) business days after Sublessor furnishes
Sublessee with a statement of the amount payable by Sublessee to Sublessor.
Sublessee shall have the right to reasonably request from Sublessor copies of
any applicable Landlord's Statement (as defined in the Lease) received by
Sublessor, and Sublessor shall furnish same upon request, but same shall not
affect Sublessee's obligations to make the required payments hereunder. In the
event that any items payable by Sublessor under Article 28 of the Lease, in
respect of which Sublessor shall have received payments from Sublessee
hereunder, are subject to adjustment by Landlord at the end of a year or other
period pursuant to the terms thereof, then (a) if there has been a corresponding
underpayment in the payments made by Sublessee, Sublessee shall pay to
Sublessor, no later than ten (10) business days after Sublessor furnishes to
3
<PAGE>
Sublessee a copy of the statement received by Sublessor from Landlord, an amount
equal to such underpayment; or (b) if there has been an overpayment in such
payments made by Sublessee, Sublessor shall credit against the next payment of
Additional Rent coming due hereunder an amount equal to such overpayment, except
that if no further payments of Additional Rent shall be due hereunder, then
Sublessor shall refund such amount to Sublessee within ten (10) business days.
The obligation to pay any amount payable by Sublessee, or to Sublessee as
provided for in the immediately preceding sentence, shall survive the end of the
term of this Sublease and shall be payable by Sublessee, or to Sublessee, as the
case may be, in the same manner as if the Term of this Sublease had not expired
or terminated.
5. Acceptance of Subleased Premises. Sublessee has inspected the
Subleased Premises and Sublessee agrees to accept the Subleased Premises on the
Commencement Date in the condition in which the Subleased Premises exists on the
Commencement Date, "as is", and further agrees that neither Sublessor nor
Landlord shall have any obligation to perform any work, supply any materials,
incur any expenses or make any installations, in order to prepare the Subleased
Premises for Sublessee's occupancy. Notwithstanding the foregoing, Sublessor,
prior to the Commencement Date, shall cause the work described on Exhibit C
hereto to have been completed. Acceptance of the Subleased Premises on the
Commencement Date shall be deemed an acknowledgement by Sublessee that such work
was performed to the satisfaction of Sublessee.
6. Performance of Covenants in the Lease. Except as expressly set forth
herein, during the Term of this Sublease, Sublessee shall observe and perform
all of the terms, covenants, conditions, and agreements contained in the Lease
to be performed and observed on the part of Sublessor, as the tenant thereunder,
insofar as same pertain to the Subleased Premises, and all of such terms,
covenants, conditions and agreements are imposed upon Sublessee, whether or not
specifically set forth or referred to herein, Sublessor being substituted for
"Landlord" under the Lease, Sublessee being substituted for "Tenant" under the
Lease and the Subleased Premises being substituted for the "Premises" under the
Lease, provided, however, that Sublessor shall not be liable for any defaults by
the Landlord under the Lease and Sublessee shall not be bound by or subject to
the provisions of the Lease that are not incorporated by reference into this
Sublease. Sublessee hereby agrees (i) to refrain from doing or causing to be
done, or suffering or permitting any thing or act to be done (except for any act
or omission of Sublessor, its officers, directors, employees, agents, guests and
invitees), which constitutes a default under the Lease or causes the Lease to
be canceled, terminated, forfeited or surrendered, or which makes Sublessor, as
tenant under the Lease, liable for any damages, claims or penalty, and (ii) to
indemnify and hold Sublessor harmless against any loss or expense suffered by
Sublessor by reason of Sublessee's failure to perform Sublessee's obligations
under this Sublease. Sublessor hereby agrees (i) that it will not take, or omit
to take, any action which will have the effect of causing a default under the
Lease, or of causing a substantial interruption in any of the services provided
by Landlord to the Subleased Premises under the Lease, and (ii) to indemnify and
hold
4
<PAGE>
Sublessee harmless against any loss or expense suffered by Sublessee by reason
of Sublessor's failure to perform its obligations under this Sublease and under
the Lease (except where such loss or expense is due to a default caused by
Sublessee under this Sublease) Provided Sublessee is not in default under this
Sublease beyond the giving of any required notice and the expiration of any
grace period, Sublessor agrees not to cancel or surrender voluntarily the Lease
as it affects the Subleased Premises, without the prior written consent of
Sublessee. If the Lease is terminated for any reason whatsoever, whether by
operation of law or otherwise, except where due to default of Sublessor (other
than a default of Sublessor under the Lease caused by Sublessee under this
Sublease), Sublessor shall not be liable in any manner whatsoever for such
termination. Sublessor shall promptly forward to Sublessee any default or
termination notice with respect to the Lease received by Sublessor from Landlord
and this Sublease shall terminate in the event of any such termination of the
Lease. Notwithstanding the incorporation by reference into this Sublease of
Section 13.03 of the Lease, Sublessor shall not terminate this Sublease pursuant
to Section 13.03 as incorporated herein unless Landlord shall have terminated
the Lease pursuant to said Section 13.03. A termination of the Lease due to the
default of Sublessor, other than Sublessor's default under the Lease caused by
Sublessee under this Sublease, shall be considered a voluntary cancellation or
surrender of the Lease hereunder. This Sublease is subject and subordinate in
all respects to the Lease and to the matters to which the Lease is subject and
subordinate. This Sublease shall also be subject to any amendments,
modifications and supplements to the Lease hereafter made between Landlord and
Sublessor, provided that any such amendments, modifications or supplements to
the Lease hereafter made between Landlord and Sublessor will not prevent, limit,
restrict or adversely affect the use by Sublessee of the Subleased Premises or
increase in any material respect its duties, obligations, responsibilities and
liabilities under and in accordance with the terms of this Sublease.
7. Use. Sublessee hereby agrees that the Subleased Premises will be
occupied and used only for the operation of general and executive offices and as
a showroom and for the display and demonstration of Sublessee's products, and
for no other purpose, and in a manner consistent in all respects with the
provisions of the Lease. It is expressly understood and agreed that the
Subleased Premises shall be used as a "Showcase" for the Sublessee's high
technology ovens and other products, and that such use shall include the
demonstration of those products and the cooking of food utilizing those
products.
8. Services Under the Lease. (A) Except as otherwise provided either in
this Paragraph 8 or elsewhere in this Sublease, Sublessee shall be entitled,
during the Term hereof, to receive all services, utilities, repairs and
facilities to be provided by Landlord under the Lease insofar as such services,
utilities, repairs and facilities pertain to the Subleased Premises. Sublessor
shall use its reasonable efforts to secure the performance by Landlord of its
obligations under the Lease with respect to the Subleased Premises for the
delivery, provision and/or performance of such services, utilities, repairs and
facilities as
5
<PAGE>
are required to be provided by Landlord under the Lease, except for such
services, utilities, repairs and facilities for which Sublessor, Sublessee or
any other tenant is responsible; provided, however, Sublessor shall in no event
be required to commence or maintain litigation to enforce such obligations of
Landlord under the Lease, or to incur any cost or expense whatsoever to secure
such performance. In the event that Sublessor fails or refuses to commence or
maintain any such litigation to enforce obligations of Landlord under the Lease,
then and in that event, Sublessee shall have the right to do so, at Sublessee's
sole cost and expense, as Sublessor's attorney-in-fact and/or assignee pursuant
hereto. Sublessee agrees that Sublessor shall have no liability of any nature
whatsoever to Sublessee as a consequence of Landlord's failure or delay in
performing its obligations under the Lease, including, without limitation,
Landlord's breach of the covenant of quiet enjoyment, provided that such
failure, delay or breach is not the result of any default by the Sublessor under
the Lease, and provided further, that Sublessor shall have had an opportunity
to cure such default. Sublessee's obligations hereunder shall not be impaired
nor shall the performance thereof be excused because of any failure or delay on
Landlord's part in performing it obligations under the Lease unless such
failure or delay results from Sublessor's being in default under the Lease and
Sublessor's default thereunder is not due to a default of Sublessee hereunder.
With respect to any request for services during any Overtime Periods (as defined
in the Lease), Sublessee may make such request in Sublessor's name directly to
Landlord provided such request is made in accordance with the provisions of
Section 29.04 of the Lease and Sublessee pays for all such services promptly
upon demand in accordance with the terms thereof; and provided further that
Sublessee provides Sublessor with duplicate copies of all such requests, if in
writing, simultaneously therewith.
(B) During the term of this Sublease, Sublessor agrees to
permit Sublessee to utilize without additional charge the furnishings and file
cabinets (the "Furniture") described on Exhibit D annexed hereto. Sublessee
shall care for and maintain the Furniture and shall return the Furniture to the
Sublessor upon the termination of this Sublease in its current condition,
reasonable wear and tear excepted.
9. Alterations. Except as otherwise herein provided, Sublessee shall
make no alterations, installations, additions or improvements (collectively,
"Alterations") into or about the Subleased Premises except in accordance with
the applicable provisions of the Lease, including but not limited to Article 5
thereof. The parties hereto acknowledge that Sublessee desires to make certain
Alterations (the "Initial Alterations") to the Subleased Premises to prepare the
same for its occupancy in accordance with certain detailed plans and
specifications ("Sublessee's Initial Plans and Specifications"), which
Sublessee's Initial Plans and Specifications are annexed hereto as Exhibit E and
are being submitted to Sublessor upon execution hereof for submission to
Landlord for Landlord's consent in compliance with Article 5 of the Lease, and
Sublessee shall diligently comply, at its sole cost and expense, with all of the
terms and conditions set forth in said Article 5 with respect to obtaining
Landlord's consent to said Initial Alterations and performing said Initial
6
<PAGE>
Alterations. Sublessor hereby consents to the Initial Alterations. It is
expressly understood and agreed that the Initial Alterations shall include the
installation of three (3) electrical outlets and the electrical circuits
necessary to handle and accommodate 3 Phase 208 volt electric current.
10. Insurance. (A) Sublessee, at Sublessee's own cost and expense,
shall maintain all policies of insurance with respect to the Subleased Premises,
in favor of Sublessor and Sublessee, which Sublessor is required to maintain in
favor of Landlord under the Lease, including but not limited to Articles 5 and
12 thereof, and shall comply with all requirements of the Lease with respect to
such insurance policies, including but not limited to types and amounts of
insurance; provided however that the business interruption insurance required of
Sublessor as tenant under the Lease shall be deemed to require Sublessee to
maintain business interruption insurance with respect to Sublessee's business.
(B) In the event that Sublessee shall fail to take out or
continuously maintain in force the insurance policies required hereunder,
Sublessor may, at its option, effect such insurance and charge the cost thereof
to Sublessee, who shall pay, as Additional Rent, such sums to Sublessor.
(C) Each of the above described policies shall contain the
following endorsement, to the extent available, "It is understood and agreed
that the premiums for these policies are due and payable from Sublessee only."
11. Full Force and Effect of the Lease. Sublessor represents that the
copy of the Lease delivered to Sublessee is a true and correct copy thereof,
except for the portions intentionally excluded as set forth above, none of which
excluded portions are relevant in any material respect to Sublessee's
obligations under this Sublease. Sublessor represents further-, that (a) there
have been no further amendments to nor modifications of the Lease, (1))to the
best of Sublessor's knowledge, neither Landlord nor Sublessor are in default
under the Lease, (c) Sublessor has not received any default notices from
Landlord, and (d) Sublessor has not sent any default notices to Landlord.
12. No Representations. Sublessor has made no representations,
agreements or promises with respect to the Building or the Subleased Premises or
the use thereof other than those expressly set forth in this Sublease and no
rights are to be deemed acquired by Sublessee, by implication or otherwise,
except those expressly granted herein. This Sublease contains the entire
agreement between Sublessor and Sublessee with respect to the Subleased Premises
and all prior negotiations and agreements are merged in this Sublease. Any
executory agreement hereafter made between Sublessor and Sublessee shall be
ineffective to change, modify, waive, release, discharge, terminate or effect an
abandonment or surrender of this Sublease, in whole or in part, unless such
agreement is in writing and signed by the party against whom enforcement thereof
is sought.
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13. Default. (A) This Sublease and the term and estate herein
granted are subject to the limitations that:
(i) if, Sublessee shall default in the observance or
performance of any term, covenant or condition of the Lease on Sublessee's part
to be observed or performed, which default results in a notice of default by
Landlord to Sublessor and such default shall continue for a period of ten
business (10) days after delivery to Sublessee of a true and complete copy of
Landlord's notice of default, or if such default is of a nature that it cannot
be completely remedied within said ten (10) business day period if Sublessee
fails to commence to cure such default within said ten (10) business day period
and thereafter diligently prosecute to completion all steps necessary to remedy
such default; or
(ii) if, Sublessee shall default in the payment when due of
any installment of Fixed Rent or in the payment when due of any Additional Rent,
and such default shall continue for a period of five (5) business days after
notice by Sublessor to Sublessee of such default; or
(iii) if, Sublessee shall default in the observance or
performance of any term, covenant or condition of this Sublease on Sublessee's
part to be observed or performed (other than the covenants for the payment of
Fixed Rent and Additional Rent) and Sublessee shall fail to remedy such default
within ten (10) business days after notice by Sublessor to Sublessee of such
default, or if such default is of a nature that it cannot be completely remedied
within said ten (10) business day period, if Sublessee shall not commence within
said ten (10) business day period and thereafter diligently prosecute to
completion all steps necessary to remedy such default; or
(iv) if, the Subleased Premises shall become vacant, deserted
or abandoned; or
(v) if, Sublessee's interest in this Sublease shall devolve
upon or pass to any person, whether by operation of law or otherwise, except as
may be expressly permitted under Paragraph 19 hereof; or
(vi) if, Sublessee shall file a voluntary petition in
bankruptcy or insolvency, or shall be adjudicated a bankrupt or insolvent, or
shall file any petition or answer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under the
present or any future federal bankruptcy act or any other statute or law, or
shall make an assignment for the benefit of creditors or shall seek or consent
to or acquiesce in the appointment of any trustee, receiver or liquidator of
Sublessee or of all or any part of Sublessee's property; or
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(vii) if, within sixty (60) days after the commencement of
any proceeding against Sublessee, whether by the filing of a petition or
otherwise, seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the present or future
applicable federal, state or other statute or law, such proceeding shall not
have been dismissed, or if, within sixty (60) days after the appointment of any
trustee, receiver or liquidator of Sublessee, or of all or any part of
Sublessee's property, without the consent or acquiescence of Sublessee, such
appointment shall not have been vacated or otherwise discharged, or if any lien,
execution or attachment shall be filed or issued against Sublessee or all or any
part of Sublessee's property pursuant to which the Subleased Premises shall be
taken or occupied or attempted to be taken or occupied by someone other than
Sublessee (except as provided in Paragraph 19 hereof);
then, upon the occurrence, at any time prior to or during the
Term, of any one or more of such events, Sublessor may, at any time thereafter,
at Sublessor's sole option, give to Sublessee a five (5) business days' notice
of cancellation of this Sublease and, in such event, this Sublease and the Term
shall come to an end and expire (whether or not the Term shall have commenced)
upon the expiration of said five (5) business day period with the same force and
effect as if the date were the Expiration Date stated herein and Sublessee shall
then quit and surrender the Subleased Premises to Sublessor, but Sublessee shall
remain liable for damages as provided in Paragraph 27 hereof. Sublessor shall
have with respect to any such default any and all of such rights and remedies as
are given to Landlord under the Lease with respect to defaults by the tenant
thereunder, all with the same force and effect as though the provisions of the
Lease with respect to defaults and the rights and remedies of Landlord were set
forth at length herein. If Sublessee shall default in the performance of any of
Sublessee's obligations hereunder or under the provisions of the Lease, after
the giving of notice and opportunity to cure as provided above, Sublessor,
without thereby waiving such default, may, at Sublessor's option, perform the
same for the account and at the expense of Sublessee. If Sublessor makes any
expenditures or incurs any obligations for the payment of money, including
without limitation, reasonable attorneys' fees and expenses in instituting,
prosecuting or defending any action or proceeding, by reason of any default of
Sublessee hereunder after giving of notice and opportunity to cure as provided
above, such sums paid or obligations incurred, with interest at the rate of 4%
per annum above the then current prime rate charged by Citibank, N.A. or its
successor, shall be deemed to be Additional Rent and shall be paid by Sublessee
to Sublessor on demand.
(B) If Sublessor shall default in the observance or
performance of any term, covenant or condition of this Sublease on Sublessor's
part, to be observed or performed, and Sublessor shall fail to remedy such
default with ten (10) business days after notice by Sublessee to Sublessor of
such default, or if such default is of a nature that it cannot be completely
remedied within said ten (10) business day period, if Sublessor shall not
commence within said ten (10) business day period and thereafter diligently
prosecute to completion all steps necessary to remedy such default, then if
Sublessee makes any
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<PAGE>
expenditures or incurs any obligations for the payment of money, including
without limitation, reasonable attorney's fees and expenses instituting,
prosecuting or defending any action or proceeding, by reason of such default of
Sublessor hereunder, after the giving of notice and an opportunity to cure as
provided above, Sublessor shall reimburse to Sublessee on demand all such sums
paid by Sublessee, with interest at the rate of 4% per annum above the then
current prime rate charged by Citibank, N.A. or its successor.
14. Indemnity and Hold Harmless. (A) Neither Sublessor nor its agents
shall be liable to Sublessee, its employees, agents, contractors, licensees,
servants, invitees or visitors and Sublessee shall save Sublessor and its agents
harmless from and against any and all liabilities, obligations, penalties,
fumes, suits, claims, demands, actions, costs and expenses of any kind or nature
(including, without limitation, reasonable attorneys' fees and expenses),
incurred in connection with or arising from any injury to Sublessee, its
employees, agents, contractors, licensees, servants, invitees or visitors or to
any other person in or about the Subleased Premises, or from any injury or
damage to or loss (by theft or otherwise) of any of Sublessee's property and/or
of the property of any other person irrespective of the cause of such injury,
damage or loss, other than injury, damage or loss caused by Sublessor's willful
acts or omissions or negligence. Sublessee agrees to indemnify and save
Sublessor and its agents harmless from and against any and all liabilities,
obligations, penalties, fines, suits, claims, demands, actions, costs and
expenses of any kind or nature by anyone whomsoever (including, without
limitation, reasonable attorneys' fees and expenses), incurred in connection
with or arising from (i) any default by Sublessee in the observance or
performance of any of the terms, covenants, conditions or agreements of this
Sublease on Sublessee's part to be observed or performed, beyond the expiration
of any applicable grace period, or (ii) the use or occupancy or manner of use or
occupancy of the Subleased Premises by Sublessee or any person claiming through
or under Sublessee, other than as permitted under this Sublease, or (iii) the
condition of the Subleased Premises (ordinary wear and tear excepted), except if
created by Sublessor, or (iv) any acts, omissions or negligence of Sublessee, or
the employees, agents, contractors, licensees, servants, invitees or visitors of
Sublessee, in or about the Subleased Premises or the Building, during the Term.
If any action or proceeding shall be brought against Sublessor by reason of any
such claim, Sublessee, upon notice from Sublessor, agrees to resist or defend
such action or proceeding and to employ counsel therefor reasonably satisfactory
to Sublessor. Sublessee shall pay to Sublessor on demand, as Additional Rent,
all sums which may be owing to Sublessor by reason of the provisions of this
Paragraph 14. Sublessee's obligations under this Paragraph 14 shall survive the
Expiration Date or sooner termination of the Term.
(B) Sublessor agrees to indemnify and save Sublessee and its agents
harmless from and against any and all liabilities, obligations, penalties,
fines, suits, claims, demands, actions, costs and expenses of any kind or nature
by anyone whomsoever (including, without limitation, reasonable attorneys'
fees-, and expenses), incurred in connection with or arising from (i) any
default by Sublessor in the observance or
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performance of any of the terms, covenants, conditions or agreements of this
Sublease on Sublessor's part to be observed or performed, beyond the expiration
of any applicable grace period, or (ii) the use or occupancy or manner of
use or occupancy of the portion of the Demised Premises occupied only by
Sublessor-, other than as permitted in the Lease, or (iii) any acts, omissions
or negligence of Sublessor, or the employees, agents, contractors, licensees,
servants, invitees, or visitors of Sublessor in or about the Demised Premises or
the Building, during the Term.
15. Notices. Any notice, demand, request or other document which, under
the terms of this Sublease or under any statute, must or may be given or made by
the parties hereto, must be in writing, and shall be either personally delivered
(provided a written receipt therefor is obtained), or sent by registered or
certified mail, postage prepaid, return receipt requested, addressed to the
party for whom intended at its address as set forth on page 1 hereof, and, if to
Sublessor, with a copy to Alter Bartfeld & Mantel LLP, 90 Park Avenue, New York,
New York 10016, Attention: Irving D. Alter, Esquire or if to Sublessee, with a
copy to: Sherman, Citren & Karasik, P.C., 152 West 57th Street, 35th Floor, New
York, New York 10019, Attention: Michael Wexelbaum, Esq. (provided, however, the
failure to forward a copy of any notice to counsel shall not be deemed to make
such notice defective). Either party, however, may designate a new or other
address by written notice given in accordance with this Paragraph 15. Any notice
personally delivered shall be deemed given upon the signing of a receipt
therefor, and any notice so addressed and mailed shall be deemed to be given
either when delivered, or, if delivery is refused, five (5) business days after
the date mailed, as the case may be. Any notice, demand or request given or made
by counsel for a party shall be deemed given or made by such party.
16. Counterclaim. Sublessee hereby waives the right to interpose a
counterclaim (other than mandatory counterclaims) in any summary proceeding
initiated by Sublessor to remove Sublessee from the Subleased Premises.
17. End of Term. On the Expiration Date, or upon any earlier
termination of this Sublease, Sublessee shall quit and surrender the Subleased
Premises to Sublessor broom-clean and in as good order, condition and repair as
the Subleased Premises existed upon the Commencement Date except for ordinary
wear and tear, any restoration of the Subleased Premises not required pursuant
hereto, damage or destruction by fife and other casualty and such other damage
the repair of which is not Sublessee's obligation hereunder (provided no such
damage shall be due to Sublessee's negligence or misconduct), and otherwise in
accordance with the applicable provisions of the Lease. Anything to the contrary
contained in the Lease or this Sublease notwithstanding, it is understood and
agreed that upon the expiration or termination of this Sublease, Sublessee shall
not be required to tear down or undo the Initial Alterations or any other
alterations approved pursuant hereto, including but not limited to the three (3)
electrical outlets and the electrical circuits installed for the 3 Phase 208
volt electric current needed by Sublessee. Sublessee recognizes that
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Sublessor may suffer substantial damage if Sublessee fails to surrender and
vacate the Subleased Premises on the Expiration Date. Sublessee, therefore,
agrees that if Sublessee shall hold-over or remain in possession beyond the
Expiration Date of this Sublease, Sublessee shall in addition to the provisions
of Paragraph 31 below, be liable for all compensatory damages directly related
thereto and arising therefrom, including any damages arising out of any lost
opportunities ( and/or new leases) in connection with such holding over. All
damages to Sublessor by reason of such holding-over by Sublessee may be the
subject of a separate action and need not be asserted by Sublessor in any
summary proceeding against Sublessee. Sublessee further agrees to indemnify
Sublessor against and from any and all losses, liabilities, damages, costs and
expenses (including reasonable attorneys' fees) Sublessor incurs to dispossess
Sublessee, or otherwise, resulting from Sublessee's failure to vacate the
Subleased Premises on the Expiration Date. Sublessee's obligations under this
Paragraph 17 shall survive the termination of this Sublease.
18. Quiet Enjoyment. Sublessor covenants with Sublessee that as long as
Sublessee shall pay the Fixed Rent and Additional Rent and shall duly perform
all of the terms, covenants, conditions and agreements of this Sublease on its
part to be performed, Sublessee shall, subject to the terms hereof and of the
Lease, peaceably have, hold and enjoy the Subleased Premises during the Term
provided herein without hindrance or molestation by Sublessor or any party
claiming by, through or under Sublessor.
19. Assignment and Subletting. Sublessee, for itself, and its
successors and assigns, expressly covenants that it shall not assign this
Sublease, nor underlet, nor suffer, nor permit the Subleased Premises or any
part thereof to be used or occupied by others, except upon the prior written
consent of both (i) Sublessor, which consent shall not be unreasonably withheld
or delayed, and (ii) Landlord; and provided further that any such attempted
assignment, subletting, use or occupancy shall be subject to compliance with all
of the terms and conditions contained in Article 15 of the Lease and to the
rights of Landlord thereunder. Sublessor agrees that it shall not have the
rights granted to Landlord under Sections 15.02-15.06 and 15.08 of the Lease for
purposes of this Sublease; but Landlord shall continue to have all of said
rights in addition to all of the other rights granted to Landlord under said
Article 15, and Sublessee shall have all of the obligations imposed on Tenant
thereunder with respect to the Subleased Premises.
20. Effect of Termination of the Lease. Notwithstanding the provisions
of Paragraph 2 hereof, the Term of this Sublease shall end one day prior to the
Term of the Lease if Landlord shall terminate the Lease in accordance with its
terms. Upon receipt of written notice from Landlord terminating the Lease,
Sublessor shall notify Sublessee of Landlord's intention to terminate the Lease
and the date such termination shall be effective. In the event of such early
termination by Landlord ("Early Termination"), Sublessor shall return to
Sublessee any prepaid Fixed Rent, any prepaid Additional Rent or Additional Rent
covering any period following Early Termination and the Security provided in
Paragraph 25
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hereof, or balance of the Security as the case may be, and thereafter this
Sublease shall terminate as finally and completely as if the date set forth in
the Early Termination notice shall be the Expiration Date set forth herein for
the termination of the Sublease Term.
21. Effect of Termination of this Sublease. References in this Sublease
to "termination" of this Sublease include expiration or earlier termination of
the Term hereof or cancellation of this Sublease pursuant to any of the
provisions of this Sublease, the Lease or pursuant to law. Upon the termination
of this Sublease, the term and estate granted by this Sublease shall end at noon
on the date of termination as if such date were the Expiration Date hereof, and
neither party shall have any further obligation or liability to the other after
such termination except as shall be expressly provided in this Sublease, any
liability for a payment which shall have accrued ~with respect to any period
ending prior to or at the time of termination shall survive the termination of
this Sublease.
22. Remedies Cumulative. Each right and remedy of Sublessor and
Sublessee provided for in this Sublease shall be cumulative and shall be in
addition to every other right and remedy provided for in this Sublease now or
hereafter existing at law or in equity or by statute or otherwise.
23. Binding Effect. The terms, covenants, conditions and agreements
contained in this Sublease shall bind and inure to the benefit of Sublessor and
Sublessee and their respective successors and assigns, except that no violation
of the provisions of Paragraph 19 hereof shall operate to vest any rights in any
successor or assignee of Sublessee. It is understood and agreed that the
obligations of Sublessor under this Sublease shall not be binding upon Sublessor
with respect to any period subsequent to the transfer of its interest in the
Lease, and that in the event of such transfer said obligations shall thereafter
be binding upon the transferee of the Sublessor's interest as tenant under the
Lease.
24. [Intentionally Deleted]
25. Security. A. On or before the date that is three business days
after Sublessor notifies Sublessee that Sublessor has received the Consent to
Sublease and the Consent to Sublessee's Initial Plans and Specifications,
Sublessee shall deposit and shall thereafter maintain at all times with
Sublessor until the date that is days after the expiration of the Term, as a
security deposit (the "Security") for the faithful performance and observance by
Sublessee of the covenants, agreements, terms, provisions and conditions of this
Sublease, an unconditional irrevocable commercial letter of credit in the
aggregate amount of Sixty Three Thousand Eight Hundred Ninety Nine Dollars
($63,899.00), in form and substance satisfactory to Sublessor and issued by a
commercial bank that is reasonably acceptable to Sublessor, payable upon
presentation by Sublessor to such issuer at its counters in New York City of a
sight draft, which letter of credit shall provide for the continuance of such
credit for the period of at least one (1) year after the date of issue. From
time to time
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during the Term, on or before the date that is thirty (30) days prior to the
expiry date of any letter of credit, Sublessee shall deliver to Sublessor a
replacement letter of credit, or an extension or renewal of the existing letter
of credit, that complies with the requirements of this Section. If Sublessee
shall fail properly and timely to replace, renew or extend the letter of credit
as aforesaid, then Sublessor shall have the right to draw on such letter of
credit for the balance remaining under such letter of credit and hold and apply
the proceeds thereof in accordance with this Section. Sublessor shall endeavor
in good faith (but shall not be required) to notify Sublessee prior to any draw
pursuant to the foregoing sentence. Notwithstanding the foregoing, in lieu of
the foregoing letter of credit in the amount of $63,899.00. Sublessee at its
option, may deposit with Sublessor the sum of Thirty One Thousand Nine Hundred
Forty-Nine Dollars and Fifty Cents ($31,949.50) in cash and a letter of credit
in the amount of Thirty-One Thousand Nine Hundred Forty-Nine Dollars and Fifty
Cents ($31,949.50) in the form of the letter of credit described herein to
constitute the Security. If Sublessee exercises such option, then in such event,
to the extent the cash portion of the Security has not been otherwise utilized
or applied in accordance with the provisions hereof, it shall be applied by
Sublessor to the payment of the Fixed Rent payable for the last sixty (60) days
of the Term.
B. Each letter of credit to be deposited and maintained with
Sublessor (or the proceeds thereof) shall be held by Sublessor as security for
the faithful performance and observance by Sublessee of the terms, provisions
and conditions of this Sublease, and in the event that (x) any default occurs
under this Sublease and is not cured by Sublessee within any applicable grace
period, or) Sublessor is entitled to draw on the letter of credit pursuant to
the provisions of subsection (A), then, in any such event, Sublessor may draw on
such letter of credit, and the proceeds of such letter of credit (or any cash
security deposited by the Sublessee with Sublessor in substitution for such
letter of credit) (collectively the "Security Proceeds"; all such Security
Proceeds shall be deemed to constitute the Security hereunder) shall then be
held and applied as security (and be Sublessor agrees to deposit the of
replenished, if necessary), in accordance with this Section. Sublessor agrees to
deposit the Security Proceeds in a separate interest bearing escrow account and,
with respect to Security Proceeds only, after deducting any administrative fees
permitted by law (currently 1 % per annum), to pay the interest to Sublessee
annually. Sublessee's tax identification number is 48-1100390.
C. It is agreed that in the event Sublessee defaults in respect
of any of the covenants, agreements, terms, provisions and conditions of this
Sublease (after notice and the expiration of any applicable grace period),
Sublessor may use, apply or retain such part of the Security Proceeds as shall
be equal to the sum as to which Sublessee is in default or for any sum which
Sublessor may expend or may be required to expend by reason of Sublessee's
default in respect of any of the covenants, agreements, terms, provisions and
conditions of this Sublease, including, but not limited to, any damages or
deficiency in the re-letting of the Subleased Premises, whether such damages or
deficiency occurred before or after summary proceedings or other re-entry by
Sublessor. Sublessor shall not be required to
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so use, apply or retain any part of the Security Proceeds, but if any part
thereof is so used, applied or retained in accordance with the provisions of
this Section, Sublessee shall, upon demand, immediately deposit with Sublessor
an amount equal to the amount so used, applied or retained.
D. In the event that Sublessee shall fully and faithfully comply
with all of the terms, provisions, covenants, agreements and conditions of this
Sublease, any unapplied Security Proceeds shall be returned to Sublessee within
ten (10) business days after the date fixed as the end of this Sublease and
after delivery of the entire possession of the Subleased Premises to Sublessor.
26. Arbitration. Either party may request arbitration of any matter in
dispute between Sublessor and Sublessee, except those matters which may be the
subject of a summary proceeding under Article 7 of the New York Real Property
Actions and Proceedings Law. The party requesting arbitration shall do so by
giving notice to that effect in accordance with the procedures of the American
Arbitration Association (or any organization successor thereto) in the City and
County of New York. The arbitration shall be conducted by a single arbitrator in
accordance with the then prevailing rules of the American Arbitration
Association (or any organization successor thereto) in the City and County of
New York. In rendering the decision and award, the arbitrator shall not add to,
subtract from or otherwise modify the provisions of this Sublease. if for any
reason whatsoever a written decision and award of the arbitrator shall not be
rendered within thirty (30) days after the arbitration hearing, then at any time
thereafter before such decision and award shall have been rendered either party
may apply to the Supreme Court of the State of New York or to any other court
having jurisdiction and exercising the functions similar to those now exercised
by such court, by action, proceeding or otherwise (1) (but not by a new
arbitration proceeding) as may be proper to determine the question in dispute
consistenfly with the provisions of this Sublease. All the expenses of the
arbitration, including attorneys' fees, shall be borne by the losing party to
the arbitration.
27. Re-entry bv Sublessor: Remedies. (A) (i) If this Sublease and the
Term shall expire and come to an end as provided in Paragraph 13 hereof:
(a) Sublessor and its agents may immediately, or at any time
thereafter, reenter the Subleased Premises or any part thereof, either by
summary proceedings, or by any other applicable court action or judicial
proceeding (without being liable to indictment, prosecution or damages
therefor), and may repossess the Subleased Premises and the Furniture and remove
any and all of their property and effects from the Subleased Premises; and
(b) Sublessor, at its option, may relet the whole or any
part or parts of the Subleased Premises, at any time or from time to time,
either in the name of Sublessor or
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otherwise, to such subtenant or subtenants, for such term or terms ending
before, on or after the Expiration Date, at such rental or rentals and upon such
other conditions, which may include concessions and free rent periods, as
Sublessor, in its sole discretion, may determine. Sublessor shall have no
obligation to relet the Subleased Premises or any part thereof and shall in no
event be liable for refusal or failure to relet the Subleased Premises or any
part thereof, or, in the event of such reletting, for refusal or failure to
collect any rent due upon such reletting, and no such refusal or failure shall
operate to relieve Sublessee of any liability under this Sublease or otherwise
to affect any such liability. Sublessor, at its option, may make such repairs,
replacements, alternations, additions, improvements, decorations and other
physical changes in and to the Subleased Premises as Sublessor, in its sole
discretion, considers advisable or necessary in connection with any such
reletting or proposed reletting, without relieving Sublessee of any liability
under this Sublease or otherwise affecting any such liability.
(ii) Sublessee, on its own behalf and on behalf of all persons
claiming through or under Sublessee, including all creditors, does further
hereby waive any and all rights which Sublessee and all such persons might
otherwise have under any present or future law to (a) redeem the Subleased
Premises, or re-enter or repossess the Subleased Premises, or (b) restore the
operation of this Sublease, after (1) Sublessee shall have been dispossessed by
a judgment or by warrant of any court or judge, (2) any re-entry by Sublessor,
or (3) any expiration or termination of this Sublease and the Term, whether such
dispossess, re-entry, expiration or termination shall be by operation of law or
pursuant to the provisions of this Sublease. The words "re-enter", "re-entered"
as used herein shall not be deemed to be restricted to their technical legal
meanings. The right to invoke the remedies hereinbefore set forth are cumulative
and shall not preclude Sublessor from invoking any other remedy allowed at law
or in equity.
(B) In the event of any breach or threatened breach by Sublessee or any
person claiming through or under Sublessee, or any of the terms of this Sublease
(whether or not the Term shall have commenced), Sublessor shall be entitled to
enjoin such breach or threatened breach and shall have the right to invoke any
other remedy allowed at law or in equity, by statute or otherwise, as if
re-entry, summary proceedings or other specific remedies were not provided for
in this Sublease.
(C) (i) If this Sublease and the Term shall expire and come to an
end as provided in Paragraph 13 hereof, or by or under any summary proceeding or
any other action or proceeding, or if Sublessor shall re-enter the Subleased
Premises as provided in this Paragraph 27 and elsewhere in this Sublease, or by
or under any summary proceeding or any other action or proceeding, then, in any
of said events:
(a) Sublessee shall pay to Sublessor all Fixed Rent, Additional
Rent and other charges payable under this Sublease by Sublessee to Sublessor to
the date upon
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which this Sublease and the Term shall have expired and come to an end or to the
date of reentry upon the Subleased Premises by Sublessor, as the case may be;
(b) All monies, if any, theretofore paid by Sublessee to
Sublessor, whether as advanced Fixed Rent, Additional Rent, Security, or
otherwise, shall be credited by Sublessor against any damages payable by
Sublessee to Sublessor, and any surplus, if any, shall be refunded to Sublessee;
(c) Sublessee also shall be liable for and shall pay to
Sublessor, as damages, any deficiency (hereafter referred to as "Deficiency")
between the Fixed Rent and Additional Rent reserved in this Sublease for the
period which otherwise would have constituted the unexpired portion of the Term
(conclusively presuming the Additional Rent to be the same as was payable for
the year immediately preceding such termination or re-entry) and the net amount,
if any, of rents collected under any reletting for any part of such period
(first deducting from the rents collected under any such reletting all of
Sublessor's expenses in connection with the termination of this Sublease, and
Sublessor's re-entry upon the Subleased Premises and with such reletting,
including, but not limited to, all repossession costs, brokerage commissions,
legal expenses, attorneys' fees and disbursements, alteration costs and other
expenses of preparing the Subleased Premises for such reletting). Any such
Deficiency shall be paid in monthly installments by Sublessee on the days
specified in this Sublease for payment of installments of Fixed Rent. Sublessor
shall be entitled to recover from Sublessee each monthly Deficiency as the same
shall arise, and no suit to collect the amount of the Deficiency for any month
shall prejudice Sublessor's right to collect the Deficiency for any subsequent
month by a similar proceeding.
(ii) If the Subleased Premises, or any part thereof, shall be
relet together with other space in the Demised Premises, rents collected or
reserved under any such reletting and the expenses of any such reletting shall
be equitably apportioned for the purposes of Section C. (i) hereof. In no event
whatsoever shall Sublessee be entitled to any rents collected or payable under
any reletting, whether or not such rents shall exceed the Fixed Rent and
Additional Rent reserved in this Sublease. Nothing contained in Paragraph 13
hereof or this Paragraph 27 shall be deemed to limit or preclude the recovery by
Sublessor from Sublessee of the maximum amount allowed to be obtained as damages
by any statute or rule of law, or of any sums or damages to which Sublessor may
be entitled in addition to the damages set forth in Section C. (i) hereof.
28. Certificates. Sublessor and Sublessee shall, without charge, at
reasonable intervals, and from time to time, within ten (10) business days after
requests by the other, deliver a written instrument to any person, firm or
corporation specified by them, duly executed and acknowledged, certifying:
17
<PAGE>
(a) that this Sublease is unmodified and in full force and
effect, if there have been any modifications, that the same are in full force
and effect as modified and stating any such modifications and if the Sublease is
not then in full force and effect, so stating and setting forth in reasonable
detail the nature of any default, deficiency or changed circumstance;
(b) whether or not there are then existing set-offs or defenses
against the enforcement of any of the agreements, terms, covenants or conditions
of this Sublease and any modifications thereof on the part of Sublessee to be
performed or complied with, and, if so, specifying the same;
(c) the dates to which the Fixed Rent and Additional Rent, and
other charges hereunder, have been paid; and
(d) whether the term of this Sublease has commenced and rent is
payable thereunder and whether Sublessee has accepted possession of the
Subleased Premises.
29. Execution of Sublease. Submission by Sublessor of the within
Sublease for execution by Sublessee shall confer no rights nor impose any
obligations on either party unless and until both Sublessor and Sublessee shall
have executed this Sublease, duplicate originals thereof shall have been
delivered to the respective parties and Landlord shall have delivered to
Sublessor the Consent to Sublease and the Consent to Sublessee's Initial Plans
and Specifications referred to in Paragraph 2 hereof and Sublessor shall have
promptly notified Sublessee of its receipt of Landlord's Consent to Sublease and
Consent to Sublessee's Initial Plans and Specifications.
30. Intentionally Deleted.
31. Holding Over. If Sublessee holds over in possession after the
expiration or sooner termination of the original Term or of any extended term of
this Sublease, such holding over shall not be deemed to extend the Term or renew
the Sublease, but such holding over thereafter shall continue upon the covenants
and conditions herein set forth, except that the charge for use and occupancy of
such holding over for each calendar month or part thereof (even if such part
shall be a small fraction of a calendar month) shall be the sum of:
(a) 1/12 of the annual Fixed Rent set forth in this Sublease,
times 2.0, plus
(b) 1/12 of all other items of annual Additional Rent which
would have been payable pursuant to this Sublease had this Sublease not expired,
plus
18
<PAGE>
(c) those other items of Additional Rent (not annual
Additional Rent) which would have been payable pursuant to this Sublease, had
this Sublease not expired, which total sum Sublessee agrees to pay to Sublessor
promptly upon demand, in full, without set-off or deduction. Neither the billing
nor the collection of use and occupancy in the above amount shall be deemed a
waiver of any right of Sublessor to collect damages for Sublessee's failure to
vacate the Subleased Premises after the expiration or sooner termination of this
Sublease. The aforesaid provisions of this Section shall survive the expiration
or sooner termination of this Sublease.
32. Late Charges. If Sublessor does not receive payment of any Fixed
Rent or Additional Rent within five (5) business days after notice by Sublessor
to Sublessee of such default, then Sublessee shall pay to Sublessor, as a "late
charge", interest at the lesser of (i) two percent (2%) per annum above the then
current prime rate charged by Citibank, N.A. or its successor, or (ii) the
maximum rate permitted by applicable law on the amount of Fixed Rent and/or
Additional Rent so overdue and such "late charge" shall be collectible as
Additional Rent by Sublessor.
33. Attorneys' Fees. In case it shall be necessary for Sublessor to
institute any action or proceeding against Sublessee for the nonpayment of rent
or for the violation of any of the covenants or provisions of this Sublease or
for the recovery of possession of the Subleased Premises or should Sublessor be
compelled to intervene in any action or proceeding wherein Sublessee is a party
m order to enforce Sublessor's interest or rights hereunder, then and in any of
such events, if Sublessor shall obtain a judgment or order in its favor on the
merits, sustained on appeal if one is taken, in such action or proceeding,
Sublessee shall be obligated to pay to Sublessor reasonable attorneys' fees,
costs and disbursements incurred for the institution and prosecution of any such
action, proceeding or intervention.
34. Signs. Sublessee shall be privileged to erect and maintain a sign
("Sublessee's Sign") outside but attached to the Subleased Premises and in the
common corridors leading to the Subleased Premises, subject to the approval of
both Landlord and Sublessor (which, as to Sublessor, shall not be unreasonably
withheld or delayed) with respect to number, type, size, shape and design and
subject to all applicable legal requirements or regulations, and to the Lease.
Sublessee may not alter the sign without the prior written approval of Sublessor
(which as to Sublessor, shall not be unreasonably withheld or delayed) and
Landlord, and at the expiration or sooner termination of the Sublease Term, if
Sublessor or Landlord shall so elect, Sublessee, at its own expense, shall
remove such sign or signs and restore the exterior of the Subleased Premises to
its original condition. Such obligations of Sublessee shall survive the
expiration or sooner termination of this Sublease. Sublessor and Landlord shall
have the right to prohibit any display by Sublessee which, in Sublessor's or
Landlord's sole judgment, tends to impair the reputation, desirability or
architectural integrity of the Demised Premises or the Building.
19
<PAGE>
35. Electricity. Subject to the provisions of Paragraph 8 of this
Sublease, Sublessor shall furnish the electric energy that Sublessee shall
reasonably require in the Subleased Premises. Commencing on the Commencement
Date, Sublessee shall pay for such electricity at the annual rate of Fifteen
Thousand Five Hundred Forty-Three Dollars ($15,543.00) (One Thousand Two Hundred
Ninety-Five Dollars and Twenty-Five Cents ($1,295.25) per month) ("Electricity
Rent") for such electric energy. The Electricity Rent shall constitute
Additional Rent payable to Sublessor hereunder.
36. Commercial Rent Tax. Sublessee shall be solely responsible for
the payment of any New York City Commercial Rent Tax which may be imposed in
connectionAAA with this Sublease. Sublessee shall pay Sublessee's Proportionate
Share of any occupancy tax or rent tax payable by Tenant under the Lease in
accordance with Section 28.02.F thereof, provided, however, that if the rent
paid under the Lease is higher than the rent paid under this Sublease, on a pro
rata basis, then in that event, Sublessee's Proportionate Share of any such
occupancy tax or rent tax shall be no greater than the Proportionate Share of
the occupancy tax or the rent tax that would have been payable based upon the
rent paid by Sublessee under this Sublease.
37. No Broker. Sublessor and Sublessee represent and warrant that
they have dealt with no broker or finder in connection with this Sublease other
than Edward S. Gordon Company Incorporated. Sublessor shall pay a commission to
Edward S. Gordon Company Incorporated pursuant to a separate written agreement.
Sublessor and Sublessee each shall indemnify, defend and save harmless the other
from and against all claims arising from any breach by such party of the
foregoing representation, warranty or covenant. The indemnity set forth herein
shall survive the expiration or earlier termination of this Sublease.
20
<PAGE>
IN WITNESS WHEREOF, Sublessor and Sublessee have duly executed this
Sublease as of the day and year first above written.
SUBLESSOR:
JONATHAN WOODNER CO.
By: /s/ Dian Woodner
----------------------------
Name: Dian Woodner
Title: Co-President
SUBLESSEE:
TURBOCHEF, INC.
By: /s/ Jeffrey B. Bogatin
----------------------------
Name: Jeffrey B. Bogatin
Title: Chairman
21
<PAGE>
EXHIBITS TO SUBLEASE
--------------------
Subleased Premises Exhibit A
Lease Exhibit B
Sublessor's Work Exhibit C
Furniture Inventory Exhibit D
Sublessee's Initial Plans Exhibit E
and Specifications
<PAGE>
EXHIBIT 10.28
Strategic Alliance Agreement
TurboChef/Maytag
Schedule No. 2
FIRST EXTENSION of the XXXXXXXXXXX XXXXXXX XXXXXXXX PROJECT RESEARCH AGREEMENT
This First Extension of the XXXXXXXXXXX XXXXXXX XXXXXXXX Project
Research Agreement (XXXX XXXXXXXXXX or the "Agreement") is made and entered into
this 4th day of March 1998, by and between MAYTAG CORPORATION, a Delaware
corporation ("Maytag") and TURBOCHEF, INC. a Delaware corporation ("TurboChef").
WITNESSETH:
WHEREAS, Maytag and TurboChef have entered into that certain Strategic
Alliance Agreement dated September 26th, 1997 (the ""Alliance Agreement"),
pursuant to which the parties agreed to work together in the development and
commercialization of highly innovative products based on leading edge
technologies with respect to heat transfer, thermodynamics and controls; and
WHEREAS, the parties entered into that certain XXXXXXXXXXX XXXXXXX
XXXXXXXX Research Agreement dated September 26, 1997 (XXXXXX) and expiring on
March 26, 1998, pursuant to which the parties conducted research with respect to
a XXXXXXXXXXX XXXXXXX XXXXXXXX for North America; and
WHEREAS, the parties now desire to continue the research and to evaluate
the commercialization of a XXXXXXXXXXX XXXXXXX XXXXXXXX for North America; and
WHEREAS, the parties now desire to set forth this understanding as to the
manner in which the XXXXXXX phase of such XXXXXXXXXXX XXXXXXX XXXXXXXX project
(the "Project") shall be implemented.
NOW, THEREFORE, in consideration of the premises and of the undertakings of
the parties herein contained, the sufficiency whereof being acknowledged by each
of them, the parties hereto hereby agree as follows:
ARTICLE I
FRAMEWORK FOR PROJECT
1.1 Personnel. Maytag and Turbo Chef shall each maintain the team
comprised of qualified persons to participate in the Project on behalf of such
party. Each team will continue to be managed by a project leader appointed by
the respective party. The project leaders shall be responsible for, among other
things, insuring that their respective team members devote sufficient time to
the Project such that the assigned tasks can be accompanied in a timely manner.
During the term of this
<PAGE>
Agreement, the two project leaders shall communicate with each other on a
regular basis with respect to the Project and shall meet in person not less than
once per month to evaluate the progress of the Project and to establish Project
milestones.
1.2 Costs. Each party shall be solely responsible for the costs and
expenses incurred by such party in participating in the Project, including,
without limitation, personnel costs and out-of-pocket costs such as travel and
lodging expenses.
ARTICLE II
DUTIES OF THE PARTIES
2.1 Maytag Duties. During the term of this Agreement, Maytag shall
perform the following duties in connection with the Project:
(a) Conduct market research in the United States for the purpose of
determining the most effective methods to commercialize TurboChef's
proprietary cooking technologies for XXXXXXXXXXX customers;
(b) Provide industrial design expertise in connection with the
development of prototypes of products for the XXXXXXXXXXX XXXXXXX market;
(c) Revise the business plan (prepared in connection with the
initial XXXXX agreement dated September 26, 1997), as appropriate to
reflect market research findings with respect to the commercialization of
TurboChef's proprietary cooking technologies in the XXXXXXXXXXX XXXXXXXXX
market;
(d) Maintain a project team comprised of qualified persons, as
determined by Maytag, with the particular expertise required to perform the
tasks contemplated by subparagraphs (a) - (c) hereinabove.
2.2 TurboChef Duties. During the term of this Agreement, TurboChef shall
perform the following duties in connection with the Project:
(a) Provide Maytag with access to all relevant proprietary data with
respect to TurboChef's cooking technologies, including, without limitation,
copies of all current drawings, specifications and patents utilized by
TurboChef in designing and manufacturing its commercial cooking systems;
(b) Design and construct one or more XXXXXXXXXXX XXXXXXX XXXXXXXXX
prototype(s), which accommodate XXXXXXX XXX, XXXX XXXX XXX XXXXXXXXXXXXX
XXXX, design platforms;
(c) Make reasonable best efforts to refine and modify the
prototype(s) of XXXXXXXXXXX XXXXXXX XXXXXXX developed by TurboChef to
respond to the requirements of the XXXXXXXXXXX market as determined by
Maytag's market research;
-2-
<PAGE>
(d) Maintain a project team comprised of qualified persons, as
determined by TurboChef, with the particular expertise required to perform
the tasks contemplated by subparagraphs (a) - (c) hereinabove and make
reasonable best efforts to make resources available to meet the objectives
of the Agreement and the milestones established by the project leaders.
ARTICLE III
PROJECT INVESTMENTS
3.1 Maytag Research and Development Fee. In addition to performing the
duties described in Section 2.1 hereof, Maytag hereby agrees to pay to
TurboChef a non-refundable research and development fee in the aggregate amount
of Three Million Six Hundred Thousand Dollars ($3,600,000.00), to underwrite
certain research and development costs associated with the Project. Maytag shall
pay such amount in twelve (12) equal monthly installments of Three Hundred
thousand Dollars ($300,000.00) each. The initial installment shall be due on
April 1, 1998 and each subsequent installment shall be due no later than the
first (1st) day of each month thereafter during the term of this Agreement.
3.2 As contemplated in Section 1.4 of the Alliance Agreement, the parties
intend to negotiate in good faith one or more Commercialization Agreements that
will include the licensing of TurboChef's proprietary cooking technology, and
which will include royalties. In their royalty negotiations, the parties will
take into consideration the factors referenced in Section 1.4 of the Alliance
Agreement, the value of TurboChef's proprietary cooking technologies, and
whether the royalty is for an exclusive or nonexclusive license. While it is
acknowledged that the parties have not yet agreed upon a royalty rate, both
parties do acknowledge that a royalty rate of XX to XXX of the wholesale price
has been discussed as a reasonable target range, subject to the determination of
certain costs, targeted selling prices and projected unit sales volumes. With
regard to minimum annual royalty referenced in Section 3.3 below, the parties
will also take into consideration the projected annual sales volumes of the
products to be commercialized.
3.3 In consideration for Maytag's agreement to pay the non-refundable
research fee set forth in Section 3.1 above, TurboChef hereby grants to Maytag
the exclusive right throughout North America to market, distribute and sell
XXXXXXXXXXX XXXXXXX XXXXXXXXXX which utilize TurboChef proprietary cooking
technologies, subject, however to Maytag meeting minimum annual royalty payments
as mutually agreed, but if Maytag fails to meet the agreed minimum annual
royalty payments, the right shall become nonexclusive. However, in the event the
parties are not able to agree on minimum annual royalty payments, Maytag's
exclusive right throughout North America to market, distribute and sell
XXXXXXXXXXX XXXXXXX XXXXXXXXXX which utilize TurboChef proprietary cooking
technologies shall be limited to a period of two years after the term of this
Agreement at which time it shall become nonexclusive, subject, however, solely
at TurboChef's option, to being converted to a nonexclusive right at any time
during said two-year period by the payment of Five Million One Hundred Thousand
Dollars ($5,100,000.00) to Maytag by TurboChef.
-3-
<PAGE>
ARTICLE IV
TERM
The initial term of this Agreement shall be twelve (12) months commencing
on March 27, 1998, unless terminated sooner pursuant to the terms of the
Alliance Agreement or by mutual agreement. At the end of the initial term of
this Agreement the parties may mutually agree to extend this Agreement for any
period. All rights granted under this Agreement shall survive termination of the
Alliance Agreement as provided in Section 3.8 of the Alliance Agreement.
ARTICLE V
EXCLUSIVITY
Except as set forth in this Agreement, during the term of this Agreement,
neither party, nor any of their respective affiliates, whether alone or in
conjunction with any other person, shall in any manner, without the written
consent of the other party, directly, directly or indirectly participate in,
propose or in any other way support, or agree to participate in, propose or
support the development and/or commercialization of a XXXXXXXXXXX XXXXXXX
XXXXXXXXX for sale in North America utilizing TurboChef's technologies and
similar high speed cooking technologies. This excludes any desire Maytag may
have to further develop XXXXXXXXX with a third party, provided the further
development does not include TurboChef technologies without the consent of
TurboChef.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day first above written.
TURBOCHEF: TURBOCHEF:
/s/ Philip R. McKee
---------------------------------
Name: Philip R. McKee
Title: President, CEO
MAYTAG: MAYTAG CORPORATION:
/s/ John M. Dupuy
---------------------------------
Name: John M. Dupuy
Title: V.P. Strategic Planning
-4-
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
JPT Financial Corp.
(Formerly known as AcadiaChef, Inc.)
Wholly owned
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