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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
___________ to ____________
Commission File Number 0-23478
_________________________
TurboChef Technologies, Inc.
(Exact name of Registrant as specified in its Charter)
DELAWARE 48-1100390
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
10500 Metric Drive, Suite 128 75243
Dallas, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(214) 341-9471
_________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of the latest practicable date.
Number of Shares Outstanding
Title of Each Class at August 6, 1999
------------------- -----------------
Common Stock, $0.01 Par Value 15,090,373
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TURBOCHEF TECHNOLOGIES, INC.
TABLE OF CONTENTS
Form 10-Q Item Page
- -------------- ----
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1999 (unaudited)
and December 31,1998........................................... 3
Unaudited Interim Condensed Statements of Operations for the
three and six months ended June 30, 1999 and 1998.............. 4
Unaudited Interim Condensed Statements of Cash Flows for the
six months ended June 30, 1999 and 1998........................ 5
Notes to the Interim Condensed Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....16
Part II. Other Information
Item 1. Legal Proceedings..............................................17
Item 2. Changes in Securities and Use of Proceeds......................17
Item 3. Defaults Upon Senior Securities................................17
Item 4. Submission of Matters to a Vote of Security Holders............17
Item 5. Other Information..............................................18
Item 6. Exhibits and Reports on Form 8-K...............................18
Signatures.....................................................19
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TurboChef Technologies, Inc.
Condensed Balance Sheets
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
1999 1998
---- ----
(Unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,975 $ 164
Marketable securities available for sale, at fair value 10,257 18,292
Marketable securities - pledged, at fair value 10,257 --
Accounts receivable, net of allowance for doubtful accounts
of $86 and $92 at June 30, 1999 and December 31, 1998, respectively 838 914
Inventories, net 23 762
Prepaid expenses 8 41
-------- --------
Total current assets 23,358 20,173
-------- --------
Property and equipment:
Leasehold improvements 168 130
Furniture and fixtures 585 475
Equipment 508 456
-------- --------
1,261 1,061
Less accumulated depreciation and amortization (667) (563)
-------- --------
Net property and equipment 594 498
-------- --------
Investment in derivatives 1,619 --
Other assets 123 129
-------- --------
Total assets $ 25,694 $ 20,800
======== ========
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 234 $ 571
Accrued payroll 483 223
Accrued warranty costs 236 259
Accrued expenses 199 474
Deferred revenue 61 49
Other 63 31
-------- --------
Total current liabilities 1,276 1,607
Long-term liabilities:
Long-term debt 6,681 --
Accrued interest 130 --
-------- --------
Total long-term liabilities 6,811 --
Total liabilities 8,087 1,607
Commitments and contingencies -- --
Stockholders' equity
Common stock, $.01 par value. Authorized 50,000,000 shares
Issued 15,090,373 and 14,659,134 shares at June 30, 1999
and December 31, 1998, respectively 151 147
Additional paid-in capital 33,613 32,436
Accumulated deficit (25,506) (21,231)
Accumulated other comprehensive income 10,514 8,292
Notes receivable from employees (714) --
Treasury stock - at cost 32,130 shares in 1999 and 1998 (451) (451)
-------- --------
Total stockholders' equity 17,607 19,193
-------- --------
Total liabilities and stockholders' equity $ 25,694 $ 20,800
======== ========
</TABLE>
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TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Operations
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product sales $ 1,352 $ 749 $ 2,026 $ 1,703
Research and development fees - 900 1,025 1,650
---------- ---------- ---------- ----------
Total revenues 1,352 1,649 3,051 3,353
Costs and expenses:
Cost of goods sold 1,097 718 1,611 1,466
Research and development expenses 924 385 1,693 844
Selling, general and administrative expenses 1,958 1,411 3,684 2,701
---------- ---------- ---------- ----------
Total costs and expenses 3,979 2,514 6,988 5,011
---------- ---------- ---------- ----------
Operating loss (2,627) (865) (3,937) (1,658)
---------- ---------- ---------- ----------
Other income (expense):
Interest income 17 29 23 66
Interest expense (84) - (130) -
Dividend income 53 47 105 94
Equity in loss of joint venture - (115) - (180)
Amortization of derivatives (162) - (324) -
Other income (expense) (7) 13 (12) 13
---------- ---------- ---------- ----------
(183) (26) (338) (7)
---------- ---------- ---------- ----------
Net loss $ (2,810) $ (891) $ (4,275) $ (1,665)
========== ========== ========== ==========
Loss per common share - basic and diluted $ (0.19) $ (0.06) $ (0.29) $ (0.11)
========== ========== ========== ==========
Weighted average number of common
shares outstanding 15,071,893 14,578,173 14,874,827 14,568,658
========== ========== ========== ==========
</TABLE>
4
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<TABLE>
<CAPTION>
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Cash Flows
(Amounts in Thousands)
Six Month Ended June 30,
1999 1998
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,275) $(1,665)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in loss of joint venture - 180
Depreciation and amortization 300 235
Amortization of investment in derivatives 324 -
Non-cash compensation expense 21 -
Provision for doubtful accounts 36 15
(Increase) decrease in accounts receivable 40 (706)
Decrease in inventories 543 282
Decrease in other assets 39 110
Increase (decrease) in accounts payable (337) 28
Increase (decrease) in accrued expenses 92 (10)
Increase in other liabilities 44 114
----------------- ------------------
Net cash used in operating activities (3,173) (1,417)
----------------- ------------------
Cash flows from investing activities:
Sales/(purchase) of marketable securities - 79
Investment in derivatives (1,943) -
Equipment and leasehold improvements (200) (60)
----------------- ------------------
Net cash provided by (used in) investing (2,143) 19
activities
----------------- ------------------
Cash flows from financing activities:
Borrowings under long-term debt 6,681 -
Exercise of stock options 768 13
Exercise of stock warrants 392 165
Notes receivable (714) -
----------------- ------------------
Net cash provided by financing activities 7,127 178
----------------- ------------------
Net increase (decrease) in cash and cash equivalents 1,811 (1,220)
Cash and cash equivalents at beginning of period 164 1,397
----------------- ------------------
Cash and cash equivalents at end of period $ 1,975 $ 177
================= ==================
</TABLE>
5
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TURBOCHEF TECHNOLOGIES, INC.
Notes to Interim Condensed Financial Statements
(Information relating to the three and six month periods
ended June 30, 1999 are unaudited)
June 30, 1999
1) General
TurboChef Technologies, Inc. ("the Company") is a technology development firm
that intends to be the leader in innovation for residential and commercial
appliances. Currently, it is engaged in designing, developing and marketing
proprietary cooking systems. These systems use microprocessors to precisely
control the distribution of energy used to cook food over time and across space.
Consequently, they achieve higher cooking speeds and/or quality levels than are
achievable with conventional cooking technologies. In addition, the
microprocessors give the cooking systems the ability to communicate with users
and service personnel over computer networks. Management believes that the
Company operates in one primary business segment.
The Company's commercial products and technologies have been validated through
utilization and extensive testing by both the Company and a variety of
foodservice operators around the world. Now, the Company is preparing to bring
its technology to residential customers in North America through its Strategic
Alliance Agreement ("Maytag Alliance" or the "Alliance") with Maytag Corporation
("Maytag"). It is also exploring alliance relationships to introduce both the
commercial and residential technologies throughout the world. The Company
intends to build upon its core technology competency, to expand its technology
portfolio by developing other innovative products and increase market
penetration through joint venture, strategic alliance and/or licensing or other
arrangements with companies already engaged in the mass marketing and/or
manufacture of foodservice products.
During the second quarter of 1999, the Company substantially completed the
transition of its North American Sales and Marketing responsibilities to G.S.
Blodgett Corporation ("Blodgett"), a wholly owned subsidiary of Maytag, engaging
in the manufacturing and sales of commercial foodservice equipment. In
addition, Blodgett has also adopted the responsibility of manufacturing of the
Company's commercial products. The Maytag Alliance will enable the Company to
focus on its core competency of technology development while utilizing the
strengths of well-established leaders within the commercial and residential
appliance industries to manufacture, market, and distribute the Company's
products in North America. Upon its successful implementation, this alliance,
and others like it, will provide the Company with royalties from the sale of
products utilizing its patented technologies and allow the Company to focus its
financial resources on the development of new products as well as new markets.
2) Interim Condensed Financial Statements
The financial statements of TurboChef Technologies, Inc. (the "Company")
included herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and have not been audited by
independent public accountants. In the opinion of management, all adjustments
(which consisted only of normal recurring accruals) necessary to present fairly
the financial position and results of operations have been made. Pursuant to
SEC rules and regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these statements
unless significant changes have taken place since the end of the most recent
fiscal year. The December 31, 1998 balance sheet was derived from audited
financial statements but does not include all disclosures required by
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generally accepted accounting principles ("GAAP"). The Company believes that
other disclosures contained herein, when read in conjunction with the financial
statements and notes included in the Company's Annual Report for the fiscal year
ended December 31, 1998 on Form 10-K, are adequate to make the information
presented not misleading. It is suggested, therefore, that these statements be
read in conjunction with the statements and notes included in the aforementioned
Form 10-K. The results of operations for the three months ended June 30, 1999
are not necessarily indicative of the results to be expected for the full year.
Basic net loss per common share is based on 15,071,893 and 14,578,173
weighted average shares outstanding for the three months ended June 30, 1999 and
1998, respectively. For the six months ended June 30, 1999 and 1998 basic net
loss per common share is based on 14,874,827 and 14,568,658 weighted average
shares outstanding, respectively. For both the three and six month periods
ended June 30, 1999 and 1998, the Company did not report any incremental shares
of potentially dilutive stock as their effect was antidilutive.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, Comprehensive Income, on January 1, 1998. This statement
requires the Company to report comprehensive income and its components with the
same prominence as other financial statements in its December 31, 1998 financial
statements. Comprehensive income describes the total of all components of
comprehensive income, including net income and other comprehensive income.
Other comprehensive income refers to all revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but excluded from net income. For the six month period
ended June 30, 1999, comprehensive income was ($2,053,000) of which ($4,275,000)
was net loss and of which $2,222,000 was the change in net unrealized gain on
marketable securities. For the six month period June 30, 1998, comprehensive
income was $1,880,000 of which ($1,665,000) was net loss and of which $3,545,000
was the change in net unrealized gain on marketable securities.
Investments in marketable securities at June 30, 1999 and December 31, 1998
consisted of Maytag common stock. These securities are classified as
available-for-sale under Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and are stated
at fair value. Unrealized holding gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific identification
basis.
3) Notes Receivable from Employees
In February, March and April 1999, the Company loaned an aggregate of $37,500,
$72,500 and $600,000, respectively, to three of its employees and two of the
Company's directors. The loaned amounts were used by such employees and
directors to exercise 284,000 (15,000 in February 1999, 29,000 in March 1999 and
240,000 in April 1999) stock options at an exercise price of $2.50 per share.
All such loans are full-recourse and are secured by the underlying securities
and the general assets of the respective borrower. Each loan has a term of five
years and is payable, along with accrued interest, in February, March and April
2004. The notes are recorded as a reduction to Stockholders' Equity. The notes
bear interest at a rate of 4.8%. The market rate of interest on June 30, 1999
was 7.0%, based upon margin rates obtained through various discount brokers.
The difference between interest earned by the Company on the notes and the
market rate of interest is recorded as compensation expense. Total compensation
expense related to notes receivable from such employees and directors was $4,000
for the six months ended June 30, 1999.
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4) Derivative Financial Instruments
As part of its strategic alliance efforts, the Company invested in equity
securities of Maytag Corporation. These securities are subject to fluctuations
from market value changes in stock prices. To mitigate this risk, the Company
hedged its investment in Maytag securities by purchasing, on January 14, 1999,
put options to sell the 293,846 shares of Maytag common stock owned by the
Company. The purchase of the put options required an initial cash outlay (the
"premium" amount) of $1.9 million. The premium is amortized over three years,
the life of the investment. The purchased put options protect the Company from
a decline in the market value of the security below a minimum level of
approximately $57.00 per share (the put "strike" price). The total value of the
put options at risk is equal to the unamortized premium, which was $1,619,000 as
of June 30, 1999. The Company's purchased put options are accounted for as a
hedge of its investment in the Company's Maytag stock in accordance with GAAP.
Hedge accounting under GAAP requires the following criteria to be met: (i) the
item to be hedged is exposed to price risk (ii) the options position reduces the
price exposure and (iii) the options position is designated as a hedge. No
options have been purchased to cover the Company's investment in Maytag stock
after January 14, 2002.
The Company could be exposed to losses related to the above financial
instrument should its counterparty default. This risk is mitigated through
credit monitoring procedures.
5) Secured Borrowings
On January 14, 1999, the Company established a revolving credit facility with
Banque AIG, London Branch (an affiliate of American International Group, Inc.
("AIG Facility")). The AIG Facility provides for the Company to pledge its
Maytag shares in the form of a "Variable Stock Transaction" and to receive cash
advances against the value of the Maytag shares. In January 1999, the Company
received advances from its credit facility in the amount of $3.4 million. This
advance bears an imputed interest rate of 5.8% and is due in January 2002. In
April and June 1999, the Company received additional advances of $1.7 million
and $1.6 million, respectively. These advances bear imputed interest rates of
6.3% and 6.9%, respectively, and are due in January 2002. All advances have been
secured by pledging an aggregate of 140,000 shares of the Company's Maytag
stock. AIG has received a first priority secured interest in the pledged shares
of the Company's Maytag stock. As of August 6, 1999, the Company was in
compliance with all of its debt covenants. As of May 14, 1999, Maytag has
granted the Company the ability to sell or pledge 100% of the Maytag shares.
Previously, 50% of the shares were not available until September 26, 1999.
Accordingly, the Company has up to $7.1 million in advances available through
the AIG Facility as of August 6, 1999. The Company has an additional $315,000
available through a secured financing agreement with its bank. Interest expense
relating to its secured borrowings was $84,000 for the quarter ended June 30,
1999.
6) Authoritative Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement is now effective for fiscal
years beginning after June 15, 2000. Previously, the Company would have had to
adopt the Statement no later than January 1, 2000. Under the new guidelines,
the Company will be required to adopt this Statement no later than January 1,
2001. SFAS No. 133 requires companies to report derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. Under
FASB 133,
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the Company's derivative investments would be marked to market on a quarterly
basis and any gain or loss would be recorded within the Company's Condensed
Statements of Operations. On June 30, 1999, the fair market value of the
Company's derivative instruments was $1,078,000.
7) Subsequent Events
In July 1999, the Company entered into an agreement with the Gas Research
Institute (GRI) to develop natural gas-fueled versions of the Company's
commercial and residential cooking systems. The agreement calls for the Company
to receive $2 million over a six-month period, beginning in July 1999. In
return, GRI will receive a royalty ranging from .0625% to .125% on sales of the
Company's commercial and residential cooking systems, up to a maximum of $4
million. In addition, GRI has been granted 50,000 warrants to purchase the
Company's common stock at $13.87 per share. The agreement grants GRI the option
to extend the research and development payment for an additional six-month
period. An extension to the agreement would provide additional royalty and
warrant consideration to GRI. This option must be exercised prior to December
31, 1999.
Item 2: Management Discussion and Analysis of Financial Condition and Results
of Operations
General
TurboChef Technologies, Inc. ("the Company") was incorporated on April 3,
1991. The Company is a technology development firm that intends to be the
recognized leader in innovation for residential and commercial appliances.
Currently, it is engaged in designing, developing and marketing proprietary
"rapid-cook" systems. Prior to its name change in July 1998, the Company
operated under the name TurboChef, Inc.
From its inception in April 1991 until March 1994, the Company was engaged
primarily in research and development, limited production operations and test
marketing of its cooking systems. In March 1994, the Company introduced its
first commercial product, the Model D-1 cooking system. In June 1995, the
Company entered into its first major contract with Whitbread PLC ("Whitbread")
and introduced an enhanced product, the Model D-2 cooking system. The Company
concentrated its efforts on the Whitbread rollout throughout 1996. Upon the
completion of the secondary public offering of Common Stock in June 1996 (the
"June 1996 Offering"), the Company began development of a direct sales
organization. By the end of the first quarter of 1997, the Company had
substantially developed a U.S. direct sales and European sales infrastructure
and marketing programs. However, the revolutionary nature of the Company's
technologies, coupled with large restaurant chain operators' historical
resistance to change and the Company's lack of brand strength has limited
commercial sales.
The Company believes its long-term success is dependent on its core
competencies of developing new technologies and products for the foodservice and
residential appliance industries. Consequently, the Company has sought to
establish alliances with major firms with strengths in manufacturing, sales,
marketing and distribution. An alliance of this nature was successfully
established in September 1997, when the Company announced a Strategic Alliance
with Maytag Corporation to jointly develop new products incorporating the
Company's technologies. The Alliance entailed a mutual exchange of each
company's common stock valued at approximately $10 million and Maytag's payment
to the Company for certain research and development activities related to
targeted product initiatives. The Company also announced in July 1998 that the
Maytag Alliance had been expanded to establish a cooperative effort to
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market and sell commercial cooking products in North America. During the first
quarter of 1999, the Company and G.S. Blodgett Corporation ("Blodgett"), a
wholly owned subsidiary of Maytag, engaging in the manufacturing and sales of
commercial foodservice equipment, began arranging for the transition of the
manufacturing of the Company's commercial unit to Blodgett's facilities. This
transition was substantially completed during the second quarter of 1999. In
addition to Blodgett's role as a manufacturer of the Company's commercial
products, Blodgett has now begun to market and distribute the Company's
commercial cooking systems throughout North America. The Maytag Alliance will
enable the Company to focus on its core competency of technology development
while utilizing the strengths of well-established leaders within the commercial
and residential appliance industries to manufacture, market, and distribute the
Company's products in North America.
In July 1999, the Company entered into an agreement with the Gas Research
Institute (GRI) to develop natural gas-fueled versions of the Company's
commercial and residential cooking systems. GRI, established in 1976, manages
cooperative research and development programs for its 327 members and the
natural gas industry. GRI conducts research and development that benefits the
entire industry and its customers; and targeted initiatives in which consortia
and individual organizations partner with GRI to develop or apply technologies
to improve their competitiveness and benefits to customers. Over 400 gas-
related products and 600 patents have come from GRI-led initiatives.
The agreement with GRI calls for the Company to receive $2 million in
research & development fees over a six-month period, beginning in July 1999. In
addition to the fees, the Company is allowed access to GRI's extensive patent
portfolio and years of experience with natural gas related products. In return,
GRI will receive a royalty ranging from .0625% to .125% on sales of the
Company's commercial and residential cooking systems, up to a maximum of $4
million. In addition, GRI has been granted 50,000 warrants to purchase the
Company's common stock at $13.87 per share. The agreement grants GRI the option
to extend the research and development agreement for an additional six-month
period. An extension to the agreement would provide additional royalty and
warrant consideration to GRI. This option must be exercised prior to December
31, 1999.
The Company will continue to pursue business growth through implementation
of the following strategies: (i) joint development and commercialization of
residential and commercial products in North America through the Maytag
Alliance, (ii) pursuit of strategic alliances and license agreements outside
North America, (iii) continued marketing to European and Japanese restaurants,
hotels, convenience stores and other foodservice operators, (iv) continued
development of new hardware, software and food solutions for residential and
commercial applications utilizing the Company's patented technologies and (v)
the development of new technologies. The Company's future profitability will
depend upon, among other things, the successful implementation of these
initiatives.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the financial statements and notes thereto contained elsewhere
in this report.
Results of Operations for the Quarter Ended June 30, 1999 Compared to the
Quarter Ended June 30, 1998
Revenues for the quarter ended June 30, 1999 were $1,352,000, compared to
revenues of $1,649,000 for the quarter ended June 30, 1998. This decrease is
primarily attributable to the completion of the first phase
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of research and development projects and expiration of the related fees,
received pursuant to the Maytag Alliance. This decrease was partially offset by
an increase in the sales of commercial cooking systems.
Cost of sales for the quarter ended June 30, 1999 were $1,097,000, an increase
of $379,000 when compared to $718,000 for cost of sales in the quarter ended
June 30, 1998. This increase is principally attributable to an increase in sales
of commercial cooking systems.
Gross profit on product sales for the quarter ended June 30, 1999 increased
$224,000 to $255,000, when compared to gross profit on product sales of $31,000
during the quarter ended June 30, 1998. This increase is principally due to an
increase in cooking system sales during the quarter and a decrease in costs
associated with the Company's extended warranty program.
Research and development expenses for the quarter ended June 30, 1999
increased $539,000, to $924,000, as compared to $385,000 for the quarter ended
June 30, 1998. The increase is due to significant additions of engineering and
technical personnel to support the Company's product development requirements
primarily associated with Maytag Alliance projects. Furthermore, the Company
established an accelerated life cycle testing facility for the durability and
reliability testing of the Company's products.
Selling, general and administrative expenses for the quarter ended June 30,
1999 increased $547,000, to $1,958,000 from comparable expenses of $1,411,000
for the quarter ended June 30, 1998. The increase over the first quarter of 1998
is due to the addition of executive officers and other administrative support
personnel along with the transition of the European sales and marketing
organization under the Company's sole direction from its former joint venture,
TurboChef Europe.
Other expense was $183,000 for the quarter ended June 30, 1999, compared to
$26,000 for the quarter ended June 30, 1998. The increase in expense is
primarily due to the amortization of the derivative investment in a "put-option"
on the Maytag stock owned by the Company ($162,000) and accrued interest on the
Company's long-term credit facility ($84,000). This was partially offset by a
decrease in equity losses from the Company's former European joint venture,
TurboChef Europe ($115,000). For additional information regarding the Company's
derivative securities and credit facility, refer to the "Liquidity and Capital
Resources" and "Authoritative Pronouncements" sections of this document.
Results of Operations for the Six Months Ended June 30, 1999 Compared to the Six
Months Ended June 30, 1998
Revenues for the six months ended June 30, 1999 were $3,051,000, compared
to revenues of $3,353,000 for the six months ended June 30, 1998. This decrease
is primarily attributable to the completion of the first phase of research and
development projects and expiration of the related fees, received pursuant to
the Maytag Alliance. This decrease was partially offset by an increase in sales
of commercial cooking systems.
Cost of sales for the six months ended June 30, 1999 was $1,611,000, an
increase of $145,000 when compared to $1,466,000 for cost of sales in the six
months ended June 30, 1998. This increase is principally attributable to the
increase in sales of commercial cooking systems.
Gross profit on product sales for the six months ended June 30, 1999
increased $178,000 to $415,000, when compared to gross profit on product sales
of $237,000 during the six months ended June 30, 1998. This increase is due to
an increase in sales of cooking systems during the period.
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Research and development expenses for the six months ended June 30, 1999
increased $849,000, to $1,693,000, as compared to $844,000 for the six months
ended June 30, 1998. The increase is due to significant additions of engineering
and technical personnel to support the Company's product development
requirements associated primarily with the Maytag Alliance projects.
Furthermore, the Company established an accelerated life cycle testing facility
for the durability and reliability testing of the Company's products.
Selling, general and administrative expenses for the six months ended June
30, 1999 increased $983,000, to $3,684,000 from comparable expenses of
$2,701,000 for the six months ended June 30, 1998. The increase over the first
six months of 1998 is due to the addition of executive officers and other
administrative support personnel along with the transition of the European sales
and marketing organization under the Company's sole direction from its former
joint venture, TurboChef Europe.
Other expense was $338,000 for the six months ended June 30, 1999, compared
to $7,000 for the six months ended June 30, 1998. The increase in expense is
primarily due to the amortization of the derivative investment in a "put-option"
on the Maytag stock owned by the Company ($324,000) and accrued interest on the
Company's long-term credit facility ($130,000). This was partially offset by a
decrease in equity losses from the Company's former European joint venture,
TurboChef Europe ($180,000). For additional information regarding the Company's
derivative securities and credit facility, refer to the "Liquidity and Capital
Resources" and "Authoritative Pronouncements" sections of this document.
Liquidity and Capital Resources
The Company's capital requirements in connection with its product and
technology development and marketing efforts have been and will continue to be
significant. In addition, capital is required to operate and expand the
Company's operations. Since its inception, the Company has been substantially
dependent on loans and capital contributions from its principal stockholders,
private placements of its securities, the proceeds from the initial public
offering of common stock in April 1994 (the "April 1994 IPO") and the June 1996
Secondary Offering to fund its activities.
Since October 1997, the Company's capital requirements have been met in
part by Maytag. In accordance with the Maytag Alliance, the Company has been
paid aggregate research and development fees of $5.9 million ($250,000 per month
from October 1997 through March 1998, $300,000 from April through July 1998,
$425,000 from August through January 1999 and $300,000 through March 1999) for
technology transfer initiatives by the Company. In March 1998, the initial
project was extended for one year and Maytag increased the monthly payment from
$250,000 to $300,000 per month for the term of the extension. In July 1998, a
commercial sales agreement was announced and the monthly payment increased to
$425,000 for six months. The increase to $425,000 ended in January 1999. The
remaining monthly payments of $300,000 ended in March 1999. The Maytag
Alliance, however, is ongoing, and provides for the opportunity to establish
additional residential and commercial product development projects in the
future. Accordingly, future revenues from the Maytag Alliance will depend upon
the establishment of additional fee based research and development projects with
Maytag and royalties from the successful commercialization and sales of the
products that embody the Company's technologies. However, if additional projects
are not initiated with Maytag there is no assurance that the Company
12
<PAGE>
would be able to find alternate sources of funding on acceptable terms for
further research and development of current and future products. This could have
a significant adverse impact on the Company's current and future operations.
In July 1999, the Company entered into an agreement with the Gas Research
Institute (GRI) to develop natural gas-fueled versions of the Company's
commercial and residential cooking systems. The agreement calls for the Company
to receive $2 million over a six-month period, beginning in July 1999. In
return, GRI will receive a royalty ranging from .0625% to .125% on sales of the
Company's commercial and residential cooking systems, up to a maximum of $4
million. In addition, GRI has been granted 50,000 warrants to purchase the
Company's common stock at $13.87 per share. The agreement grants GRI the option
to extend the research and development payment for an additional six-month
period. An extension to the agreement would provide additional royalty and
warrant consideration to GRI. This option must be exercised prior to December
31, 1999.
In January 1999, the Company terminated an existing revolving credit agreement
with its bank and entered into an agreement with Banque AIG, London Branch (an
affiliate of American International Group, Inc. ("AIG Facility")). The AIG
Facility provides for the Company to pledge its Maytag shares in the form of a
"Variable Stock Transaction" and to receive cash advances against the value of
the Maytag shares. All advances mature within three years and bear interest at
LIBOR plus 0.75%, on the date of the advance. At the end of the three-year term,
the Company may satisfy any outstanding obligation by surrendering Maytag shares
equal to the fair value of the obligation or with cash. The transaction allows
the Company to benefit from all appreciation in the Maytag share price over the
three-year period and provides down-side protection to the Company in the form
of a "put option" for the 293,846 shares of Maytag stock. The put option
establishes a minimum realizable value for the Maytag shares of approximately
$57 per share.
As of August 6, 1999, the Company had pledged 140,000 shares of the Maytag
stock in connection with the AIG Facility and received advances totaling $6.7
million. In addition, Maytag has granted the Company the ability to sell or
pledge 100% of the Maytag shares, effective May 14, 1999. Previously, 50% of
the shares were not to be available until September 26, 1999. Consequently, the
Company has up to $7.1 million in advances available through the AIG Facility as
of August 6, 1999.
In February 1999, the Company entered into an agreement with its bank to
support general corporate requirements. The credit agreement is set to expire
in February 2000. The agreement is secured by 6,923 shares of Maytag common
stock owned by the Company. The Company can borrow up to the lesser of $315,000
or 75% of the market value of the Maytag stock at market rates of interest.
Management believes that cash flows from operations and advances from the AIG
Facility and borrowings under the bank agreement will be adequate to fund the
Company's operations during the fiscal year 1999.
At June 30, 1999, the Company had working capital of $22,082,000 as compared
to working capital of $18,566,000 at December 31, 1998. Of the $22,155,000 in
working capital, $10,256,000 has been pledged to secure the Company's long term
debt obligations. The $3,516,000 working capital increase is primarily due to an
increase in the value of the Company's Maytag stock and an increases in cash and
cash equivalents provided by the AIG facility.
Cash used in operating activities was $3,173,000 for the six months ended
June 30, 1999 as
13
<PAGE>
compared to cash used in operating activities of $1,417,000 for the six months
ended June 30, 1998. The net loss in the first six months of 1999 included
$681,000 of non-cash charges, as compared to $430,000 in 1998. Cash used in
investing activities for the six months ended June 30, 1999 was $2,143,000,
consisting of an investment in derivatives of $1,943,000 and equipment purchases
of $200,000. Cash provided by financing activities was $7,127,000 for the six
months ended June 30, 1999, of which $6,681,000 was obtained through advances
from the Company's credit facility, $21,000 was related to non-cash compensation
expenses and $445,000 was obtained through the exercise of stock options and
warrants. At June 30, 1999, the Company had cash and cash equivalents of
$1,975,000, compared to cash and cash equivalents of $164,000 at December 31,
1998.
Year 2000 Issues
The Company, like other businesses, is facing the Year 2000 issue. The Year
2000 issue arises from the past practice of utilizing two digits (as opposed to
four) to represent the year in some computer programs and software. If
uncorrected, this could result in computational errors as dates are compared
across the century boundary. Since the software used in the Company's patented
cooking system does not utilize an internal calendar, the Company believes that,
for the most part, its products will be unaffected by Year 2000 issues.
Through August 6, 1999, the Company has had all of its
internal software and hardware tested. Substantially all of the Company's
software and hardware is compliant or has been made compliant. The Company's
financial application software version is not Year 2000 compliant, however, the
Company is in the process of installing the lastest Year 2000 compliant version
of such software. The Company expects to complete this upgrade and all remaining
upgrades by September 30, 1999.
While Year 2000 costs incurred to date have not been material, the Company
believes it will continue to incur costs related to Year 2000 readiness
throughout 1999. Furthermore, the Company believes that future costs associated
with achieving Year 2000 readiness will not be material, however, there is no
guarantee that the Company's operations will not be materially impacted by these
costs.
The failure of the Company's third party vendors to be Year 2000 ready
could prevent or delay the manufacturing or shipping products, providing
customer support and completing transactions, all of which could have a material
adverse affect on the Company's business, operating results and financial
condition. The Company's commercial oven manufacturer, G S Blodgett, is Year
2000 compliant. The Company does not believe that any Year 2000 issues outside
of G.S. Blodgett's control will cause any significant delays in the
manufacturing of the Company's commercial cooking system.
Authoritative Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement is effective and will be
adopted by the Company on January 1, 2001. SFAS No. 133 requires companies to
report derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Under FASB 133, the Company's
derivative investments would be marked to market on a quarterly basis and any
gain or loss would be recorded within the Company's Condensed Statements of
Operations. On June 30, 1999, the fair market value of the Company's derivative
instruments was $1,078,000.
14
<PAGE>
Forward Looking Statements
The Company has utilized the proceeds from the June 1996 Offering, and has
used the proceeds received from the Maytag Alliance, to strengthen its
management team and support its product development activities. The Company has
completed the current phase of targeted research and development and the
associated per month payments ended in January and March 1999, respectively.
The Maytag Alliance, however, is ongoing, and provides for the opportunity to
establish additional residential and commercial product development projects in
the future. Future revenues from the Maytag Alliance will depend upon the
establishment of additional fee based research and development projects with
Maytag and royalties from the successful commercialization and sales of the
products that embody the Company's technologies.
The Company's goals are to continue its development of innovative and
commercially viable products, to support the Maytag Alliance efforts and to
establish additional strategic alliances and license agreements outside North
America. To ensure financing for corporate activities, in January 1999 the
Company entered into the AIG Facility. The AIG Facility provides for the
Company to pledge its Maytag shares in the form of a "Variable Stock
Transaction" and to receive cash advances against the value of the Maytag
shares. All advances mature within three years and bear interest at LIBOR plus
0.75%, on the date of the advance. At the end of the three-year term, the
Company may satisfy any outstanding obligation by surrendering Maytag shares
equal to the fair value of the obligation or with cash. The transaction allows
the Company to benefit from all appreciation in the Maytag share price over the
three-year period and provides down-side protection to the Company in the form
of a "put option" for the 293,846 shares of Maytag stock. The put option
establishes a minimum realizable value for the Maytag shares of approximately
$57 per share. As of August 6, 1999, the Company had pledged 140,000 shares of
the Maytag stock and received advances totaling $6.7 million. The Company has
up to $7.1 million in additional advances available on August 6, 1999. In
addition, in February 1999 the Company entered into an agreement with its bank
to support general corporate requirements. This credit agreement is set to
expire in February 2000 and is secured by 6,923 shares of Maytag common stock
owned by the Company. The Company can borrow up to the lesser of $315,000 or
75% of the market value of the Maytag stock at market rates of interest.
The Company's future performance will be subject to a number of business
factors, including those beyond the Company's control, such as economic
downturns and evolving industry needs and preferences, as well as to the level
of the Company's competition and the ability of the Company to successfully
market its products and effectively monitor and control its costs. The Company
believes that increases in
15
<PAGE>
revenues sufficient to offset its expenses could be derived from its currently
proposed plans within the next 9 to 15 months, if such plans are successfully
completed. These plans include: (i) joint development and commercialization of
residential and commercial products in North America through the Maytag
Alliance, (ii) pursuit of strategic alliances and license agreements outside
North America, (iii) continued marketing to European and Japanese restaurants,
hotels, convenience stores and other foodservice operators, and (iv) continued
development of new hardware, software and food solutions for residential and
commercial applications. However, there can be no assurance that the Company
will be able to successfully implement any of the foregoing plans, that either
its revenues will increase or its rate of revenue growth will continue or that
it will ever be able to achieve profitable operations.
As of June 30, 1999, the amount of backlog orders believed to be firm was
approximately $0.3 million, as compared to approximately $0.4 million as of
December 31, 1998. Because Blodgett has assumed the sales responsibilities for
the Company's commercial products within North America, the June 30, 1999
backlog no longer accounts for any orders within North America. 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 3: Quantitative and Qualitative Disclosures about Market Risk
In January 1999, the Company invested approximately $1.9 million to
purchase a "put option" that covered all of the Company's Maytag stock. The
function of the put option is to guarantee a minimum value of the Company's
Maytag stock for a three-year period. This put option is an integral part of
the AIG credit facility as it established a minimum borrowing base from which
the Company could draw upon from time to time. The market value of the put
option will be based upon the current price of Maytag stock and the amount of
time remaining on the option. The Company is currently amortizing this
investment on a straight-line basis, over a three-year period. The maximum
potential exposure that the Company has, with respect to the put option, is $1.9
million, the initial cost of the investment. For further information regarding
the Company's credit facility see the "Liquidity and Capital Resources" and
"Notes to Condensed Financial Statements" sections of this document.
16
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 15, 1999, the Annual Meeting of Stockholders of the Company was
held in Dallas, Texas. At the Annual Meeting, the Company's stockholders
elected five (5) individuals to serve as the Company's Board of Directors until
the next Annual Meeting of the Stockholders and until their successors are
elected and duly qualified. The table presented below indicates the number of
votes cast in favor of the election of such persons as directors, the number of
votes cast against and the number of votes withheld. There were no broker non-
votes cast at the annual meeting.
<TABLE>
<CAPTION>
Name of Director Number of Votes For Number of Votes Against Withheld Votes
- ----------------------- -------------------------- ------------------------------ --------------------
<S> <C> <C> <C>
Marion H. Antonini 12,058,494 2,031,701 -0-
Jeffery B. Bogatin 12,046,303 2,043,901 -0-
Richard N. Caron 12,058,594 2,031,610 -0-
Donald J. Gogel 12,057,894 2,032,310 -0-
Sir Anthony Jolliffe 12,057,694 2,032,510 -0-
</TABLE>
In addition to the election of the Company's Board of Directors, the
stockholders approved the following proposals at the Annual Meeting:
1. A proposal to amend the Fourth Article of the Company's Restated
Articles of Incorporation to authorize a class of blank check preferred stock.
An aggregate of 8,410,393 shares were voted for this proposal, 2,389,566 shares
were voted against this proposal and 45,632 shares abstained; and
2. A proposal to ratify the appointment of Arthur Andersen LLP as the
Company's independent public accountants for the 1999 fiscal year. An aggregate
of 14,048,171 shares were voted for this proposal, 16,400 shares voted against
this proposal and 25,633 shares abstained.
17
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TURBOCHEF TECHNOLOGIES, INC.
By:/s/ Dennis J. Jameson
------------------
Dennis J. Jameson
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
Dated August 13, 1999
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,975,000
<SECURITIES> 20,514,000
<RECEIVABLES> 838,000
<ALLOWANCES> 0
<INVENTORY> 23,000
<CURRENT-ASSETS> 23,358,000
<PP&E> 1,261,000
<DEPRECIATION> (667,000)
<TOTAL-ASSETS> 25,694,000
<CURRENT-LIABILITIES> 1,276,000
<BONDS> 0
0
0
<COMMON> 151,000
<OTHER-SE> 17,456,000
<TOTAL-LIABILITY-AND-EQUITY> 25,694,000
<SALES> 1,352,000
<TOTAL-REVENUES> 1,352,000
<CGS> 1,097,000
<TOTAL-COSTS> 3,979,000
<OTHER-EXPENSES> (183,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,810,000)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
