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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 March 31, 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 May 14, 1998
------------------- ---------------
Common Stock, $0.01 Par Value 15,083,706
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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 March 31, 1999 (unaudited)
and December 31, 1998........................................ 3
Condensed Statements of Operations (unaudited) for
the three months ended March 31, 1999 and 1998............... 4
Condensed Statements of Cash Flows (unaudited) for
the three months ended March 31, 1999 and 1998............... 5
Notes to Condensed Financial Statements (unaudited).......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 14
Part II. Other Information
Item 1. Legal Proceedings............................................ 15
Item 2. Changes in Securities and Use of Proceeds.................... 15
Item 3. Defaults Upon Senior Securities.............................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......... 15
Item 5. Other Information............................................ 15
Item 6. Exhibits and Reports on Form 8-K............................. 15
Signatures................................................... 16
2
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TurboChef Technologies, Inc.
Balance Sheets
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
------------ ------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 1,909 $ 164
Marketable securities available for sale, at fair value 10,862 18,292
Marketable securities, pledged and at fair value 6,879
Accounts receivable, net 832 914
Inventories, net 820 762
Prepaid expenses 31 41
------------ ------------
Total current assets 21,333 20,173
------------ ------------
Property and equipment:
Leasehold improvements 129 130
Furniture and fixtures 524 475
Equipment 497 456
------------ ------------
1,150 1,061
Less accumulated depreciation and amortization (615) (563)
------------ ------------
Net property and equipment 535 498
------------ ------------
Investment in derivatives 1,780 --
Other assets 126 129
------------ ------------
Total assets $ 23,774 $ 20,800
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 122 $ 571
Accrued payroll 346 223
Accrued warranty costs 177 259
Accrued expenses 319 474
Deferred revenue 48 49
Other 28 31
------------ ------------
Total current liabilities 1,040 1,607
Long-term liabilities:
Long-term debt 5,109 --
Accrued interest 46 --
------------ ------------
Total long-term liabilities 5,155 --
Total liabilities 6,195 1,607
Commitments and contingencies -- --
Stockholders' equity
Common stock, $.01 par value. Authorized 50,000,000 shares
Issued 14,828,706 and 14,659,134 shares at March 31, 1999
and December 31, 1998, respectively 149 148
Additional paid-in capital 32,946 32,435
Notes receivable from employees (110) --
Accumulated deficit (22,696) (21,231)
Accumulated other comprehensive income 7,741 8,292
Treasury stock - at cost 32,130 at March 31, 1999 and
December 31, 1998, respectively (451) (451)
------------ ------------
Total stockholders' equity 17,579 19,193
------------ ------------
Total liabilities and stockholders' equity $ 23,774 $ 20,800
============ ============
</TABLE>
3
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TurboChef Technologies, Inc.
Statements of Operations
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Product sales $ 674 $ 954
Research and development fees 1,025 750
------------ ------------
Total revenues 1,699 1,704
Costs and expenses:
Cost of goods sold 514 748
Research and development expenses 769 459
Selling, general and administrative expenses 1,726 1,289
------------ ------------
Total costs and expenses 3,009 2,496
------------ ------------
Operating loss (1,310) (792)
------------ ------------
Other income (expense):
Interest income 6 39
Interest expense (46) --
Dividend income 52 47
Equity in loss of joint venture -- (65)
Amortization of derivatives (162) --
Other income (expense) (6) (3)
------------ ------------
(156) 18
------------ ------------
Net loss $ (1,466) $ (774)
============ ============
Loss per common share - basic and diluted $ (0.10) $ (0.05)
============ ============
Weighted average number of
common shares outstanding 14,675,572 14,559,037
============ ============
</TABLE>
4
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TurboChef Technologies, Inc.
Statements of Cash Flows
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Month Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,466) $ (774)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in loss of joint venture -- 65
Depreciation and amortization 187 117
Amortization of derivative premium 162 --
Provision for doubtful accounts 17 8
Amortization of director compensation -- 7
Decrease (increase) in accounts receivable 65 (524)
Decrease (increase) in inventories (189) 228
Decrease in prepaid expenses 10 45
Increase (decrease) in accounts payable (449) 47
Decrease in other expenses (72) (25)
---------- ----------
Net cash used in operating activities (1,735) (806)
---------- ----------
Cash flows from investing activities:
Sales/purchase of marketable securities -- 812
Investment in derivative securities (1,942) --
Purchase of equipment (89) (28)
---------- ----------
Net cash provided by (used in) investing activities (2,031) 784
---------- ----------
Cash flows from financing activities:
Long-term debt 5,109 --
Exercise of stock options 10 13
Exercise of stock warrants 392 50
---------- ----------
Net cash provided by financing activities 5,511 63
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,745 41
Cash and cash equivalents at beginning of period 164 1,397
---------- ----------
Cash and cash equivalents at end of period $ 1,909 $ 1,438
========== ==========
Long-term debt
</TABLE>
5
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TURBOCHEF TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
March 31, 1999
General
- -------
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 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 March 31, 1999
are not necessarily indicative of the results to be expected for the full year.
Basic net loss per common share is based on 14,675,572 and 14,559,037
weighted average shares outstanding for the three months ended March 31, 1999
and 1998, respectively. For the three months ended March 31, 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 three month period
ended March 31, 1999, comprehensive income was ($2,017,000) of which
($1,466,000) was net loss and of which ($551,000) was the change in net
unrealized gain on marketable securities. For the three-month period March 31,
1998, comprehensive income was $3,276,000 of which ($774,000) was net loss and
of which $4,050,000 was the change in net unrealized gain on marketable
securities.
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 five of its employees. The loaned amounts
were used by the employees to exercise 284,000 (15,000 in February, 29,000 in
March and 240,000 in April) stock options at an exercise price of $2.50 per
share. All loans to employees are full-recourse and are secured by the
underlying securities and
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the general assets of each employee. Each loan has a term of five years and is
payable, along with accrued interest, in February, March and April 2004. The
notes are recorded as a reduction to Stockholders' Equity. The notes bear
interest at a rate of 4.8%. The market rate of interest on March 31, 1999 was
7.0%, based upon margin rates obtained through various discount brokers. The
difference between interest earned by the Company on the notes and the market
rate of interest is recorded as compensation expense. Total compensation expense
related to notes receivable from the employees was less than $1,000 in the
quarter ended March 31, 1999.
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")). 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 1999, the Company received additional advances of $1.7 million. This
advance bears an interest rate of 6.3% and is due in January 2002. Both 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. The Company is currently in compliance
with all of its debt covenants. As of May 14, 1999, Maytag has granted TurboChef
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
an additional $8.7 million in advances available through the AIG Facility as of
May 14, 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 $46,000 for the quarter ended March 31, 1999.
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/share (the put "strike" price). The total value the put
options are at risk is equal to the unamortized premium, which was $1,780,000 as
of March 31, 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.
7
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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 market
and sell commercial cooking products in North America. During the first quarter
of 1999, the Company and G.S. Blodgett Corporation, 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. 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.
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
8
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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 March 31, 1999 Compared to the
Quarter Ended March 31, 1998
Revenues for the quarter ended March 31, 1999 were $1,699,000, compared to
revenues of $1,704,000 for the quarter ended March 31, 1998. This decrease is
primarily attributable to a reduction in sales of commercial cooking systems,
offset by an increase in research and development fees received pursuant to the
Maytag Alliance.
Cost of sales for the quarter ended March 31, 1999 were $514,000, a
decrease of $234,000 when compared to $748,000 for cost of sales in the quarter
ended March 31, 1998. This decrease is principally attributable to a reduction
in sales of commercial cooking systems and a decrease in costs associated with
the Company's extended warranty program.
Gross profit on total net sales for the quarter ended March 31, 1999
increased $229,000 to $1,185,000 when compared to gross profit on total net
sales of $956,000 during the quarter ended March 31, 1998. The increase is
primarily attributable to the increase in revenues received pursuant to the
Maytag Alliance. Gross margin on net cooking system sales was 36% during the
quarter ended March 31, 1999, compared to 36% for the quarter ended March 31,
1998.
Research and development expenses for the quarter ended March 31, 1999
increased $310,000, to $769,000, as compared to $459,000 for the quarter ended
March 31, 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 quarter ended March
31, 1999 increased $437,000, to $1,726,000 from comparable expenses of
$1,289,000 for the quarter ended March 31, 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 income/(expense) was ($156,000) for the quarter ended March 31, 1999,
compared to $18,000 for the quarter ended March 31, 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. This non-cash charge for
the quarter was $162,000 (for additional information, refer to the "Liquidity
and Capital Resources" and "Authoritative Pronouncements" sections of this
document).
9
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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 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 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")). 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 this 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 the appreciation over $63.25 per share 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 May 14, 1999, the Company had pledged 140,000 shares of the Maytag
stock in connection with the AIG Facility and received advances totaling $5.2
million. In addition, Maytag has granted TurboChef 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. Accordingly, the Company has
an additional $8.7 million in advances through the AIG Facility as of May 14,
1999.
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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 March 31, 1999, the Company had working capital of $20,293,000 as
compared to working capital of $18,566,000 at December 31, 1998. The $1,727,000
working capital increase is primarily due to increases in cash and cash
equivalents provided by the AIG facility. For the quarter ended March 31, 1999,
accounts receivable turnover was 3.8 compared to 5.0 during the quarter ended
March 31, 1998. The decrease in accounts receivable turnover principally
relates to uncollected amounts from certain European customers.
Cash used in operating activities was $1,735,000 for the quarter ended
March 31, 1999 as compared to cash used in operating activities of $806,000 for
the quarter ended March 31, 1998. The net loss in the first quarter of 1999
included $366,000 of non-cash contributions to net loss, compared to $197,000 in
1998. Major factors leading to the increase in net cash used in operating
activities for the quarter ended March 31, 1999 were decreases in accounts
payable ($449,000) and increases in inventory ($189,000). Cash used in investing
activities for the quarter ended March 31, 1999 was $2,031,000, consisting of an
investment in derivatives of $1,942,000 and equipment purchases of $89,000. Cash
provided by financing activities was $5,511,000 for the quarter ended March 31,
1999, of which $5,109,000 was obtained through advances from the AIG facility
and $402,000 was obtained through the exercise of stock options and warrants. At
March 31, 1999, the Company had cash and cash equivalents of $1,909,000,
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, it will be unaffected by Year 2000 issues.
Through May 7, 1999, the Company has had the majority of its internal
software and hardware tested and made Year 2000 compliant, where necessary. The
Company currently plans to have all of its hardware, software and embedded
systems contained in the Company's equipment tested by June 30, 1999 and, if
necessary, made Year 2000 compliant no later than 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.
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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 is currently working on plans to assess the Year 2000
readiness of its major third party vendors as well as developing contingency
plans as it relates to its operations and major third party vendors. These plans
should be completed by the end of the second quarter 1999.
Authoritative Pronouncements
The Financial Accounting Standards Board (FASB) has recently issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
and SFAS No. 132, "Employers' Disclosure about Pensions and Other Post-
Retirement Benefits". These Statements are effective for the Company in 1998.
The adoption of these statements does not have a material effect on the
Company's financial statements.
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, 2000. 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 March 31, 1999, the fair market value of the Company's
derivative instruments were $1,851,000.
In October 1998, the FASB issued SFAS No 134, "Accounting for Certain
Mortgage Banking Activities". This Statement is effective for the Company in
1999. The adoption of this statement is not expected to have a material effect
on the Company's financial statements.
The American Institute of Certified Public Accountants (AICPA) has issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition". The adoption
of this Statement does not have a material effect on the Company's financial
statements.
In 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", and SOP 98-5, "Reporting on
the Costs of Start-Up Activities". The adoption of these Statements does not
have a material effect on the Company's financial statements.
12
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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 on the date of the advance 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 the appreciation over $63.25 per share 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 April 30, 1999, the Company had pledged
140,000 shares of the Maytag stock and received advances totaling $5.2 million.
The Company has approximately $1.6 million in advances available on May 14,
1999. Once the additional 146,923 Maytag shares are pledged, the Company will
have available approximately $7.1 million in additional advances. 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 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.
13
<PAGE>
As of March 31, 1999, the amount of backlog orders believed to be firm was
approximately $0.5 million, as compared to approximately $0.4 million as of
December 31, 1998. 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.
14
<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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
15
<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 May 17, 1999
16
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