<PAGE>
================================================================================
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, 2000
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 5, 2000
------------------- --------------
Common Stock, $0.01 Par Value 15,728,423
================================================================================
<PAGE>
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, 2000 (unaudited) and
December 31, 1999............................................ 3
Unaudited Interim Condensed Statements of Operations for the
three months ended March 31, 2000 and 1999................... 4
Unaudited Interim Condensed Statements of Cash Flows for the
three months ended March 31, 2000 and 1999................... 5
Notes to the Interim Condensed Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 17
Part II. Other Information
Item 1. Legal Proceedings............................................ 18
Item 2. Changes in Securities and Use of Proceeds.................... 18
Item 3. Defaults Upon Senior Securities.............................. 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 5. Other Information............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
Signatures................................................... 19
2
<PAGE>
<TABLE>
<CAPTION>
TurboChef Technologies, Inc.
Condensed Balance Sheets
(Amounts in Thousands, Except Share Data)
March 31, December 31,
2000 1999
---------- -----------
(Unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 251 $ 1,928
Marketable securities available for sale, at fair value 7,335 7,335
Marketable securities - pledged, at fair value 5,135 7,920
Accounts receivable, net 1,115 1,280
Inventories, net 248 252
Prepaid expenses 100 209
---------- ----------
Total current assets 14,184 18,924
---------- ----------
Property and equipment:
Leasehold improvements 389 315
Furniture and fixtures 751 720
Equipment 538 518
---------- ----------
1,678 1,553
Less accumulated depreciation and amortization (898) (822)
---------- ----------
Net property and equipment 780 731
---------- ----------
Premium on purchased put option, net 1,133 1,295
Other assets 116 119
---------- ----------
Total assets $ 16,213 $ 21,069
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,178 $ 1,000
Accrued payroll 152 141
Accrued warranty & upgrade costs 769 1,069
Accrued expenses 374 481
Deferred revenue 1,727 1,727
Other 19 22
---------- ----------
Total current liabilities 4,219 4,440
Long-term liabilities:
Long-term debt 3,621 6,406
Accrued interest 504 372
---------- ----------
Total long-term liabilities 4,125 6,778
Total liabilities 8,044 11,218
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.01 par value. Authorized 50,000,000 shares.
Issued 15,728,423 and 15,090,373 shares at March 31, 2000
and December 31, 1999, respectively 157 151
Additional paid-in capital 35,789 34,119
Accumulated deficit (32,151) (30,010)
Notes receivable from employees (2,202) (685)
Accumulated other comprehensive income 6,727 6,727
Treasury stock - at cost 32,130 shares in 2000 and 1999 (451) (451)
---------- ----------
Total stockholders' equity 7,869 9,851
---------- ----------
Total liabilities and stockholders' equity $ 16,213 $ 21,069
========== ==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Operations
(Amounts in Thousands, Except Share Data)
Three Months Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Revenues:
Product sales $ 382 $ 674
Research and development fees 1,850 1,025
Royalties 5 -
----------- -----------
Total revenues 2,237 1,699
Costs and expenses:
Cost of goods sold 570 514
Research and development expenses 1,483 769
Selling, general and administrative expenses 2,142 1,726
----------- -----------
Total costs and expenses 4,195 3,009
----------- -----------
Operating loss (1,958) (1,310)
----------- -----------
Other income (expense):
Interest income 30 6
Interest expense (132) (46)
Dividend income 52 52
Amortization of purchased put option premium (162) (162)
Other income (expense) 29 (6)
----------- -----------
(183) (156)
----------- -----------
Net loss $ (2,141) $ (1,466)
=========== ===========
Loss per common share - basic and diluted $ (0.14) $ (0.10)
=========== ===========
Weighted average number of common
shares outstanding - basic and diluted 15,220,802 14,675,572
=========== ===========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Cash Flows
(Amounts in Thousands)
Three Month Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,141) $(1,466)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 76 187
Amortization of premium on purchased put option 162 162
Non-cash compensation expense 123 -
Provision for doubtful accounts - 17
Change in assets and liabilities:
Decrease in accounts receivable 165 65
Decrease (increase) in inventories 4 (189)
Decrease in prepaid expenses 109 10
Decrease (increase) in other assets 3 -
Increase (decrease) in accounts payable 178 (449)
Decrease in accrued expenses (396) (118)
Decrease in other liabilities (3) -
Accrued interest 132 46
------- -------
Net cash used in operating activities (1,588) (1,735)
------- -------
Cash flows from investing activities:
Premium on purchased put option - (1,942)
Purchase of equipment and leasehold improvements (125) (89)
------- -------
Net cash provided by (used in) investing activities (125) (2,031)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt - 5,109
Notes receivable from employees (1,517) (44)
Proceeds from the exercise of stock options 1,553 54
Proceeds from the issuance of warrants - 392
------- -------
Net cash provided by financing activities 36 5,511
------- -------
Net increase (decrease) in cash and cash equivalents (1,677) 1,745
Cash and cash equivalents at beginning of period 1,928 164
------- -------
Cash and cash equivalents at end of period $ 251 $ 1,909
------- -------
</TABLE>
5
<PAGE>
TURBOCHEF TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
March 31, 2000
1) General
-------
TurboChef Technologies, Inc. ("TurboChef Technologies" or "the Company") is
a leading technology development company that heretofore has engaged primarily
in designing, developing and licensing its proprietary high-speed cooking
technologies. The TurboChef high-speed cooking system employs proprietary
hardware and software technologies to "cook-to-order" a variety of food products
at faster speeds and to quality standards comparable, and in many instances
superior to, other conventional residential and commercial ovens currently
available. In addition, the Company's high-speed cooking systems use a
microprocessor to control the cooking processes to ensure consistent quality and
also has the ability to communicate with users and service personnel over
computer networks and the Internet.
As a result of the explosion in the Internet and intelligent appliance
innovation, the Company has embarked on an internal development effort to couple
the computer intelligence and cooking performance of the Company's proprietary
rapid cook technologies with the Internet. The strategy behind this product
development effort is to provide lifestyle changing benefits to consumers that
make cooking, shopping and meal planning a less time consuming activity. The
first stage of product development, a prototype appliance ("iAppliance") that
couples the Company's rapid cook oven with a wireless web pad that provides
connectivity to the Internet and intuitive touch screen controls for the oven,
was demonstrated in March 2000.
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. The latest version of the Company's
commercial product, the C-3 commercial counter top, was recognized as the best
innovative new product at the Hotelympia international foodservice show in
London in February 2000.
The Company's current strategic alliance partner in North America, Maytag
Corporation ("Maytag"), recently introduced the Company's high-speed cooking
technologies to the US residential market, when it launched the Jenn-Air(R)
Accellis(TM) 5XP wall oven. The Accellis(TM) 5XP is currently scheduled for
delivery to consumers in July 2000.
6
<PAGE>
2) Liquidity
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 incurred operating
losses and has been substantially dependent on loans and capital contributions
from its principal stockholders, private placements of its securities, the
proceeds from stock offerings to fund its activities. Although the Company has
historically incurred significant losses, the Company expects to generate future
cash flows from the direct sale of its commercial cooking systems, royalties
from the sale its commercial and residential cooking systems, license fees for
the non-exclusive licensing of its technologies, research and development fees
for product development and, as necessary and available, raising capital through
future equity or debt financing.
The Company is currently dependent on a single company, Maytag Corporation,
for its research and development funding and royalty revenues. In addition, the
Company is dependent on Maytag to manufacture, market and sell its products in
North America. The Company is currently pursuing potential marketing and
manufacturing partners in Europe and Asia. No such partnerships currently exist.
Both Maytag and the Company may choose to cancel the Alliance by giving at least
30 days prior written notice. If Maytag chooses to cancel the commercial License
Agreement, it may do so with 180 days prior written notice and would be required
to pay the Company the total amount of the minimum royalties ($5.75 million),
less the sum of all royalty payments previously received pursuant to the
agreement, within 30 days of the termination of the agreement.
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 for product
development initiatives by the Company.
In October 1999, the Company entered into a commercial License Agreement
with Maytag that broadens their distribution rights with respect to commercial
cooking products utilizing the Company's rapid cook technologies. Pursuant to
the terms of the agreement, Maytag now has exclusive rights to market and sell
throughout North America and certain worldwide rights to sell to North American
based chains with international locations. This exclusivity extends until March
2002, with certain applications extending until March 2003. In consideration for
these rights, Maytag has agreed to pay the Company per unit royalties or
approximately 10% of targeted wholesale prices. In the event that actual gross
margins exceed target levels, the Company will share equally in the incremental
margin. Maytag has also agreed to establish $5.75 million as the minimum royalty
threshold over the first twenty four months of exclusivity ($1.5 million in
2000, $3.3 million in 2001 and $0.9 million in 2002). Maytag has also agreed to
provide the Company with $2.5 million in 1999 and up to $2.1 million in 2000,
for the research and development of prototype units relating to this agreement.
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 provided the Company
with $2 million in funding during 1999. In addition to the funding, the Company
is allowed access to GRI's extensive patent portfolio and years of experience
with natural gas related products. In exchange for the funding, GRI received
50,000 warrants to purchase the Company's common stock and a defined percentage
of the royalty that the Company receives on the sale of various commercial
products in North America and Europe. Such payments terminate upon the
cumulative payments of $4,000,000 to GRI.
Cash used during the first quarter of 2000 and projected cash requirements
for the balance of fiscal 2000 have exceeded the Company's original forecast,
primarily as a result of the following:
. Certain discretionary spending is being made to fund the development of
the Company's Internet strategy, the TurboChef rapid cook iAppliance and
certain marketing activities in support of Management's fundraising
efforts in the forms of research and development sponsorships, strategic
alliances and/or equity investments.
. The launch of the commercial counter top oven has been delayed by about
two months, resulting in a delay in the realization of revenues from
sales in Europe and could lead to the deferral of a quarterly minimum
royalty payment ($500,000) from Maytag into fiscal 2001.
Management will continuously evaluate its liquidity position throughout the
year. If at that time Management believes that incremental funding is not
achievable, royalty payments from Maytag are not expected to be received
according to schedule and/or sufficient incremental revenues are not realized,
the Company would decrease discretionary spending and implement cost-cutting
measures to ensure that cash flow from operations and financing facilities
currently in place are sufficient to fund operations throughout fiscal 2000.
7
<PAGE>
3) Interim Condensed Financial Statements
--------------------------------------
The financial statements of 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, 1999
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, 1999 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, 2000 are not necessarily indicative of the
results to be expected for the full year.
Basic net loss per common share is based on 15,220,802 and 14,675,572
weighted average shares outstanding for the three months ended March 31, 2000
and 1999, respectively. For the three months ended March 31, 2000 and 1999, 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, 1999 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, 2000, comprehensive income was (2,141,000) of which all
(2,141,000) was related to net loss. For the three-month period 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.
4) Notes Receivable from Employees
-------------------------------
In March and April 1999, the Company loaned an aggregate of $72,500 and
$600,000, respectively, to two of its employees and two of the Company's
directors. The loaned amounts were used by such employees and directors to
exercise 269,000 (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. Three of the loans have a term of two years and are
payable, along with accrued interest, in March and April 2001. One of the loans
has a term of five years and is payable, along with accrued interest, on April
2004. All of 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.
In February and March 2000, the Company loaned an aggregate of $13,500 and
$1,500,000 to two of its employees and one of its directors. The amount of
$13,500 was used by such employees to exercise 9,000 stock options at an
exercise price of $1.50 per share in February 2000. The amount of $1,500,000
was used by such director to exercise 600,000 stock options at an exercise price
of $2.50 per share in March 2000. 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 and March 2005. The notes have been recorded as a
reduction to Stockholders' Equity. The notes bear interest at a rate of 6.7%.
The market rates of interest in February and March 2000 was 7.5%, based upon
margin rates obtained through various discount brokers. The difference between
8
<PAGE>
interest earned by the Company on the notes and the market rate of interest has
been recorded as compensation expense.
The total compensation expense related to notes receivable from such
employees and directors was $4,000 for the three months ended March 31, 2000.
5) 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. In connection with the Variable Stock
Transaction (as defined in Note 6 hereof) and in order to mitigate market 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 will be amortized over three
years, the life of the investment. The purchased put options protect the Company
from a decline in the market value of the security below a minimum level of
approximately $57.00 per share (the put "strike" price) on January 14, 2002. The
total value of the put options at risk is equal to the unamortized premium,
which was $1,133,000 as of March 31, 2000. The Company's purchased put options
are accounted for as a hedge of its investment in the Company's Maytag stock in
accordance with GAAP. Hedge accounting under GAAP requires the following
criteria to be met: (i) the item to be hedged is exposed to price risk, (ii) the
options position reduces the price exposure, and (iii) the options position is
designated as a hedge. No options have been purchased to cover the Company's
investment in Maytag stock after January 14, 2002.
At March 31, 2000, the market value of the Company's Maytag common stock
was less than the strike price of the purchased put options. The net unrealized
gain of approximately $7.6 million on the purchased put options is equal to the
difference between the strike price of the options and the market value of the
Maytag common stock as of March 31, 2000, and is recorded as an increase in
accumulated other comprehensive income. The net unrealized gain on the pledged
shares of approximately $4.3 million as of March 31, 2000 has been recorded as a
reduction to the Company's long term debt. The net unrealized gain of
approximately $3.3 million on shares not pledged as of March 31, 2000 has been
recorded as an increase in marketable securities available for sale.
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.
6) Accrued Warranty and Upgrade Costs
----------------------------------
On September 1, 1999, the Company entered into an agreement to upgrade and
warranty 262 cooking systems installed for Whitbread PLC. The Company received
approximately $1.4 million from Whitbread PLC to complete the upgrade and
warranty the cooking systems for a three-year period, beginning in September
1999. The cooking system upgrades will include design changes that should
substantially increase the life and durability of the cooking systems. The
Company recorded a corresponding liability of $1.4 million representing the
estimated cost of upgrade and warranty. The liability is reduced as services
related to the upgrade and warranty are incurred. During 1999 and 2000, the
Company accrued an additional $755,000 and $300,000, respectively, for expenses
relating to the completion of the upgrade and remainder of the warranty period.
The cooking system upgrades were completed in February 2000. At
9
<PAGE>
this time, the Company believes that it has accrued expenses sufficient to cover
the total cost of the upgrades and any charges arising during the three-year
warranty period. The liability has been estimated and is subject to a high
degree of judgement. There can be no assurance that future expenses incurred on
the upgrade and three-year warranty will not have a material adverse effect upon
the Company.
7) Secured Borrowings
------------------
In January 1999, the Company 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 on January 14, 2002. Interest is imputed
at rates ranging from 5.8% to 7.4%. The Company may satisfy any outstanding
obligation by surrendering Maytag shares equal to the number of pledged shares
or with cash at any time up to and including January 14, 2002. 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 purchased put option for the 293,846 shares of
Maytag stock. The purchased put option establishes a minimum realizable value
for the Maytag shares of approximately $57 per share.
As of March 31, 2000, the Company had pledged 165,000 shares of the Maytag
stock, receiving advances totaling $7.9 million from AIG. As of May 5, 2000, the
Company had pledged 215,000 shares of the Maytag stock, receiving advances
totaling $10.4 million. As of May 5, 2000, the Company has approximately $4.0
million in advances available through the AIG credit facility.
In February 1999, the Company entered into a revolving credit agreement
with its bank. The credit agreement is set to expire in May 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 the prime interest rate less 0.5%.
8) Authoritative Pronouncements
----------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement is now effective
for fiscal years beginning after June 15, 2000. Previously, the Company would
have had to adopt the Statement no later than January 1, 2000. Under the new
guidelines, the Company will be required to adopt this Statement no later than
January 1, 2001. SFAS No. 133 requires companies to report derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Under FASB 133, the Company's derivative investments would be marked
to market on a quarterly basis and certain gains or losses would be recorded
within the Company's Condensed Statements of Operations. On March 31, 2000, the
fair market value of the Company's derivative instruments was $6,047,000.
10
<PAGE>
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. Prior to its name change in July 1998, the Company operated under the name
TurboChef, Inc. The Company is a foodservice technology company engaged
primarily in designing, developing and marketing high-speed cooking systems. The
Company believes its primary markets are with both residential and commercial
foodservice operators throughout North America, Europe and Asia. Management
believes that the Company operates in one primary business segment.
In September 1997, the Company and Maytag Corporation ("Maytag") entered
into a "Strategic Alliance Agreement" ("Alliance") for the purpose of the
development and commercialization of innovative products based on new
technologies in the areas of heat transfer and thermodynamics. In connection
with the Alliance, the Company issued 564,668 shares of common stock with an
aggregate fair market value of approximately $10.0 million for 293,846 shares of
Maytag common stock at the same aggregate market value. In addition, the Company
received fees from Maytag for research and development activities. These fees
totaled $4,075,000 and $750,000 in 1998 and 1997, respectively. In July 1998,
the Company announced a commercial sales agreement with Maytag whereby Maytag
will lead the Company's North American commercial sales and marketing
initiatives. In November 1999, the Company announced a commercial License
Agreement with Maytag. The Company received $2,500,000 in research and
development fees during the fourth quarter of 1999, $1,850,000 during the first
quarter of 2000 and $250,000 during April 2000, relating to this agreement.
Future revenues from the current Alliance projects will depend upon the
successful commercialization of these products and the minimum royalty
agreements associated with the commercial License Agreement.
The Maytag Alliance is ongoing, and provides for the opportunity to
establish additional residential and commercial product development projects in
the future. Accordingly, future revenues from the 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, the Maytag Alliance is
cancelable by either party with 30 days prior written notice.
During the second half of 1999, the Company 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. Blodgett is currently the Company's sole source of supply for its
cooking systems.
In addition, the Company is dependent on Maytag to manufacture, market and
sell its products in North America. The Company is currently pursuing potential
marketing and manufacturing partners in Europe and Asia. No such partnerships
currently exist. Both Maytag and the Company may choose to cancel the Alliance
by giving at least 30 days written notice. If Maytag chooses to cancel the
commercial License Agreement, it may do so with 180 days prior written notice
and would be required to pay the Company the total amount of the minimum
royalties ($5.75 million), less the sum of all royalty payments previously
received pursuant to the agreement, within 30 days of the termination of the
agreement. If the Alliance is canceled or if any of
11
<PAGE>
the alliance projects are canceled, 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 or operations. The
failure to find acceptable alternative financing could have a significant
adverse impact on the Company's current and future operations. However,
management is confident that through the sales of its commercial cooking
systems, royalties from the sale of its licensed products and financing
agreements, it will have adequate funding to finance its operations throughout
2000.
In July 1999, the Company entered into a research and development agreement
with the Gas Research Institute ("GRI"). Through this agreement, the Company has
received $2,000,000 in funding for the development of gas fueled cooking
platforms. In exchange for the funding, GRI received 50,000 warrants to purchase
the Company's common stock and a defined percentage of the royalty that the
Company receives on the sale of various European and North American commercial
products developed by research and development efforts undertaken as a result of
the GRI agreement. Such royalty payments terminate upon the cumulative payments
of $4,000,000 to GRI.
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, 2000 Compared to the
Quarter Ended March 31, 1999
Revenues for the quarter ended March 31, 2000 were $2,237,000, compared to
revenues of $1,699,000 for the quarter ended March 31, 1999. This increase is
primarily attributable to the receipt of research and development fees pursuant
to the commercial License Agreement with Maytag, partially offset by a decline
in revenues from the direct sales of parts and commercial cooking systems in
North America. This decline in revenues is a result of the transition to a
royalty arrangement with Maytag in North America, as compared to the recognition
of the full sales price as revenues during the comparable quarter of 1999.
Cost of sales for the quarter ended March 31, 2000 was $570,000, an
increase of $56,000 when compared to $514,000 for cost of sales in the quarter
ended March 31, 1999. This increase is due to estimated expenses relating to the
Company's upgrade and warranty program, partially offset by a reduction in parts
sales and the transition from the direct sales of commercial cooking systems to
a licensing arrangement with Maytag, resulting in the elimination of cost of
sales for such units.
Gross profit on direct cooking system sales for the quarter ended March 31,
2000 decreased $43,000 to $103,000, when compared to gross profit on direct
cooking system sales of $146,000 during the quarter ended March 31, 1999. The
decrease is due the transition of the North American sales and marketing
responsibilities to Maytag, resulting in royalty income to the Company, and the
wholesale sale of commercial units to the Company's distributor in Asia.
Research and development expenses for the quarter ended March 31, 2000
increased $714,000, to $1,483,000, as compared to $769,000 for the quarter ended
March 31, 1999. This increase is principally due to engineering and prototype
expenses relating to the development of the Company's commercial counter top
platforms, pursuant to the commercial License Agreement. In addition, the
Company has
12
<PAGE>
incurred prototype expenses relating to the Company's "next generation"
residential cooking system and development expenses relating to the Company's
Internet strategy.
Selling, general and administrative expenses for the quarter ended March
31, 2000 increased $416,000, to $2,142,000 from comparable expenses of
$1,726,000 for the quarter ended March 31, 1999. The increase over the quarter
ending March 31, 1999 is primarily due to marketing costs associated with the
Company's new commercial countertop platform, expansion of the Company's
corporate insurance coverage, including costs incurred in the establishment of
the Lloyds of London offensive and defensive patent insurance policies, non-cash
compensation expenses relating to stock option grants to former employees and
the costs associated with the Company's ongoing efforts to develop international
alliances and partnerships.
Other expense was $183,000 for the quarter ended March 31, 2000, compared
to $156,000 for the quarter ended March 31, 1999. The increase in expense is
primarily due to interest expense, related to the Company's long-term credit
agreement, partially offset by an increase in interest income on cash balances
and an increase other income.
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 incurred operating
losses and has been substantially dependent on loans and capital contributions
from its principal stockholders, private placements of its securities and the
proceeds from stock offerings.
Although the Company has historically incurred significant losses, the
Company expects to generate future cash flows from the direct sale of its
commercial cooking systems, royalties from the sale its commercial and
residential cooking systems, license fees for the non-exclusive licensing of its
technologies, research and development fees for product development and, as
necessary and available, raising capital through future equity or debt
financing. As previously discussed, the Company is currently dependent on a
single company, Maytag Corporation, for its research and development funding and
royalty revenues. Accordingly, future revenues from the 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, the Alliance is canceled, or if revenues
from cooking system sales, cash from its financing agreements and external
financing is not sufficient, the Company may be required to revise its plan of
operations, including a curtailment of expansion, product development activities
and reduction of other general and administrative expenses. Furthermore, there
is no assurance that the Company would be able to find alternative sources of
funding which could have a significant adverse effect on the Company's current
and future operations. However, management is confident that through sales of
its commercial cooking systems, minimum royalties and current credit facilities,
it will have adequate funding for further research and development throughout
2000.
Since October 1997, the Company's cash requirements have been met in part
by Maytag. In accordance with the Maytag Alliance, the Company has been paid an
aggregate of $7.8 million for technology transfer initiatives by the Company.
13
<PAGE>
Cash used during the first quarter of 2000 and projected cash requirements
for the balance of fiscal 2000 have exceeded the Company's original forecast,
primarily as a result of the following:
. Certain discretionary spending is being made to fund the development of
the Company's Internet strategy, the TurboChef rapid cook iAppliance and
certain marketing activities in support of Management's fundraising
efforts in the forms of research and development sponsorships, strategic
alliances and/or equity investments.
. The launch of the commercial counter top oven has been delayed by about
two months, resulting in a delay in the realization of revenues from
sales in Europe and could lead to the deferral of a quarterly minimum
royalty payment ($500,000) from Maytag into fiscal 2001.
Management will continuously evaluate its liquidity position throughout the
year. If at that time Management believes that incremental funding is not
achievable, royalty payments from Maytag are not expected to be received
according to schedule and/or sufficient incremental revenues are not realized,
the Company would decrease discretionary spending and implement cost-cutting
measures to ensure that cash flow from operations and financing facilities
currently in place are sufficient to fund operations throughout fiscal 2000.
In October 1999, the Company entered into a commercial License Agreement
that broadens Maytag's distribution rights with respect to commercial cooking
products utilizing the Company's rapid cook technologies. Pursuant to the terms
of the agreement, Maytag now has exclusive rights to market and sell throughout
North America and certain worldwide rights to sell to North American based
chains with international locations. This exclusivity extends until March 2002,
with certain applications extending until March 2003. In consideration for these
rights, Maytag has agreed to pay the Company per unit royalties of approximately
10% of targeted wholesale prices. In the event that actual gross margins exceed
target levels, the Company will share equally in the incremental margin. In
addition to the payment of royalties, Maytag has also agreed to establish $5.75
million as the minimum royalty threshold over the first two years of
exclusivity, as well as provide the Company with approximately $4.6 million in
additional research and development funding ($2.5 million during the fourth
quarter of 1999, $1.85 million during the first quarter of 2000 and $250,000
during the second quarter of 2000), for the development of prototype units
relating to this agreement. This agreement is cancelable by either Maytag or the
Company with a minimum of 30 days written notice. If Maytag chooses to cancel
the commercial License Agreement, it may do so with 180 days prior written
notice and would be required to pay the Company the total amount of the minimum
royalties ($5.75 million), less the sum of all royalty payments previously
received pursuant to the agreement, within 30 days of the termination of the
agreement. The cancellation of this agreement could have a material adverse
effect on the operations and the financial position of the Company if they were
unable to enter into an agreement with another party with similar terms.
The Maytag Alliance called for the mutual exchange of each company's stock
with a value of approximately $10.0 million. In 1997, Maytag purchased 564,668
shares of the Company's common stock, and the Company purchased 293,846 shares
of Maytag common stock. As of May 5, 2000, these securities had a market value
of approximately $10.4 million.
In July 1999, the Company entered into a research and development agreement
with the Gas Research Institute ("GRI"). Through this agreement, the Company
has received $2,000,000 in funding for the development of gas fueled cooking
platforms. In exchange for the funding, GRI received warrants to purchase
50,000 shares of the Company's common stock and a percentage of the royalty that
the Company receives on the sale of various commercial products containing
technology developed from the GRI funding in North America and Europe. The
maximum cumulative royalty that GRI will receive under this agreement is $4.0
million.
In January 1999, the Company 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 on January 14, 2002. Interest is imputed
at rates ranging from 5.8% to 7.4%. The Company may satisfy any outstanding
obligation by surrendering Maytag shares equal to the fair value of the
obligation or with cash at any time up to and including January 14, 2002. 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 purchased put option for the
293,846 shares of Maytag stock. The purchased put option establishes a minimum
realizable value for the Maytag shares of approximately $57 per share.
As of March 31, 2000, the Company had pledged 165,000 shares of the Maytag
stock, receiving advances totaling $7.9 million from AIG. As of May 5, 2000,
the Company had pledged 215,000 shares
14
<PAGE>
of the Maytag stock, receiving advances totaling $10.4 million. As of May 5,
2000, the Company has approximately $4.0 million in advances available through
the AIG credit agreement.
In February 1999, the Company entered into a revolving credit agreement
with its bank. The credit agreement is set to expire in May 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 the prime interest rate less 0.5%. As of March 31, 2000,
the Company had no outstanding borrowings and approximately $172,000 in
borrowings available through this facility.
At March 31, 2000, the Company had working capital of $9,965,000 as
compared to working capital of $14,484,000 at December 31, 1999. The $4,519,000
working capital decrease is primarily due to decreases in the fair value of the
Company's pledged Maytag common stock and operating losses during the quarter.
Cash used in operating activities was $1,588,000 for the quarter ended March
31, 2000 as compared to cash used in operating activities of $1,735,000 for the
quarter ended March 31, 1999. The net loss in the first quarter of 2000 included
$493,000 of non-cash contributions to net loss, compared to $412,000 in 1999.
Major factors leading to the decrease in net cash used in operating activities
for the quarter ended March 31, 2000 were non-cash contributions to net loss
($493,000), increases in accounts payable ($178,000) and decreases in accounts
receivable ($165,000) and prepaid expenses ($109,000). These were partially
offset by a decrease in accrued expenses ($396,000). Cash used in investing
activities for the quarter ended March 31, 2000 was $125,000, consisting of
equipment and leasehold improvement purchases. Cash provided by financing
activities was $36,000 for the quarter ended March 31, 2000, which was obtained
through the net exercise of stock options. At March 31, 2000, the Company had
cash and cash equivalents of $251,000, compared to cash and cash equivalents of
$1,909,000 at December 31, 1999.
Authoritative Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement is now effective
for fiscal years beginning after June 15, 2000. Previously, the Company would
have had to adopt the Statement no later than January 1, 2000. Under the new
guidelines, the Company will be required to adopt this Statement no later than
January 1, 2001. SFAS No. 133 requires companies to report derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Under FASB 133, the Company's derivative investments would be marked
to market on a quarterly basis and certain gains or losses would be recorded
within the Company's Condensed Statements of Operations. On March 31, 2000, the
fair market value of the Company's derivative instruments was $6,047,000.
Forward Looking Statements
Although the Company has historically incurred significant losses,
management believes that it will generate sufficient cash flows for future
operations from the direct sale of its commercial cooking systems, royalties
from the sale its commercial and residential cooking systems, license fees for
the
15
<PAGE>
licensing of its technologies, research and development fees for product
development and, as necessary and available, raising capital through future
equity or debt financing. If revenues from cooking system sales, cash from its
financing agreements and external financing is not sufficient, the Company may
be required to revise its plan of operations, including a curtailment of
expansion, product development activities and reduction of other general and
administrative expenses. Furthermore, there is no assurance that the Company
would be able to find alternative sources of funding. Any of the aforementioned
factors could have a significant adverse effect on the Company's current and
future operations and financial position.
Cash used during the first quarter of 2000 and projected cash requirements
for the balance of fiscal 2000 have exceeded the Company's original forecast,
primarily as a result of the following:
. Certain discretionary spending is being made to fund the development of
the Company's Internet strategy, the TurboChef rapid cook iAppliance and
certain marketing activities in support of Management's fundraising
efforts in the forms of research and development sponsorships, strategic
alliances and/or equity investments.
. The launch of the commercial counter top oven has been delayed by about
two months, resulting in a delay in the realization of revenues from
sales in Europe and could lead to deferral of a quarterly minimum
royalty payment (2,500,000) from Maytag into fiscal 2001.
Management will continuously evaluate its liquidity position throughout the
year. If at that time Management believes that incremental funding is not
achievable, royalty payments from Maytag are not expected to be received
according to schedule and/or sufficient incremental revenues are not realized,
the Company would decrease discretionary spending and implement cost-cutting
measures to ensure that cash flow from operations and financing facilities
currently in place are sufficient to fund operations throughout fiscal 2000.
The Company has substantially completed its targeted commercial cooking
system research and development in April 2000 and, subsequently, has ceased
receiving the monthly research and development funding payments associated with
such projects. 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. 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, partnerships and license agreements in
major international markets.
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 18 to 24 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 in major international markets, (iii) continued direct
marketing to European 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, (v) the development of new foodservice
technologies, and (vi) the development and execution of an Internet and
connectivity strategy for both residential and commercial appliances including
the filing of key business process patents. However, there can be no assurance
that the Company will be able to successfully implement any of the foregoing
plans, that either its revenues will increase or its rate of revenue growth will
continue or that it will ever be able to achieve profitable operations.
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward looking statements and
information that are based on the beliefs of the Company's management as well as
estimates and assumptions made by, and information currently available to, the
Company's management. When used in SEC Filings, the words "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan," and similar
expressions, as they relate to the Company or the Company's management, identify
forward looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, competitive factors and pricing pressures, shifts in market
demand, the performance and needs of the segments of the foodservice industry
served by the Company, the costs
16
<PAGE>
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.
17
<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
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/ Richard N. Caron
--------------------
Richard N. Caron
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Dennis J. Jameson
---------------------
Dennis J. Jameson
Executive Vice-President and
Chief Accounting Officer
(Principal Accounting Officer)
Dated May 12, 2000
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 251,000
<SECURITIES> 12,470,000
<RECEIVABLES> 1,115,000
<ALLOWANCES> 0
<INVENTORY> 248,000
<CURRENT-ASSETS> 14,184,000
<PP&E> 1,678,000
<DEPRECIATION> 898,000
<TOTAL-ASSETS> 16,213,000
<CURRENT-LIABILITIES> 4,219,000
<BONDS> 0
0
0
<COMMON> 157,000
<OTHER-SE> 7,712,000
<TOTAL-LIABILITY-AND-EQUITY> 16,213,000
<SALES> 382,000
<TOTAL-REVENUES> 2,287,000
<CGS> 570,000
<TOTAL-COSTS> 4,195,000
<OTHER-EXPENSES> 183,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132,000
<INCOME-PRETAX> (2,141,000)
<INCOME-TAX> (2,141,000)
<INCOME-CONTINUING> (2,141,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,141,000)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
