<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter ended September 30, 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) 379-6000
_________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.
Number of Shares Outstanding
Title of Each Class at November 3, 2000
------------------- -------------------
Common Stock, $0.01 Par Value 15,728,423
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TURBOCHEF TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form 10-Q Item Page
-------------- ----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999................................................................ 3
Unaudited Interim Condensed Statements of Operations for the
three and nine months ended September 30, 2000 and 1999.......................... 4
Unaudited Interim Condensed Statements of Cash Flows for the
nine months ended September 30, 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........................................................ 10
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................................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................................. 19
Signatures....................................................................... 20
</TABLE>
<PAGE>
TurboChef Technologies, Inc
Condensed Balance Sheets
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
------------------ ------------------
2000 1999
-------- --------
(Unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,714 $ 1,928
Marketable securities available for sale, at fair value 1,642 7,335
Accounts receivable, net 2,179 1,280
Inventories 630 252
Prepaid expenses 120 209
-------- --------
Total current assets 6,285 11,004
-------- --------
Property and equipment:
Leasehold improvements 345 315
Furniture and fixtures 736 720
Equipment 259 518
-------- --------
1,340 1,553
Less accumulated depreciation and amortization (622) (822)
-------- --------
Net property and equipment 718 731
-------- --------
Marketable securities - pledged, at fair value 8,314 7,920
Premium on purchased put option, net 809 1,295
Other assets 93 119
-------- --------
Total assets $ 16,219 $ 21,069
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,264 $ 1,000
Accrued warranty & upgrade costs 786 1,069
Accrued expenses 973 622
Deferred revenue 1,511 1,727
Other 7 22
-------- --------
Total current liabilities 4,541 4,440
Long-term liabilities:
Long-term debt 6,108 6,406
Accrued interest 918 372
-------- --------
Total long-term liabilities 7,026 6,778
-------- --------
Total liabilities 11,567 11,218
-------- --------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $0.01 par value. Authorized 50,000,000 shares.
Issued and outstanding - 15,728,423 and 15,090,373 shares at
September 30, 20000 and December 31, 1999, respectively 157 151
Preferred stock, Authorized 5,000,000 shares. 2,100 -
Issued 21,000 and no shares at September 30, 2000 and
and December 31, 1999, respectively
Additional paid-in capital 35,826 34,119
Accumulated deficit (37,387) (30,010)
Notes receivable from employees and directors (2,275) (685)
Accumulated other comprehensive income 6,682 6,727
Treasury stock - at cost 32,130 shares in 2000 and 1999 (451) (451)
-------- --------
Total stockholders' equity 4,652 9,851
-------- --------
Total liabilities and stockholders' equity $ 16,219 $ 21,069
======== ========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
3
<PAGE>
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Operations
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 2,128 $ 540 $ 2,651 $ 2,566
Research and development fees 115 - 2,315 1,025
Royalties 463 - 478 -
----------- ----------- ----------- -----------
Total revenues 2,706 540 5,444 3,591
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 1,824 392 2,840 2,002
Research and development expenses 649 940 2,966 2,633
Selling, general and administrative 1,597 1,962 6,283 5,647
expenses ----------- ----------- ----------- -----------
Total costs and 4,070 3,294 12,089 10,282
expenses ----------- ----------- ----------- -----------
Operating loss (1,364) (2,754) (6,645) (6,691)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 81 15 130 38
Interest expense (232) (126) (546) (256)
Dividend income 52 50 155 155
Amortization of purchased put option (162) (162) (486) (486)
premium
Other income (expense) 9 (38) 15 (50)
----------- ----------- ----------- -----------
(252) (261) (732) (599)
----------- ----------- ----------- -----------
Net loss $ (1,616) $ (3,015) $ (7,377) $ (7,290)
=========== =========== =========== ===========
Loss per common share - basic and diluted $ (0.10) $ (0.20) $ (0.47) $ (0.49)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - basic and diluted 15,728,423 15,090,373 15,559,834 14,947,465
=========== =========== =========== ===========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
4
<PAGE>
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Cash Flows
(Amounts in Thousands)
<TABLE>
<CAPTION>
Nine Month Ended
September 30,
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,377) $(7,290)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 265 411
Amortization of premium on purchased put option 486 486
Accrued preferred stock dividends (20) -
Unrealized foreign exchange loss (45) -
Non-cash compensation expense 180 26
Provision for doubtful accounts - 54
Change in assets and liabilities:
Increase in accounts receivable (899) (23)
Decrease (increase) in inventories (378) 405
Decrease (increase) in other assets 105 (174)
Increase in accounts payable 264 271
Increase in accrued expenses 68 1,294
Decrease in deferred revenue (216) -
Decrease in other liabilities (15) (55)
Accrued interest 546 256
------- -------
Net cash used in operating activities (7,036) (4,339)
------- -------
Cash flows from investing activities:
Premium on purchased put option - (1,943)
Purchase of equipment and leasehold improvements (242) (395)
------- -------
Net cash used in investing activities (242) (2,338)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt 5,001 8,392
Accrued interest on notes receivable from employees and directors (81) (9)
Proceeds from the issuance of preferred stock 2,100 -
Proceeds from the exercise of stock options 44 58
Proceeds from the exercise of stock warrants - 392
Proceeds from the issuance of warrants - 153
------- -------
Net cash provided by financing activities 7,064 8,986
------- -------
Net increase (decrease) in cash and cash equivalents (214) 2,309
Cash and cash equivalents at beginning of period 1,928 164
------- -------
Cash and cash equivalents at end of period $ 1,714 $ 2,473
======= =======
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
5
<PAGE>
TURBOCHEF TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
September 30, 2000
1) Basis of Presentation
---------------------
TurboChef Technologies, Inc. ("the Company" or "TurboChef") was
incorporated on April 3, 1991. TurboChef is a technology licensing company which
designs, develops and licenses to third parties, the right to manufacture and
distribute high-speed commercial and residential ovens that incorporate the
Company's patented thermodynamic cooking technologies. The Company's
technologies are a combination of high speed forced air that cooks food from the
outside in, by browning the food and sealing in its natural juices, and with
microwave energy that cooks the food from the inside out. Management believes
that the Company operates in one primary services segment.
The financial statements of the Company for the three and nine months ended
September 30, 2000 and September 30, 1999, included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
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 and
cash flows for all periods presented 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 and notes included in the Company's Annual Report on Form 10K for the
year ended December 31, 1999, but does not include all disclosures required by
generally accepted accounting principles ("GAAP"). It is suggested that these
financial statements be read in conjunction with the statements and notes
included in the aforementioned Form 10-K. The results of operations for the
three and nine months ended September 30, 2000 are not necessarily indicative of
the results to be expected for the full year.
Certain amounts in prior periods financial statements have been
reclassified to conform to current year presentation.
Basic net loss per common share is based on 15,728,423 and 15,090,373
weighted average shares outstanding for the three months ended September 30,
2000 and 1999, respectively. For the nine months ended September 30, 2000 and
1999 basic net loss per common share is based on 15,559,834 and 14,947,465
weighted average shares outstanding, respectively. For both the three and nine
month periods ended September 30, 2000 and 1999, the Company did not report any
incremental shares of potentially dilutive stock as their effect was anti-
dilutive.
2) Liquidity
---------
The Company anticipates that it will need to obtain additional sources of
funding in order to continue its ongoing operations according to its current
plans. Management believes that through sales of its commercial cooking systems,
minimum royalties, technology transfer fees and the possibility of raising
capital through debt and equity financing, the Company will have adequate
funding for its continued operations and research and development efforts
throughout 2001. However, if the Company is unable to obtain additional
financing, it will have to curtail its current level of operations and research
and development. No assurances can be made that the Company will actually obtain
the necessary funding to finance its operations.
6
<PAGE>
3) Comprehensive Income
--------------------
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 nine-month period ended September
30, 2000, comprehensive income was ($7,422,000) of which ($45,000) was related
to the net unrealized foreign exchange loss and (7,377,000) was related to net
loss. For the nine-month period September 30, 1999, comprehensive income was
($10,313,000) of which ($7,290,000) was net loss and of which ($3,023,000) was
the change in net unrealized gain on marketable securities.
4) Notes Receivable from Employees and Directors
---------------------------------------------
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. These transactions have been eliminated from the
Unaudited Interim Condensed Statements of Cash Flows, as they were non-cash
transactions. 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 were 7.5%, 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 has been recorded as compensation
expense.
5) Derivative Financial Instruments
--------------------------------
As part of its strategic alliance efforts, the Company invested in equity
securities of Maytag Corporation ("Maytag"). 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 is being 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 $809,000 as of September 30,
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.
7
<PAGE>
At September 30, 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 $7.5 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 September 30, 2000, and is recorded as an
increase in accumulated other comprehensive income. The net unrealized gain on
the pledged shares under the "Variable Stock Transaction" of approximately $6.8
million as of September 30, 2000 has been recorded as a reduction to the
Company's long-term debt. The net unrealized gain of approximately $0.7 million
on shares not pledged as of September 30, 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. The Company attempts to mitigate
this risk through credit monitoring procedures.
The derivative instrument and underlying marketable securities were sold on
November 13, 2000. All gains and losses relating to this transaction will be
recorded during the fourth quarter of 2000.
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 $680,000, respectively, for expenses
relating to the completion of the upgrade and remainder of the three-year
warranty period. The cooking system upgrades were completed in February 2000. At
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 8.0%. 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 September 30, 2000, the Company had pledged 265,000 shares of the
Maytag stock, receiving advances totaling $12.9 million from AIG. As of November
3, 2000, the Company had pledged its remaining 28,846 shares of the Company's
Maytag stock and received additional advances of $1.5 million. No additional
funding is available to the Company under this borrowing arrangement.
This borrowing facility was terminated on November 13, 2000.
8
<PAGE>
8) Equity Transactions and Long-Term Contracts
-------------------------------------------
In September 1997, the Company and 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 November 1999, the Company announced a
commercial License Agreement with Maytag. The Company received $3,525,000 in
research and development fees during 1999 and $2,100,000 during the first half
of 2000. 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 for the
parties 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, royalties, if any, from the successful commercialization
and sales of the products that embody the Company's technologies, advances
against those royalties, and any other appropriate consideration. 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.
The Company is dependent on Maytag to manufacture, market and sell its
products in North America. 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 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.
In August 2000, the Company entered into an agreement with the Gas
Research Institute ("GRI") in which they purchased $2.1 million of the Company's
Convertible Preferred Stock for $100.00 per share. The 21,000 shares of
Convertible Preferred Stock carries a dividend of 7% per annum which is payable
in common shares upon conversion of the Convertible Preferred Stock into the
Company's common stock. These securities will be converted into shares of the
Company's common stock on the earlier of the Company's next generation
residential oven becoming generally available for delivery to consumers in the
United States or March 31, 2002. The conversion rate of the Convertible
Preferred Stock will be dependent upon the average closing price of the
Company's common stock over a fixed period of time prior to the conversion date.
9
<PAGE>
9) Authoritative Pronouncements
----------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement is now effective
for all quarters of all 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 and as clarified by SFAS 138, 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 September 30, 2000, the fair market value of the
Company's derivative instruments was $3,625,000.
In December of 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This SAB does not change any of the existing rules on revenue
recognition. Rather, the SAB provides additional guidance for transactions not
addressed by existing rules. The Company is required to review its revenue
recognition policies by the fourth quarter of fiscal year 2000 to determine that
its recognition criteria is in compliance with the SAB interpretations. Any
change in accounting principle required in order to comply with the SAB may be
reported as a cumulative catch-up adjustment at that time. The Company is
currently reviewing its revenue recognition policies and does not feel that any
change in accounting required would have a material impact on the Company's
reported financial position, results of operations or cash flows.
Additionally, the Company is evaluating the effects of FASB Interpretation
44, Accounting for Certain Transactions Involving Stock Options. The Company has
not yet adopted or completed its assessment of this interpretation on its
current practices.
Item 2: Management Discussion and Analysis of Financial Condition and Results
---------------------------------------------------------------------
of Operations
-------------
Forward-Looking Statements
Certain statements contained in this section and elsewhere in this Form 10-
Q constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements and
the Company's future financial performance will be subject to a number of known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, but are not limited to,
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, uncertainty regarding the Company's
ability to successfully complete development of and market new products,
possible product obsolescence, dependence on third-party manufacturers and
suppliers, customer concentration, uncertainties with respect to customer
preferences, possible economic downturns in the markets served by the Company
which could adversely affect consumer spending, regulatory changes or
developments, changes in tariffs or currency exchange rates that could impact
the Company's ability to market and produce products overseas and other risks
detailed in the Company's
10
<PAGE>
other filings made with the Securities and Exchange Commission. The words
"believe", "expect", "anticipate", "may", "plan" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
they were made.
General
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto contained elsewhere in this report.
TurboChef Technologies, Inc. ("the Company" or "TurboChef") is a technology
licensing company which designs, develops and licenses to third parties, the
right to manufacture and distribute high-speed commercial and residential ovens
that incorporate the Company's patented thermodynamic cooking technologies. The
Company's technologies are a combination of high speed forced air that cooks
food from the outside in, by browning the food and sealing in its natural
juices, and with microwave energy that cooks the food from the inside out.
These technologies employ proprietary hardware and software 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. The cooking systems use a
microprocessor to control the cooking processes to ensure consistent quality.
The microprocessor also creates the ability to communicate over computer
networks and the Internet with other oven users, other Internet users and
service personnel. Using TurboChef's computer controlled technology, home and
commercial users can cook food faster than a microwave and to gourmet quality
standards of a conventional oven, on a consistent basis.
The Company's commercial products and technologies are in use by
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 C-3 is currently available for sale in continental
Europe and the United Kingdom and cooks approximately 7 to 8 times faster than
most commercially available cooking systems. Recently, the Company completed its
delivery of over 340 C-3 ovens to the Little Chef chain of restaurants in the
United Kingdom.
The North American version of the Company's C-3 oven is the Accellis C-70.
This oven is currently available through the Company's commercial market partner
G. S. Blodgett and sold under the Accellis brand name. The C-70 was awarded the
Product of the Year award by the Electronic Foodservice Council in August 2000.
Like the C-3, the C-70 also cooks 7 to 8 times faster than most commercially
available cooking systems.
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. Currently, there are over 120 Jenn-Air Preferred
Dealers authorized to sell the Accellis(TM) 5XP wall oven, and the Company was
informed that orders are now being accepted from consumers for delivery in early
2001.
The Company is currently developing its Next Generation Oven ("NGO"). When
completed, management believes that the NGO can be manufactured at a cost lower
than the current cost of the Jenn-
11
<PAGE>
Air(R) Accellis(TM) 5XP. The prototype NGO ovens completed by the Company are
embodied in a full size oven cavity, and may be sold as either a built in wall
oven or a freestanding range. The prototype NGO ovens cook food 7 to 8 times
faster than conventional ovens and can accommodate a 20+ pound turkey.
The Company's strategy embraces the idea of including the "TurboChef" brand
as an "ingredient brand" on each oven manufactured by multiple third parties.
The strategy embraces the classic Business-to-Business Model, which includes
creating multiple market partners who will distribute ovens manufactured
directly by such market partner or those manufactured by other Original
Equipment Manufacturers ("OEM's"). Thus, other than for direct commercial sales
made to businesses by the Company's sales force in the United Kingdom, it is
anticipated that the Company would not sell its products to end users. The
Company expects to license its technologies to other businesses with well-
established commercial and residential distribution channels.
Several distributors are now authorized to sell commercial ovens that use
the Company's patented technology. In North America and the Caribbean ("the
Maytag Territories"), Maytag owns the exclusive right to sell these ovens.
Electrolux owns the non-exclusive right to sell these ovens throughout the
world, excluding the Maytag territories, and the United Kingdom. In the United
Kingdom, the Company maintains its own sales force. In China, the Shandong
Xiaoya Group is authorized to sell commercial ovens that it manufactures.
Discussions are underway with other distributors in other territories to
increase the number of organizations authorized to sell commercial ovens that
use TurboChef's patented technology, but no assurance can be given that any such
discussions will result in an agreement
As a result of the explosion in the Internet and intelligent appliance
innovation, the Company has also embarked on an internal development effort to
couple the computer intelligence and cooking performance of the residential oven
with the Internet. The Company's strategy 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 first demonstrated by the Company in March
2000. There can be no assurances that the Company will be able to successfully
commercially produce and market the iAppliance product.
Results of Operations for the Quarter Ended September 30, 2000 Compared to the
Quarter Ended September 30, 1999
Revenues for the quarter ended September 30, 2000 were $2,706,000, compared
to revenues of $540,000 for the quarter ended September 30, 1999. This increase
is primarily attributable to revenues from the direct sales of commercial
cooking systems to the Little Chef division of Granada PLC in the amount of $1.9
million, the United Kingdom's largest food service company, and minimum
royalties from Maytag in the amount of $463,000, according to the terms of the
commercial License Agreement. For additional information regarding the
commercial License Agreement, see "Liquidity and Capital Resources".
Cost of sales for the quarter ended September 30, 2000 were $1,824,000, an
increase of $1,432,000 when compared to $392,000 for cost of sales in the
quarter ended September 30, 1999. The increase is principally due to the costs
associated with the commercial cooking systems sold during the quarter ended
September 30, 2000.
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<PAGE>
Gross profit on product sales for the quarter ended September 30, 2000
increased $156,000 to $304,000, when compared to gross profit on product sales
of $148,000 during the quarter ended September 30, 1999. This increase is due
primarily to the increase in the number of direct sales of commercial cooking
systems in Europe during the period.
Research and development expenses for the quarter ended September 30, 2000
decreased $291,000, to $649,000, as compared to $940,000 for the quarter ended
September 30, 1999. The decrease in research and development expense principally
relates a reduction in payroll & related expenses of $149,000 and prototyping
expenses of $122,000. These expenses were eliminated due to the substantial
completion of the Company's C3/C70 commercial counter top cooking platform and
related components.
Selling, general and administrative expenses for the quarter ended
September 30, 2000 decreased $365,000, to $1,597,000 from comparable expenses of
$1,962,000 for the quarter ended September 30, 1999. The decrease from the
quarter ending September 30, 1999 is primarily due to a decrease in labor and
consulting expenses.
Other income (expense) was ($252,000) for the quarter ended September 30,
2000, compared to ($261,000) for the quarter ended September 30, 1999.
Results of Operations for the Nine Months Ended September 30, 2000 Compared to
the Nine Months Ended September 30, 1999
Revenues for the nine months ended September 30, 2000 was $5,444,000,
compared to revenues of $3,591,000 for the nine months ended September 30, 1999.
This increase is primarily attributable to the increase in research and
development revenues and minimum royalties received pursuant to the commercial
License Agreement with Maytag. For additional information regarding the
commercial License Agreement, see "Liquidity and Capital Resources".
Cost of sales for the nine months ended September 30, 2000 were $2,840,000,
an increase of $838,000 when compared to $2,002,000 for cost of sales in the
nine months ended September 30, 1999. This increase is principally due to costs
associated with the Company's Extended Warranty Program of $329,000 and the
costs associated with the sales of C3 commercial cooking systems during the
three months ended September 30, 2000.
Gross profit (loss) on product sales for the nine months ended September
30, 2000 decreased $753,000 to ($189,000), when compared to gross profit on
product sales of $564,000 during the nine months ended September 30, 1999. The
decrease was principally due to increased costs associated with the Company's
Extended Warranty Program in the amount of $530,000, partially offset by the
profits obtained on the sale of C3 commercial cooking systems sold during the
period.
Research and development expenses for the nine months ended September 30,
2000 increased $333,000, to $2,966,000, as compared to $2,633,000 for the nine
months ended September 30, 1999. The increase in research and development
expense principally relates to an increase in prototyping expenses of $543,000,
relating to the development of the Company's C3/C70 commercial counter top
cooking platform and related components, and was partially offset by a reduction
in payroll & related expenses of $101,000 and a reduction in depreciation
expenses of $108,000. As of September 30, 2000, the C3/C70 commercial
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<PAGE>
counter top cooking platform project and its related components were
substantially completed.
Selling, general and administrative expenses for the nine months ended
September 30, 2000 increased $636,000, to $6,283,000 from comparable expenses of
$5,647,000 for the nine months ended September 30, 1999. The increase over the
nine months ending September 30, 1999 is primarily due to an increase in
marketing costs associated with the Company's new C-3 commercial counter top
platform of $533,000 and an increase in non-cash compensation charges relating
to non-employee stock option grants of $154,000.
Other income (expense) was ($732,000) for the nine months ended September
30, 2000, compared to ($599,000) for the nine months ended September 30, 1999.
The increase in expense of $133,000 is primarily due to an increase in interest
expense related to the Company's long-term credit agreement of $290,000,
partially offset by an increase in interest income on cash balances of $92,000.
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 and sales of its securities to fund its
activities.
The Company expects to generate future cash flows from the direct sale of
its commercial cooking systems, royalties from the sale of 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 equity or debt financing. As
previously discussed, the Company is currently dependent on a single company,
Maytag Corporation, for its royalty revenues. Accordingly, future revenues from
the Alliance will depend upon the establishment of additional fee based research
and development projects with Maytag, royalties from the successful
commercialization and sales of the products that embody the Company's
technologies, advances against such royalties, and other potential revenue
sources. 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 and or operations, 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.
The Company anticipates that it will need to obtain additional sources of
funding in order to continue its ongoing operations according to its current
plans. Management believes that through sales of its commercial cooking systems,
minimum royalties, technology transfer fees and the possibility of raising
capital through debt and equity financing, the Company will have adequate
funding for its continued operations and research and development efforts
throughout 2001. However, if the Company is unable to obtain additional
financing, it will have to curtail its current level of operations and research
and development. No assurances can be made that the Company will actually obtain
the necessary funding to finance its operations.
14
<PAGE>
Cash used during the first three quarters 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:
. The launch of the commercial counter top oven has been delayed by
about three months from the date originally anticipated by the
Company, resulting in a delay in the realization of revenues from
sales in Europe and to the three-month deferral of the quarterly
minimum royalty payments from Maytag.
. The Company is applying staff resources and funding in connection with
the development of its Next Generation Oven. The prototype NGO's
completed by the Company are embodied in a full size oven cavity, and
may be sold as either a built in wall oven or a freestanding range.
The prototype NGO ovens cook food 7 to 8 times faster than
conventional ovens and can accommodate a 20+ pound turkey.
. Certain funds are being applied to the development of the Company's
Internet strategy, the TurboChef rapid cook iAppliance and certain
marketing activities support of management's efforts to procure
additional funding in the forms of research and development
sponsorships, strategic alliances and/or equity investments.
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 $10.5 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 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. Maytag has also agreed to establish $5.75 million as the minimum royalty
threshold over the first twenty-four months of exclusivity ($1.0 million in
2000, $2.9 million in 2001 and $1.9 million in 2002). Maytag has also provided
the Company with $2.5 million in 1999 and $2.1 million in 2000, for the research
and development of prototype units relating to this agreement.
In August 2000, the Company entered into an agreement with the Gas Research
Institute ("GRI") in which they purchased $2.1 million of the Company's
Convertible Preferred Stock for $100.00 per share. The 21,000 shares of
Convertible Preferred Stock carries a dividend of 7% per annum which is payable
in common shares upon conversion of the Convertible Preferred Stock into the
Company's common stock. These securities will be converted into shares of the
Company's common stock on the earlier of the Company's next generation
residential oven becoming generally available for delivery to consumers in the
United States or March 31, 2002. The conversion rate of the Convertible
Preferred Stock will be dependent upon the average closing price of the
Company's common stock over a fixed period of time prior to the conversion date.
15
<PAGE>
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 8.0%. 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 September 30, 2000, the Company had pledged 265,000 shares of the
Maytag stock, receiving advances totaling $12.9 million from AIG. As of November
3, 2000, the Company had pledged its remaining 28,846 shares of the Company's
Maytag stock and received additional advances of $1.5 million. No additional
funding is available to the Company under this borrowing arrangement.
At September 30, 2000, the Company had working capital of $1,744,000 as
compared to working capital of $6,564,000 at December 31, 1999. The $4,820,000
working capital decrease is primarily due to decreases in the fair value of the
Company's Maytag common stock.
Cash used in operating activities was $7,036,000 for the nine months ended
September 30, 2000 as compared to cash used in operating activities of
$4,339,000 for the nine months ended September 30, 1999. The net loss in the
first nine months of 2000 included $1,412,000 of non-cash contributions to net
loss, compared to $1,233,000 in 1999. Major factors leading to the increase in
net cash used in operating activities for the nine months ended September 30,
2000 was an increase in accounts receivable of $876,000, an increase in
inventories of $783,000 and a decrease in accrued expenses of $1,226,000. These
were partially offset by a $146,000 decrease in depreciation and amortization
from the prior period.
Cash used in investing activities for the nine months ended September 30,
2000 was $242,000, compared to $2,338,000 in 1999. The investments during nine
months ended September 30, 2000 related to the purchase of $106,000 of
computers, equipment and improvements relating to the Company's ongoing research
& development activities and $136,000 of computers, equipment and improvements
for administrative and sales support.
Cash provided by financing activities was $7,064,000 for the nine months
ended September 30, 2000, compared to $8,986,000 for 1999. Financing activities
for the nine months ended September 30, 2000, was principally due to $5,001,000
in borrowings under the Company's long-term credit facility and the issuance of
$2,100,000 of preferred stock.
At September 30, 2000, the Company had cash and cash equivalents of
$1,714,000, compared to cash and cash equivalents of $1,928,000 at December 31,
1999.
Management will continuously evaluate its liquidity position. 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,
sufficient incremental revenues are not realized and/or debt or equity financing
is not available, the Company would consider decreasing non-core business
spending and implement cost-cutting measures. However, without additional
funding, it is unlikely the Company will be able to fund it
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<PAGE>
current level of operations and, as a result, may have to significantly curtail
its operations and research and development efforts. The Company anticipates
that it will need to obtain additional sources of funding in order to continue
its ongoing operations according to its current plans. Management believes that
through sales of its commercial cooking systems, minimum royalties, technology
transfer fees and the possibility of raising capital through debt and equity
financing, the Company will have adequate funding for its continued operations
and research and development efforts throughout 2001. However, if the Company is
unable to obtain additional financing, it will have to curtail its current level
of operations and research and development. No assurances can be made that the
Company will actually obtain the necessary funding to finance its operations.
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 Note
5 of the "Notes to Condensed Financial Statements".
17
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds.
In August 2000, the Company sold 21,000 shares of its Series A
Convertible Preferred Stock at $100.00 per share to the Gas
Research Institute in a private transaction that was exempt from
the registration provisions of the Securities Act of 1933 under
Section 4 (2) of the Securities Act.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On July 12, 2000, the Annual Meeting of Stockholders of the Company was
held in Dallas, Texas. At the Annual Meeting, the Company's stockholders
elected five (5) individuals to serve as the Company's Board of Directors until
the next Annual Meeting of the Stockholders and until their successors are
elected and duly qualified. The table presented below indicates the number of
votes cast in favor of the election of such persons as directors and the number
of votes withheld.
<TABLE>
<CAPTION>
Name of Director Number of Votes For Withheld Votes
---------------- ------------------- --------------
<S> <C> <C>
Marion H. Antonini 13,036,338 694,076
Jeffery B. Bogatin 13,062,338 668,076
Richard N. Caron 13,072,462 657,952
Donald J. Gogel 13,144,319 586,095
Sir Anthony Jolliffe 13,134,378 596,036
</TABLE>
In addition to the election of the Company's Board of Directors, the
stockholders approved the following proposal at the Annual Meeting:
1. A proposal to amend the Company's 1994 Stock Option Plan, as amended,
to increase the number of shares of Common Stock reserved for issuance
under the plan by 1,000,000 shares. Aggregates of 7,932,805 shares
were voted for this proposal, 865,139 shares voted against this
proposal and 30,470 shares abstained. There were 4,902,000 broker non-
votes with respect to this proposal.
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<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1: Amendment to Certificate of Incorporation -
Certificate of Designation of Series A
Convertible Preferred Stock
Exhibit 27: Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
A Form 8-K was filed on August 16, 2000, pursuant to Item 5,
indicating the Company had secured a $2.1 million investment
from the Gas Research Institute.
A Form 8-K was filed on October 23, 2000 under Item 4 to
report the engagement of BDO Seidman, LLP as the Company's
independent public accountant with respect to its fiscal
year ending December 31, 2000.
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<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/ Marc Jacobson
------------------
Marc Jacobson
Interim Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Dated November 14, 2000
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