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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter ended June 30, 2002
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 August 9, 2002
------------------- ----------------------------
Common Stock, $0.01 Par Value 19,057,193
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TURBOCHEF TECHNOLOGIES, INC.
TABLE OF CONTENTS
FORM 10-Q ITEM PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2002 (unaudited) and
December 31, 2001..............................................................3
Unaudited Interim Condensed Statements of Operations for the
three and six months ended June 30, 2002 and 2001..............................4
Unaudited Interim Condensed Statements of Cash Flows for the
six months ended June 30, 2002 and 2001........................................5
Notes to the Interim Condensed Financial Statements (unaudited)................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.....................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................16
Item 2. Changes in Securities and Use of Proceeds......................................17
Item 3. Defaults Upon Senior Securities................................................17
Item 4. Submission of Matters to a Vote of Security Holders............................17
Item 5. Other Information..............................................................17
Item 6. Exhibits and Reports on Form 8-K...............................................17
Signatures.....................................................................18
2
TurboChef Technologies, Inc.
Balance Sheets
(Amounts in Thousands, Except Share Data)
June 30, December 31,
2002 2001
------------- -----------------
(Unaudited)
-------------
Assets
Current assets:
Cash and cash equivalents $ 692 $ 4,498
Accounts receivable net of allowance for doubtful accounts of
$69 and $70 at June 30, 2002 and December 31, 2001, respectively 1,716 979
Accounts receivable - other 735 735
Inventory 2,616 1,857
Prepaid expenses - 61
------------- -----------------
Total current assets 5,759 8,130
------------- -----------------
Property and equipment, net 251 380
Other assets 148 162
------------- -----------------
Total assets $ 6,158 $ 8,672
============= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 934 $ 373
Accounts payable - other 1,390 1,390
Accrued expenses 497 517
Notes payable 327 327
Accrued upgrade and warranty costs 801 1,038
------------- -----------------
Total current liabilities 3,949 3,645
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value and $100.00 stated value.
Authorized 5,000,000 shares. 30,000 and 51,000 issued at
June 30, 2002 and December 31, 2001, respectively 2,430 4,530
Common stock, $.01 par value. Authorized 50,000,000 shares.
Issued 19,057,193 and 18,418,213 shares at
June 30, 2002 and December 31, 2001, respectively 191 184
Additional paid-in capital 46,106 43,628
Accumulated deficit (43,604) (40,458)
Notes receivable for stock issuances (2,463) (2,406)
Treasury stock - at cost 32,130 shares in 2001 and 2000 (451) (451)
------------- -----------------
Total stockholders' equity 2,209 5,027
------------- -----------------
Total liabilities and stockholders' equity $ 6,158 $ 8,672
============= =================
- ----------
The accompanying notes are an integral part of these financial statements.
3
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Operations
(Amounts in Thousands, Except Share Data)
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Product sales $ 905 $ 778 $ 2,734 $ 1,259
------------ ------------ ------------ ------------
Total revenues 905 778 2,734 1,259
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 414 372 1,413 669
Research and development expenses 142 281 310 689
Selling, general and administrative expenses 2,106 1,412 4,077 2,841
------------ ------------ ------------ ------------
Total costs and expenses 2,602 2,065 5,800 4,199
------------ ------------ ------------ ------------
Operating loss (1,787) (1,287) (3,066) (2,940)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 36 21 79 62
Interest expense (24) - (26) -
Other income (expense) (1) 39 2 12
------------ ------------ ------------ ------------
11 60 55 74
------------ ------------ ------------ ------------
Net loss $ (1,706) $ (1,227) $ (3,011) $ (2,866)
============ ============ ============ ============
Preferred stock dividends 60 36 155 43
Beneficial conversion of Series B preferred stock - 380 - 380
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (1,836) $ (1,643) $ (3,166) $ (3,289)
============ ============ ============ ============
Loss per common share - basic and diluted $ (0.10) $ (0.10) $ (0.17) $ (0.21)
============ ============ ============ ============
Weighted average number of common
shares outstanding - basic and diluted 19,046,644 15,858,918 18,746,323 15,794,031
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Cash Flows
(Amounts in Thousands)
Six Months Ended June 30,
2002 2001
-------------- ------------
Cash flows from operating activities:
Net loss $ (3,011) $ (2,866)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 274 170
Non-cash interest on notes receivable from employees and directors (65) (34)
Non-cash compensation expense 24 (111)
Changes in operating assets and liabilities:
Accounts receivable (737) 533
Inventories (850) (87)
Prepaid expenses and other assets 61 309
Accounts payable 657 (1,180)
Accrued expenses (150) (13)
-------------- ------------
Net cash used in operating activities (3,797) (3,279)
-------------- ------------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (40) (36)
-------------- ------------
Net cash used in investing activities (40) (36)
-------------- ------------
Cash flows from financing activities:
Proceeds for the sale of preferred stock - 2,000
Proceeds for the sale of common stock - 500
Proceeds for the issuance of a convertible note - 1,000
Payment of broker commission on the sale of common stock (25) -
Repayments of notes receivable from employees 8 -
Proceeds from the exercise of stock options 48 -
-------------- ------------
Net cash provided by financing activities 31 3,500
-------------- ------------
Net increase (decrease) in cash and cash equivalents (3,806) 185
Cash and cash equivalents at beginning of period 4,498 1,417
-------------- ------------
Cash and cash equivalents at end of period $ 692 $ 1,602
============== ============
Supplemental disclosures of noncash activities:
Noncash financing activity - accrued preferred
stock dividend $ 155 $ 43
============== ============
Preferred stock dividends through the issuance of common stock $ 363 $ -
============== ============
Conversion of preferred stock $ 2,100 $ -
============== ============
Beneficial conversion of preferred stock $ - $ 380
============== ============
The accompanying notes are an integral part of these financial statements.
5
TURBOCHEF TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
June 30, 2002
1) Basis of Presentation
TurboChef Technologies, Inc. ("TurboChef" or "the Company") was incorporated on
April 3, 1991. The Company is engaged primarily in designing, developing and
marketing its proprietary rapid cook technologies. TurboChef's proprietary rapid
cook oven, which requires no ventilation, employs a combination of high speed
forced air and microwave energy 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 commercial and residential ovens currently
available.
The Company's commercial oven employs the Company's proprietary cooking
technologies to quickly, efficiently and evenly transfer, disperse and control
the heat used in the cooking process. In addition, because of the TurboChef
oven's moisture retention, browning, crisping and toasting capabilities, the
Company believes that the characteristics of most food items cooked in a
TurboChef oven (including their flavor, texture and appearance) are superior in
quality to those achieved using most other cooking methods.
Management believes that the Company operates in one primary business
segment.
The financial statements of the Company as of June 30, 2002 and 2001,
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 accounting principles generally accepted in the
United States of America ("GAAP") 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, 2001 balance sheet was derived from audited
financial statements and notes included in the Company's Annual Report on Form
10-K for the year ending December 31, 2001, but does not include all disclosures
required by GAAP. It is suggested that these financial statements be read in
conjunction with the financial statements and notes included in the
aforementioned Form 10-K. The results of operations for the three and six months
ended June 30, 2002 are not necessarily indicative of the results to be expected
for the full year.
Certain amounts in prior period's financial statements have been
reclassified to conform to current year presentation.
Basic net loss per common share is based on 19,046,644 and 15,858,918
weighted average shares outstanding for the three months ended June 30, 2002 and
2001, respectively. For the six months ended June 30, 2002 and 2001 basic net
loss per common share is based on 18,746,323 and 15,794,031 weighted average
shares outstanding, respectively. For the three and six months ended June 30,
2002 and 2001, the Company did not report any incremental shares of potentially
dilutive stock, as their effect was anti-dilutive.
6
2) Liquidity
TurboChef's capital requirements in connection with its product and
technology development and marketing efforts have been and will continue to be
significant. Additional capital will be required to operate and expand the
Company's operations. Since its inception, the Company has incurred significant
operating losses and has been substantially dependent on loans and capital
contributions from its principal stockholders and proceeds from the sale of its
securities. Furthermore, the Company will continue to be dependent on outside
sources of financing for the foreseeable future to fund its working capital
needs. The Company anticipates that it may need to raise additional capital by
the fourth quarter of 2002. No assurances can be made that the Company will
generate the necessary sales from its rapid cook ovens or from the proceeds from
the sales of its securities or other financing sources to generate the necessary
working capital. As a result of these conditions, the independent certified
public accountant's report on the Company's financial statements for the year
ended December 31, 2001 contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
The Company has, and will continue to hold inventory, due to its long
manufacturing cycle. As of June 30, 2002, the Company held $1,478,000 of
finished goods inventory (ovens), $61,000 of demonstration inventory (ovens used
for customer demonstrations, tests and pilot programs) and $1,077,000 of parts
inventory (used for manufacturing and service). The Company will offer
demonstration inventory free of charge or at reduced prices to certain
potentially large customers, who wish to test and evaluate an oven prior to
purchase. Should sales fail to materialize, or materialize at slower rates than
currently anticipated by the Company, additional working capital will be
required to cover the carrying costs of component parts and purchase completed
ovens. No assurances can be made that the Company will generate the necessary
sales of its ovens or from the proceeds from the sales of its securities or
other financing sources to generate the necessary working capital.
In March 2002, the Company agreed to purchase from the Shandong Xiaoya
Group ("Xiaoya") approximately $14 million of C-3 ovens over a seventeen month
period. In addition, in connection with the manufacturing agreement the Company
will be required to use working capital to purchase certain component parts that
will be supplied to Xiaoya for use in the ovens. Although the Company entered
into the agreement with Xiaoya in anticipation that its sales of C-3 ovens will
increase from current levels, there can be no such assurance that any sales will
materialize. The Company does not currently have a significant number of
purchase orders or firm commitments to purchase ovens in the future. The Company
is currently exploring alternative sources of financing for its inventory and
receivables. No assurances can be made that the Company will be successful in
developing any of these sources or that any terms that may be offered will be
acceptable to the Company.
In February 2002, the Company and Whitbread Group PLC ("Whitbread") entered
into an agreement to terminate an extended warranty originally purchased by
Whitbread, from the Company, in September 1999. Under the new agreement,
TurboChef is required to pay Whitbread (pound)460,000 (approximately $670,000)
plus VAT over a 24 month period, beginning in March 2002. In return, Whitbread
will release TurboChef from its obligation to continue its warranty on 260 older
model ovens. On signing the agreement, TurboChef made an initial payment to
Whitbread of (pound)50,000 (approximately $72,000) plus VAT and thereafter has
agreed to pay (pound)15,000 (approximately $22,000) plus VAT a month for the
next 24 months, with a final payment of (pound)50,000 plus VAT due the final
month.
7
The Company continues to expand its direct sales efforts and estimates that
approximately $150,000 per month in operating costs has been added since
December 31, 2001. In addition, additional working capital will be required
should the Company pursue the development, manufacturing and marketing of a
residential oven. The Company does not currently anticipate any significant
increases in lease payments or any other long-term fixed obligations from
current levels during the remainder of fiscal 2002.
The Company anticipates that it will need to obtain additional sources of
funding in order to continue its ongoing operations as currently conducted.
However, no assurances can be made that the Company will actually obtain the
necessary funding to finance its operations. A failure to obtain additional
funding would have significant adverse effects on the Company. All of the above
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
3) Long-Term Contracts
In March 2002, the Company agreed to purchase from Xiaoya approximately $14
million of C-3 ovens over a seventeen month period. Although the Company entered
into the agreement with Xiaoya in anticipation that its sales of C-3 ovens will
increase from then current levels, there can be no such assurance that any sales
will materialize. The Company does not currently have a significant number of
purchase orders or firm commitments to purchase ovens in the future.
In February 2002, the Company and Whitbread entered into an agreement to
terminate an extended warranty originally purchased in September, 1999. Under
the new agreement, TurboChef is required to pay Whitbread (pound)460,000
(approximately $670,000) plus VAT over a 24 month period, beginning in March
2002. In return, Whitbread will release TurboChef from its obligation to
continue its warranty on 260 older model ovens.
4) Authoritative Pronouncements
In June 2001, respectively, the Financial Accounting Standards Board
("FASB") issued FASB Statement No. 141, Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective for years
beginning after December 31, 2001. Under the new rules, goodwill will no longer
be amortized but will be subject to annual impairment tests in accordance with
the statements. Other intangible assets will continue to be amortized over their
useful lives.
Effective January 1, 2002, the Company adopted the new rules on accounting
for goodwill and other intangible assets. The Company did not recognize goodwill
amortization in prior periods. The company also evaluated its other intangible
assets and concluded that no additional adjustments were needed to reduce the
book value of these assets. The Company will continue to evaluate these assets
on a quarterly basis and make any and all required adjustments.
In June 2001 and August 2001, respectively, FASB finalized Statement No.
143, Accounting for Asset Retirement Obligations (SFAS 143) and Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
SFAS 143 requires that the fair value for an asset retirement obligation be
recognized in the period in which it is incurred, if a reasonable estimate of
fair value can be made, and that the carrying amount of the asset, including
capitalized asset retirement costs, be tested for impairment. SFAS 143 is
effective for
8
fiscal years beginning after June 15, 2002. Management does not believe this
statement will have a material effect on the Company's financial position or
results of operations.
SFAS 144 prescribes financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed of, and specifies
when to test a long-lived asset for recoverability. Effective January 1, 2002,
the Company adopted this new rule. Management has determined that this will not
have a material effect on the Company's financial position or results of
operations.
In April 2002, FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS 145). This statement eliminates the current requirement that gains and
losses on debt extinguishment must be classified as extraordinary items in the
income statement. Instead, such gains and losses will be classified as
extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classification. In
addition, SFAS 145 eliminates an inconsistency in lease accounting by requiring
that modifications of capital leases that result in reclassification as
operating leases be accounted for consistent with sale-leaseback accounting
rules. The statement also contains other nonsubstantive corrections to
authoritative accounting literature. The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. Adoption of this standard will not have any effect on the
Company's consolidated financial statements.
On June 20, 2002, the FASBs Emerging Issues Task Force (EITF) reached a
partial consensus on Issue No. 02-03, Recognition and Reporting of Gains and
Losses on Energy Trading Contracts under EITF Issues No. 98-10, Accounting for
Contracts Involved in Energy Trading and Risk Management Activities, and No.
00-17, Measuring the Fair Value of Energy-Related Contracts in Applying Issue
No. 98-10. The EITF concluded that, effective for periods ending after July 15,
2002, mark-to-market gains and losses on energy trading contracts (includes
those to be physically settled) must be retroactively presented on a net basis
in earnings. Also, companies must disclose volumes of physically-settled energy
trading contracts. Adoption of this standard will not have any effect on the
Company's consolidated financial statements.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146), which addresses
accounting for restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force (EITF) Issue No.
94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring
activities initiated after December 31, 2002. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date of a companys commitment to an exit plan. SFAS
No. 146 also establishes that the liability should initially be measured and
recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of
recognizing future restructuring costs as well as the amount recognized. The
Company does not believe that the adoption of this standard will not have any
effect on the Company's consolidated financial statements.
5) Subsequent Events
In July, 2002, the Company issue a Promissory Note of $1,000,000 to Grand
Cheer Company LTD ("Grand Cheer"), a principal stockholder of the Company, which
is secured by 350 C-3 ovens. The note is due on October 15, 2002. A non-cash
finance charge of $200,000 is payable upon the maturity of the note through a
reduction in the exercise price from $1.20 to $1.00 for 1,000,000 warrants
previously issued to Grand Cheer upon their purchase of the Company's Series B
Convertible Preferred Stock. The $200,000 finance charge will be recorded as
interest expense during the third quarter of 2002.
Critical Accounting Estimates
We have identified certain accounting policies as critical to our business
and to the results of our operations which entail significant estimates. These
critical policies are further discussed below. There are other significant
accounting policies followed by us, please refer to the notes to the
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2001.
Inventories
Inventories are valued at the lower of cost or market and primarily consist
of ovens and replacements parts. The Company determines cost for ovens by the
specific cost method. Freight costs are included in costs of goods sold. Ovens
used for demonstration and testing are generally depreciated over a one-year
period.
Product Warranty
The Company's rapid cook ovens are under warranty against defects in
material and workmanship for a period of one year. Anticipated future warranty
costs are estimated, based upon historical expenses, and are recorded in the
period cooking systems are sold.
Revenue
Revenue is recognized when substantially all obligations relating to the
sales are completed. The revenue cycle is substantially complete after
installation; therefore, revenue is recognized after installation for sales
directly to customers. Inventory is shipped to a customer designated agent when
the customer has assumed responsibility for installation. For sales where the
customer has assumed the installation responsibility, substantially all
obligations are completed relating to the sale of the product at the time of
delivery to the customer designated agent.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of TurboChef Technologies, Inc. to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the ability to obtain additional financing necessary to continue operations; the
uncertainty of consumer acceptance of new products or technologies that may be
offered by TurboChef; the need to hire and retain key personnel; relationships
with and dependence on third-party equipment manufacturers and suppliers;
uncertainties relating to business and economic conditions in markets in which
TurboChef operates; uncertainties relating to customer plans and commitments;
potential performance issues with suppliers; the highly competitive environment
in which TurboChef operates; potential entry of new, well-capitalized
competitors into the markets served by TurboChef; uncertainties inherent in
international sales including foreign currency fluctuations; uncertainty
regarding strategic relationships and alliances and the ability to protect
TurboChef's proprietary information. The words "believe," "expect,"
"anticipate," "intend," and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
any of these forward-looking statements, which speak only as of the date of the
statement was made. TurboChef undertakes no obligation to update any
forward-looking statement..
GENERAL
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations, financial condition and liquidity. The discussion should be read
in conjunction with the financial statements and notes thereto contained
elsewhere in this report.
9
The Company is engaged primarily in designing, developing and marketing its
proprietary rapid cook technologies. TurboChef's proprietary rapid cook ovens,
which requires no ventilation, employs a combination of high speed forced air
and microwave energy 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 commercial and residential ovens currently available.
The Company's commercial ovens employs the Company's proprietary cooking
technologies to quickly, efficiently and evenly transfer, disperse and control
the heat used in the cooking process. In addition, because of the TurboChef
oven's moisture retention, browning, crisping and toasting capabilities, the
Company believes that the characteristics of most food items cooked in a
TurboChef cooking oven (including their flavor, texture and appearance) are
superior in quality to those achieved using most other cooking methods.
The Company believes its technology offers the following unique features to
its customers:
. Cooking speeds 5-10 times faster than a conventional oven
. Quality is equal to or higher than a conventional oven
. Maintains high consistency of cooked product
. Versatility of cooking platform (bake, broil, grill, air
fried, poached and steamed cooking profiles)
. Ventless operation
. Through the Company's Menu in a Minute software technology,
the menus and cook settings can be easily changed with
minimal labor cost
The Company launched the current version of its commercial oven, the
TurboChef C-3, in the second quarter of 2000. To date, the TurboChef rapid cook
oven has provided cooking solutions to various quick service restaurants,
convenience stores, hotels and traditional restaurants in the United Kingdom,
Europe and the United States. In addition, the Company has provided cooking
solutions to non-traditional operators in the food service business such as
stadiums, cinemas and service stations.
The Company currently sells its C-3 oven through a direct sales force in
North America, the United Kingdom, Europe and Asia. Until May 2001, the
Company's C-3 ovens were marketed in the United States through Maytag
Corporation ("Maytag") and its subsidiary, G. S. Blodgett ("Blodgett"), pursuant
to the terms of a series of agreements in which the Company granted them the
exclusive right to sell its C-3 ovens in North America. Under the agreements the
Company retained the right to sell directly outside of North America, with the
exception of selling to U.S. based customers overseas. In the first quarter of
2001, the Company and Maytag entered into arbitration with respect to certain
disputes under the agreements which arbitration is pending (see Part 2, Item 1 -
Legal Proceedings). In May 2001, the Company regained from Maytag and Blodgett
the right to sell its C-3 ovens products directly in the United States and began
building its own sales force to make direct oven sales.
The Company is currently expanding its direct marketing and sales efforts
throughout North America, the United Kingdom, Europe and Asia. The Company's
primary sales office is located in Dallas, Texas. In addition, the Company has
sales offices in New York, the United Kingdom, and the Netherlands.
In addition to its direct sales force, the Company is in the process of
seeking to develop multiple distribution channels through the use of third party
distributors, manufactures representatives, agents and
10
wholesale food distributors. The Company is also considering entering into
strategic marketing alliances with third parties who have established
relationships or synergies with mutual prospective customers.
In the second quarter of 2000, TurboChef established a manufacturing
venture with Xiaoya, in China in which Xiaoya was granted the exclusive
manufacturing rights for the C-3 oven. In March 2002, TurboChef signed a new
agreement to purchase approximately $14 million of C-3 ovens from Xiaoya over
the next 17 months.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2001
Revenues for the quarter ended June 30, 2002 were $905,000, compared to
revenues of $778,000 for the quarter ended June 30, 2001. This increase is
primarily attributable to a 51% increase in the number of C-3 ovens sold during
the period. This increase is principally due to sales generated through trade
shows, direct marketing and continued sales efforts with new and existing
customers. Approximately 23% of the sales during the quarter ended June 30, 2002
were to one customer. Continued sales to this customer are anticipated to be
material during the remainder of fiscal 2002. There were no research and
development or royalty revenues in the first or second quarter of 2002 or 2001.
Cost of sales for the quarter ended June 30, 2002 were $414,000 compared to
$372,000 for cost of sales in the quarter ended June 30, 2001. The increase of
$42,000 is principally due to an increase in the number of C-3 ovens sold during
the recent quarter.
Gross profit on product sales for the quarter ended June 30, 2002 increased
$85,000 to $491,000, when compared to gross profit on product sales of $406,000
during the quarter ended June 30, 2001. This increase is due primarily to a
greater number of C-3 ovens sold and a lower manufacturing cost of ovens sold in
the first quarter of 2002, offset in part by a lower average sales price
received on the ovens. The lower average sales price is principally due to an
increase in sales to customers that purchase in greater volume and therefore,
receive quantity discounts.
Research and development expenses for the quarter ended June 30, 2002
decreased $139,000, to $142,000, as compared to $281,000 for the quarter ended
June 30, 2001. The decrease in research and development expense principally
relates to a reduction in payroll and related expenses of $79,000 and occupancy
expenses totaling $37,000.
Selling, general and administrative expenses for the quarter ended June 30,
2002 increased $724,000, to $2,136,000 from comparable expenses of $1,412,000
for the quarter ended June 30, 2001. The increase is primarily due to an
increase in general administrative costs, which included additional salaries of
$308,000 and other sales and marketing expenses of $398,000. In addition, the
Company accrued $100,000 relating to the settlement of a lawsuit with a former
vendor and $51,000 related to restructuring charges in the United Kingdom. These
increases were due to the Company's continued expansion of sales and marketing
departments after Maytag terminated the commercial License Agreement (see Part
2, Item 1 - Legal Proceedings) in the first quarter of 2001.
Other income was $11,000 for the quarter ended June 30, 2002, compared to
$60,000 for the quarter ended June 30, 2001. The decrease in income is
attributable to $32,000 foreign exchange gains recorded in the second quarter of
2001, as compared to a loss of $1,000 in the second quarter of 2002 and a
decrease in interest income of $15,000, principally due to a decrease in cash
balances.
11
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2001
Revenues for the six months ended June 30, 2002 were $2,734,000, compared
to revenues of $1,259,000 for the six months ended June 30, 2001. This increase
is primarily attributable to a 156% increase in unit sales of C-3 ovens sold
during the period. This increase is principally due to sales generated through
trade shows, direct marketing and continued sales efforts with new and existing
customers. Approximately 30% of the sales during the six months ended June 30,
2002 were to one customer. Continued sales to this customer are anticipated to
be material during the remainder of fiscal 2002.
Cost of sales for the six months ended June 30, 2002 were $1,413,000 an
increase of $744,000 for the cost of sales of $669,000 for the six months ended
June 30, 2001. This increase is principally due to an increase in the number of
C-3 ovens sold during the comparable periods.
Gross profit/(loss) on product sales for the six months ended June 30, 2002
increased $731,000 to $1,321,000, when compared to a gross profit/(loss) on
product sales of $590,000 during the six months ended June 30,2001. The increase
is due primarily to an increase in sales of C-3 ovens, offset in part, by a
lower average gross margin earned on the ovens sold during the period. The lower
average sales price is principally due to an increase in sales to customers that
purchase in greater volume and therefore, receive quantity discounts.
Research and development expenses for the six months ended June 30, 2001
decreased $379,000, to $310,000, as compared to $689,000 for the six months
ended June 30, 2001. The decrease in research and development expense
principally relates to a reduction in payroll and related expenses of $256,000
and a reduction of occupancy expenses of $61,000.
Selling, general and administrative expenses for the six months ended June
30, 2002 increased $1,236,000, to $4,077,000 from comparable expenses of
$2,841,000 for the six months ended June 30, 2001. This increase is principally
due to an increase in travel, trade show and related marketing expenditures of
$434,000, an increase in salaries and consulting services of $350,000, an
increase in non-cash compensation expenses of $238,000 and an increase in
depreciation and amortization of $104,000.
Other income was $55,000 for the six months ended June 30, 2002, as
compared to $74,000 for the six months ended June 30, 2001. The $19,000 decrease
in other income is primarily attributable to an increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
TurboChef's capital requirements in connection with its product and
technology development and marketing efforts have been and will continue to be
significant. Additional capital will be required to operate and expand the
Company's operations. Since its inception, the Company has incurred significant
operating losses and has been substantially dependent on loans and capital
contributions from its principal stockholders and proceeds from the sale of its
securities. Furthermore, the Company will continue to be dependent on outside
sources of financing for the foreseeable future to fund its working capital
needs. The Company anticipates that it may need to raise additional capital by
the fourth quarter of 2002. No assurances can be made that the Company will
generate the necessary sales from its rapid cook systems or from the proceeds
from the sales of its securities or other financing sources to generate the
necessary working capital. As a result of these conditions, the independent
certified public accountant's report on the Company's financial statements for
the year ended December 31, 2001 contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
12
The Company has, and will continue to hold inventory, due to its long
manufacturing cycle. As of June 30, 2002, the Company held $1,478,000 of
finished goods inventory (ovens), $61,000 of demonstration inventory (ovens used
for customer demonstrations, tests and pilot programs) and $1,077,000 of parts
inventory (used for manufacturing and service). The Company will offer
demonstration inventory free of charge or at reduced prices to certain
potentially large customers, who wish to test and evaluate an oven prior to
purchase. Should sales fail to materialize, or materialize at slower rates than
currently anticipated by the Company, additional working capital will be
required to cover the carrying costs of component parts and purchase completed
ovens. No assurances can be made that the Company will generate the necessary
sales of its ovens or from the proceeds from the sales of its securities or
other financing sources to generate the necessary working capital.
In March 2002, the Company agreed to purchase from Xiaoya approximately $14
million of C-3 ovens over a seventeen month period. In addition, in connection
with the manufacturing agreement the Company will be required to use working
capital to purchase certain component parts that will be supplied to Xiaoya for
use in the ovens. Although the Company entered into the agreement with Xiaoya in
anticipation that its sales of C-3 ovens will increase from current levels,
there can be no such assurance that any sales will materialize. The Company does
not currently have a significant number of purchase orders or firm commitments
to purchase ovens in the future. The Company is currently exploring alternative
sources of financing for its inventory and receivables. No assurances can be
made that the Company will be successful in developing any of these sources or
that any terms that may be offered will be acceptable to the Company.
In February 2002, the Company and Whitbread entered into an agreement to
terminate an extended warranty originally purchased in September, 1999. Under
the new agreement, TurboChef is required to pay Whitbread(pound)460,000
(approximately $670,000) plus VAT over a 24 month period, beginning in March
2002. In return, Whitbread will release TurboChef from its obligation to
continue its warranty on 260 older model ovens. On signing the agreement,
TurboChef will make an initial payment to Whitbread of(pound)50,000
(approximately $72,000) plus VAT and thereafter pay(pound)15,000 (approximately
$22,000) plus VAT a month for the next 24 months, with a final payment of
(pound)50,000 plus VAT due the final month.
In July, 2002, the Company issue a Promissory Note of $1,000,000 to Grand
Cheer Company LTD. ("Grand Cheer"), a principal stockholder of the Company which
is secured by 350 C-3 ovens. The note is due on October 15, 2002. A non-cash
finance charge of $200,000 is payable upon the maturity of the note through a
reduction in the exercise price from $1.20 to $1.00 for 1,000,000 warrants
previously issued to Grand Cheer upon their purchase of the Company's Series B
Convertible Preferred Stock. The $200,000 finance charge will be recorded as
interest expense during the third quarter of 2002.
The Company continues to expand its direct sales efforts and estimates that
approximately $150,000 per month in operating costs has been added since
December 31, 2001. In addition, additional working capital will be required
should the Company pursue the development, manufacturing and marketing of a
residential oven. The Company does not currently anticipate any significant
increases in lease payments or any other long-term fixed obligations from
current levels during the remainder of 2002.
At June 30, 2002, the Company had working capital of $1,810,000 as compared
to working capital of $4,485,000 at December 31, 2001. The $2,675,000 working
capital decrease resulted primarily from operating losses incurred during the
first half of 2002.
13
Cash used in operating activities was $3,797,000 for the six months ended
June 30, 2002, as compared to cash used in operating activities of $3,279,000
for the six months ended June 30, 2001. The net loss of $3,011,000, for the six
months ended June 30, 2002, included $233,000 of non-cash charges (depreciation,
amortization, non-cash interest and non-cash compensation expenses), as compared
to $25,000 for the six months ended June 30, 2001. Net cash used in operating
activities for the six months ended June 30, 2002 was negatively impacted by
increases in accounts receivable ($737,000) and inventory ($850,000) and
decreases (payments) on accrued expenses of $150,000. These operating cash
requirements were partially offset by an increase in accrued accounts payable of
$657,000.
Cash used in investing activities for the six months ended June 30, 2002,
was $40,000, compared to $36,000 for the six months ended June 30, 2001. The
uses of cash were made up of capital equipment purchases during the periods. The
Company anticipates an increase in capital expenditures to approximately
$100,000 during fiscal 2002, in order to build its global sales and marketing
infrastructure.
Cash provided by financing activities for the six months ended June 30,
2002 was $31,000 compared to $3,500,000 for the six months ended June 30, 2001.
During the first six months of 2001, the Company raised $2,000,000 from the sale
of its Series B convertible preferred and $1,000,000 from the issuance of a 8%
promissory note and $500,000 from the sale of common stock.
At June 30, 2002, the Company had cash and cash equivalents of $692,000, as
compared to cash and cash equivalents of $1,602,000 at December 31, 2001.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Approximately 46% of the Company's revenues in the second quarter of 2002
were derived from sales outside of the United States, and its territories. For
the six months ended June 30, 2002, approximately 38% of the Company's revenues
were derived from sales outside of the United States, and its territories. These
sales and related accounts receivable, the salaries of employees located outside
of the United States and approximately 20% of selling, general and
administrative expenses are denominated in foreign currencies, including British
pounds and the Euro. The Company is subject to risk of financial loss resulting
from fluctuations in exchange rates of these currencies against the US dollar.
As of June 30, 2002, the Company does not have any assets or liabilities
that have the potential for market risk that would affect the operating results
or cash flow of the Company and is not engaged in any hedging activity.
14
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In 2001, the Company commenced an arbitration proceeding in Texas against
its former strategic partner, the Maytag Corporation ("Maytag"). In July 2002,
in response to an Iowa court proceeding brought by Maytag which is discussed
below, the Company filed an amended arbitration claim removing two of its
pending claims from the Texas arbitration which claims may be filed as a future
arbitration in Boston, Massachusetts. Maytag has made certain counterclaims
against the Company in the arbitration and is seeking in excess of $70 million
in damages under its counterclaims. The Company believes that Maytag's claims
are without merit and intend to vigorously defend against Maytag's allegations.
In May 2002, Maytag filed a complaint in Iowa federal court seeking, among
other things, to require that two of the Company's claims originally filed and
pending in the Texas arbitration be decided only in a separate arbitration
proceeding in Boston, Massachusetts. As noted above, the Company determined not
to oppose Maytag's claim to arbitrate certain of the Company's claims in Boston,
Massachusetts. In addition, Maytag's complaint in the Iowa proceeding also
alleges that the Company publicized false and misleading statements about
Maytag's use of the Company's intellectual property in its residential
appliances in a January 2002 press release and in certain other unidentified
statements. Based upon this allegation, Maytag asserts claims that the Company
caused false advertising with respect to Maytag's goods and services, that the
Company has intentionally interfered with Maytag's prospective business, that
the Company has defamed Maytag and that the Company has unfairly competed with
Maytag. Unlike Maytag's counterclaims in the Texas arbitration proceeding, its
complaint in the Iowa proceeding does not specify the dollar amount of damages
sought. In July 2002, the Company filed a motion to dismiss the Maytag complaint
or, in the alternative, stay the Iowa proceeding pending resolution of the Texas
arbitration. Maytag has not responded to this motion. The Company believes that,
other than with respect to Maytag's claim for removal of certain of the
Company's Texas arbitration claims to Boston, Maytag's allegations are without
merit and the Company intends to vigorously defend this action. The outcome of
any litigation is uncertain and an unfavorable outcome could have an adverse
effect on our operating results and future operations. Since the outcome of the
arbitration proceeding is uncertain, no adjustments have been made to the
financial statements.
15
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS.
In April 2002, the Company issued 57,985 shares of its $.01 per share par
value common stock in lieu of a cash dividend due upon the Company's Series B
Convertible Preferred Stock.
In April 2002, the Company issued 33,529 shares of its $.01 per share par
value common stock in lieu of a cash dividend and interest payment due upon the
Company's Series C Convertible Preferred Stock.
These issuance's were made pursuant to the exemption from registration
contained in Section 3(a)(9) and/or Section 4(2), respectively, of the
Securities Act of 1933.
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
10.1 Supplementary Agreement to the OEM Manufacturing
Contract executed on March 27, 2002 between
Turbochef Technologies, Inc. and Shandong Xiaoya,
which was previously filed is being filed as an
exhibit to this report to unredact certain
portions of the agreement. Portions of this
exhibit have been omitted and filed separately
with the Securities and Exchange Commission
pursuant to a request for confidential treatment
of the omitted portions.
(b) REPORTS ON FORM 8-K
None
16
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/ Stuart L. Silpe
--------------------------------
Stuart L. Silpe
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Dated August 14, 2002
17