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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
Form 10-K
For Annual and Transition Reports pursuant to Sections 13 or
15(d) of the Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
___________ to ____________
Commission File Number 0-23478
_________________________
TurboChef Technologies, Inc.
(Exact name of Registrant as specified in its Charter)
DELAWARE 48-1100390
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
10500 Metric Drive, Suite 128 75243
Dallas, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(214) 341-9471
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $0.01 Par Value
(Title of Class)
_________________________
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to this
Form 10-K. YES [ ] NO [ ]
Aggregate Market Value of voting stock held by non-affiliates of the
Registrant at March 15, 1999: $52,689,312
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 March 15, 1999
------------------- -----------------
Common Stock, $0.01 Par Value 14,668,818
_________________________
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy materials for its 1999
annual meeting of stockholders are incorporated by reference in Part III hereof.
================================================================================
TURBOCHEF TECHNOLOGIES, INC.
TABLE OF CONTENTS
Form 10-K Item Page
- -------------- ----
Part I.
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 17
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 25
Part III.
Item 10. Directors and Executive Officers of the Registrant.......... 26
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 26
Item 13. Certain Relationships and Related Transactions.............. 26
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................... 27
Signatures.................................................. 32
Item 1. Business
--------
General
TurboChef Technologies, Inc. ("TurboChef Technologies" or "the Company") is a
technology development firm that intends to be the leader in innovation for
residential and commercial appliances. Currently, it is engaged in designing,
developing and marketing proprietary cooking systems. These systems use
microprocessors to precisely control the distribution of energy used to cook
food over time and across space. Consequently, they achieve higher cooking
speeds and/or quality levels than are achievable with conventional cooking
technologies. In addition, the microprocessors give the cooking systems the
ability to communicate with users and service personnel over computer networks.
The Company's commercial products and technologies have been validated
through utilization and extensive testing by both the Company and a variety of
foodservice operators around the world. Now, the Company is preparing to bring
its technology to residential customers in North America through its Strategic
Alliance Agreement ("Maytag Alliance" or the "Alliance") with Maytag Corporation
("Maytag"). It is also exploring alliance relationships to introduce both the
commercial and residential technologies throughout the world. The Company
intends to build upon its core technology competency, to expand its technology
portfolio by developing other innovative products and increase market
penetration through joint venture, strategic alliance and/or licensing or other
arrangements with companies already engaged in the mass marketing and/or
manufacture of foodservice products.
The Company's commercial cooking systems, marketed under the name
TurboChef, employ the Company's proprietary cooking technologies to quickly,
efficiently and evenly transfer, disperse and control the heat used in the
cooking process. The Company's proprietary computerized control platform
monitors the cooking process and automatically adjusts cook settings during the
cooking cycle for optimum performance. These technologies provide foodservice
operators the flexibility to "cook-to-order" a variety of food items at speeds
which the Company believes are significantly faster than those permitted by
conventional commercial ovens, grills, microwave ovens, and other currently
available high-speed ovens, without sacrificing quality. Among the various
types of foods which can be cooked in a TurboChef cooking system are an 8-ounce
salmon filet in approximately 55 seconds, a 16-inch deluxe par-baked pizza in
approximately 75 seconds, a 1 1/4 lb. lobster in 110 seconds and three 10oz. T-
bone steaks in 160 seconds. In addition, because of the TurboChef cooking
system's moisture retention, browning and crisping capabilities, the Company
believes that the characteristics of most food items cooked in a TurboChef
cooking system (including their flavor, texture and appearance) are superior in
quality to those achieved using other rapid cook ovens, or microwave ovens, and
are equal to, or, in some cases, superior in quality to those achieved using
conventional ovens and grills.
The Company was incorporated on April 3, 1991, as a Kansas corporation and
was reincorporated on August 17, 1993, as a Delaware corporation. The Company
was privately held
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until April 7, 1994. The Company's principal corporate offices are located at
10500 Metric Drive, Suite 128, Dallas, Texas 75243 and its telephone number is
(214) 341-9471.
Rapid Cook Technology
Traditional cooking systems employ a wide range of processes for
transferring heat energy to food. These include: conduction (direct energy
transfer from a hot surface, as in a grill); natural convection (energy transfer
to and from naturally moving air, as in a typical home oven); forced convection
(energy transfer to and from mechanically circulated air, as in a typical
convection oven); air impingement (forced convection with rapidly moving air
directed at the food); induction (heating by the generation of electromagnetic
fields); microwave radiation (heating by the dissipation of microwave energy in
food); and infra-red radiation (heating by light whose wavelength falls below
that of the color red in the electromagnetic spectrum).
Newer cooking systems incorporate two or more of these conventional sources
of energy. For example, some allow cooks to use both microwaves and air
impingement. The Company believes that these systems generally do not provide
tangible advantages to both commercial and residential kitchens because they
typically operate each energy source independently without facilitating their
interaction.
In direct contrast, in its simplest form, the Company's unique, patented
system couples hot air with microwave energy. Just as the inter-twining of two
strings to form a rope gives the rope greater strength than the two strings
could provide on their own, so does the close coupling of the two energy
sources enable faster cooking at higher quality levels than is possible by each
energy source operating independently. The air is forced down from the top of
the oven and suctioned out through a return path that creates a tight air wrap
around food. The air wrap not only browns food more evenly, but also creates
temperature and moisture gradients that enable precisely targeted microwaves to
energize water molecules that cook the food. Microwave energy is introduced
from a direction directly opposite that of the direction of the air flow, thus
capturing the food between the two opposing energy gradients.
Two technological elements make possible the "coupling" described above.
First, precise mechanical design enables a spatial coupling. The flowing air
enshrouds the food in a fashion that is not achievable in traditional convection
or impingement ovens. The microwave energy is directed precisely at those
locations within the cooking cavity where it can contribute maximum value. In
contrast, in most conventional microwave ovens, the energy resonates throughout
the entire chamber. Second, a proprietary microprocessor system couples the hot
air and microwaves temporally. It allows the cook/chef to define the precise
airflow, microwave and, in some cases, temperature conditions required during
different phases of the cooking process.
As a result, the TurboChef system cooks food extremely rapidly, enabling
foods to retain their natural moisture and hence, their appearance, texture and
flavor. Specific advantages over alternative cooking systems include:
. Speed Single servings of most food items can be cooked in under 90 seconds.
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. Quality Foods retain much of their intrinsic moisture and as such, their
tenderness. They can also be browned and/or crisped as desired.
. Flexibility A filtration and proprietary catalyst system strips the air in
the oven of food particles and aromatic by-products of the cooking process.
Thus, foods with very different flavors can be sequentially cooked without
flavor transfer. Indeed, in some circumstances, different foods with similar
cooking characteristics can be cooked simultaneously. Moreover, no external
ventilation is required for most applications.
. Consistency Food cooks uniformly and evenly without the use of any special
ingredient or formulation. Moreover, the microprocessor automatically adjusts
cooking conditions to produce consistent quality even if the cooking process
is unexpectedly interrupted.
Other Products and Applications
The presence of the microprocessor as an intrinsic element of the oven also
gives TurboChef cooking systems a powerful tool to communicate with its users.
For example, cooking programs can be downloaded via computer modem into the
cooking system and the cooking system routinely monitors its own performance
and diagnoses possible problems. To facilitate this process, for its commercial
customers, the Company has developed (and is continuing to enhance and refine)
ChefComm(TM), a software that enables Executive Chefs of food service chains to
program the cooking systems centrally. Thus, for most food service chains, the
use of this system can provide a higher level of cooking quality than is
currently possible. Planned enhancements to ChefComm will also improve oven
reliability -- a critically important food service need.
History
The Company was founded in April 1991, and until March 1994 was engaged
primarily in research and development, limited production operations and test
marketing of its cooking systems. In March 1994, the Company introduced its
first commercial product, the Model D-1 cooking system. In April 1994, the
Company completed an underwritten initial public offering, resulting in net
proceeds of just over $5 million, and became publicly traded on the NASDAQ Small
Cap Stock Market. The Company's common stock was approved for trading on the
NASDAQ National Market effective March 1, 1999. The emphasis on research and
development continued into its first major contract with Whitbread PLC
("Whitbread") in June 1995, when the Company introduced an enhanced product, the
Model D-2 cooking system. The Company concentrated its efforts on the Whitbread
rollout throughout 1996. Whitbread commenced a 30-store test program in the fall
of 1998 in its Pub Partnership Division. As of December 31, 1998, 451 units
have been sold to Whitbread.
In June 1996, the Company completed a secondary public offering of Common
Stock (the "June 1996 Offering") which yielded approximately $10.3 million for
the Company. After the June 1996 Offering, the Company began development of a
direct sales organization in the US. During the first quarter of 1997, the
Company had substantially developed a US direct sales
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infrastructure and marketing program.
In January 1997, the Company entered into a joint venture with The Queally
Group, a large food manufacturer based in Ireland, and formed TurboChef Europe
Limited. The objective of this alliance was to market the Company's cooking
technologies together with value-added food products developed and produced by
Queally. Sales efforts were conducted through the establishment of distribution
agreements with regional foodservice equipment distributors throughout Western
Europe. This joint venture was terminated by mutual agreement in June 1998.
Since that date, the Company has concentrated its European sales and marketing
efforts in the UK region under a new management team operating out of its UK
office.
In January 1997, the Company established a business development office in
Kyoto, Japan to evaluate opportunities within the Asian market. In June 1998
the Company consummated a Purchase Agreement with Japan's Kanematsu Corporation,
a $30 billion multi-national trading company. Pursuant to this agreement,
Kanematsu agreed to purchase a minimum quantity of cooking systems to be
primarily used for market development and seeding. The cooking systems are
marketed through the cooperative efforts of a major Japanese foodservice
equipment distributor (FMI) and a high profile food consultant (Feast
International).
In September 1997 the Company entered into a strategic alliance with Maytag
Corporation to jointly develop residential foodservice products utilizing the
Company's technologies. The Alliance entailed a mutual exchange of each
company's common stock valued at approximately $10 million and Maytag's payment
to TurboChef Technologies for certain research and development activities
related to targeted product initiatives. The Strategic Alliance umbrella
agreement is open-ended and provides for the opportunity of establishing
specific project agreements. In October 1997 the Company entered its first
project agreement with Maytag to explore the potential for adapting the
Company's rapid cook technologies for residential use. The Company received
funding from Maytag for its efforts during this six-month project. In March
1998, a second residential project was initiated pursuant to which the Company
was to develop specific residential cooking prototypes for Maytag. The Company
received research and development fees for this project, which was completed in
March 1999. In July 1998, the Maytag Alliance was expanded to include an
agreement, which calls for Maytag to lead the Company's commercial sales and
marketing initiatives in North America. In addition, Maytag agreed to pay
certain technology transfer fees for research and development activities related
to targeted commercial initiatives. As the Company has previously reported, the
current phase of targeted research and development and the associated per month
payments ended in January and March 1999, respectively. Accordingly, future
revenues from the Maytag Alliance will depend upon the establishment of
additional fee based research and development projects with Maytag and royalties
from the successful commercialization and sales of the products that embody the
Company's technologies.
Opportunities and Strategy
The Company believes that its long-term success is dependent upon the
successful commercialization of its cooking technologies in commercial and
residential products and upon leveraging its core competencies of developing new
innovative technologies. While pursuit of
-5-
opportunities in the commercial cooking markets will continue as a priority, the
Company is also devoting meaningful resources to take advantage of the shift in
American family trends in recent years. Traditionally, the husband was the
primary breadwinner and would arrive home in time for dinner, while the wife
generally did not work outside the home and would prepare dinner for the family
each evening. The shift to two-income families, coupled with longer working
hours, children's activities and increased commute times have threatened to
render the traditional family dinner obsolete. While many families have worked
hard to maintain the traditional family dinner, the length of time required for
the meal preparation process has made this difficult. Families have shifted to
eating at fast-food restaurants, buying pre-packaged frozen foods that can be
prepared quickly in a microwave oven, or eating so-called "junk-food", often
sacrificing food quality and nutrition, as well as the interaction between
family members once prevalent at the evening meal.
TurboChef Technologies believes that its rapid cook technology provides a
potential solution to this dilemma along with an overall improvement in family
lifestyle. As Maytag's recently introduced "white paper," The Future of Cooking,
points out, the Company's residential oven will reduce cooking times to as
little as one-fifth of traditional cook times. For example, a three-pound whole
chicken can be cooked to perfection in 21 minutes, a task that typically takes
up 1 hour and 15 minutes. When available to consumers, the oven will be the
first appliance that delivers the possibility of a stress-free approach to
building family ties over a home-cooked meal. In addition, it can enable the
preparation of quality meals at the spur of the moment. Whether people decide to
prepare home-cooked meals on a nightly basis or simply cook frozen casseroles,
they are likely to experience more time to enjoy dinner. Just as importantly,
the oven will bake, roast, broil, brown and crisp while at least maintaining
nutrition, taste, texture and appearance that is at least comparable to that of
food cooked in conventional ovens.
The Maytag Alliance allows the Company to refocus on its core competencies
of developing new technologies and innovative products, while gaining access to
Maytag's substantial expertise and capabilities in commercializing,
manufacturing, marketing and distributing residential and commercial appliances.
In addition, Maytag has agreed to make certain payments to fund research and
development efforts for mutually agreed upon project initiatives. This Alliance
places a significant amount of dependence upon Maytag's overall infrastructure
capabilities and financial support. However, the Company believes that having a
partner with Maytag's qualities, one that is pursuing innovation as an important
element of its long-term growth strategy, better positions TurboChef
Technologies to continue developing innovative products, expand on its core
technologies and be successfully marketed and commercialized to consumers
worldwide. The Company is also exploring the development of other strategic
alliance, joint venture and/or licensing arrangements outside of North America.
A strategic synopsis by region is as follows:
North America. Since inception, the Company has maintained a direct sales
and marketing organization focused on the commercial foodservice industry in
North America. However, the revolutionary nature of the Company's technologies,
coupled with large restaurant chain operators' historical resistance to change
and the Company's lack of brand strength has
-6-
limited commercial sales. To address this issue, the Company has entered into an
agreement with Maytag to cooperate in the sales and marketing of the Company's
commercial cooking systems in North America. The Alliance, in cooperation with
G.S. Blodgett Corporation, Maytag's commercial foodservice equipment subsidiary,
has developed a comprehensive consultative selling program, which more
effectively identifies and quantifies the benefits of implementing the TurboChef
cooking system. This program offers the foodservice operator total system
solutions, including customized hardware applications, full equipment line-up,
quality and productivity enhancing software and professional services that
include kitchen design, concept development and new formulation.
The Company is also nearing completion of the product development phase of
the Alliance's first residential project. The Alliance is now focusing on the
commercialization and launch of the first residential cooking product
incorporating the Company's technologies under Maytag's heritage-cooking brand,
Jenn-Air. The Company believes that Maytag's commitment to innovation coupled
with their brand leadership and capabilities in marketing, manufacturing and
distribution in residential and commercial cooking are ideal complements to the
Company's technology and development assets.
Europe. Previously, a joint venture with the Queally Group had been
established, with the objective to market the Company's cooking technologies
through European food equipment distributors together with value-added food
products developed and produced by Queally. The strategy did not prove to be
effective and the joint venture was terminated by mutual agreement in June 1998.
Direct marketing efforts utilizing the consultative selling program have been
established under a new Managing Director in the UK. In total, 87 units were
sold throughout Europe during 1998.
Japan. In January 1997, the Company established a business development
office in Japan to evaluate opportunities in the Japanese market. In June 1998,
the Company entered into a Purchase Agreement with Kanematsu, a $30 billion
trading company. To facilitate cooking system sales, relationships were
established with FMI (Food Machines International), a foodservice distribution
company, and Feast International, a Japanese foodservice consulting firm.
Efforts to "seed" the Japanese market will continue along with ongoing
assessments of the commercial and residential business opportunities. In
October 1998, the Japanese government's Ministry of International Trade (MITI)
approved the TurboChef model D-2 cooking system and sales were initiated. In
total, 32 units were sold in Japan during 1998.
TurboChef Technologies believes that the combination of the Strategic
Alliance with Maytag for sales and marketing in North America, its own
international selling activities and success in developing other alliances,
joint venture and/or licensing arrangements outside of North America, will
enable the broad commercialization of the Company's technologies in both
commercial and residential markets.
Production and Supply
Throughout 1998, the Company relied on one contract manufacturer, Techniform
Waterford Ltd., based in Waterford, Ireland, to build its commercial cooking
systems. However, the Company is currently in the process of arranging for the
transition of the manufacturing of its commercial cooking systems to G.S.
Blodgett Corporation, a Maytag subsidiary specializing in the manufacturing and
sale of commercial foodservice equipment. This transition is expected to deliver
enhanced product
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quality and cost advantages. It is anticipated that Blodgett will be able to
provide the necessary production requirements to fulfill demand.
In anticipation of the transition, the Company had a supply of cooking
systems built to fulfill sales demand during this period.
The Company has been and will continue to be dependent on third parties for
the supply and manufacture of all of its component and electronic parts,
including both standard components and specially-designed component parts, such
as the printed circuit computer boards and wiring harnesses used in the
TurboChef cooking systems. The Company generally does not maintain supply
agreements with such third parties but instead purchases components and
electronic parts pursuant to purchase orders in the ordinary course of business.
The Company is substantially dependent on the ability of its manufacturers and
suppliers to, among other things, meet the Company's design, performance and
quality specifications. Failure by the Company's manufacturers and suppliers to
comply with these and other requirements could have a material adverse effect on
the Company.
The Company has required that its contract manufacturers follow generally
accepted industry standard quality control procedures. In addition, the Company
maintains its own quality assurance personnel and testing capabilities to assist
its contract manufacturers with their respective quality programs and to perform
periodic audits of manufacturing facilities and finished products to ensure the
integrity of the quality assurance procedures. Component parts furnished to the
Company by its suppliers and manufacturers are generally covered by a one-year
limited warranty and contract manufacturers furnish a limited warranty for any
of their manufacturing or assembly defects.
The Company's manufacturing cycle, which is the period from the execution
of a purchase order until actual shipment of the product to the customer,
generally ranges from two to six weeks for small volume cooking system sales and
up to one or two months longer for initial shipments to commence under large
multi-cooking system purchase contracts. Pursuant to the Company's warranty
policy, the Company will accept the return of a cooking system if the cooking
system does not perform according to product specifications. For certain
potentially large customers, who wish to test and evaluate a cooking system
prior to purchase, the Company occasionally offers one or more units at a
reduced price for such evaluation.
Research and Development
During the years ended December 31, 1998, 1997 and 1996, the Company
incurred costs related to research and development activities in the amounts of
$2,311,000, $1,220,000, and $681,000, respectively. It is the intention of the
Company to continue to invest in the continued development of its core
technologies and related applications to the extent needed to establish them as
a major world-wide cooking platform. In particular, in the area of cooking, the
Company plans to continue improving the performance of its commercial system and
embody the core technology in a broader range of cooking appliances. The Company
also plans to complete the development of its first residential cooking system
and to work closely with Maytag to develop other residential embodiments of its
cooking technologies. Finally, the Company plans to develop and enhance a range
of software products for residential and commercial kitchens to enable users to
extract more value from their cooking systems.
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Competition
The commercial cooking and warming segment of the foodservice equipment
market is characterized by intense competition. The Company competes with
numerous well-established manufacturers and suppliers of conventional commercial
ovens, grills and fryers (including those that cook through the use of
conduction, convection, induction, air impingement, infrared and/or microwave
heating methods). In addition, the Company is aware of others who are
developing, and in some cases have introduced, new ovens based on high-speed
heating methods and technologies. Although the Company is not aware of any
competitive products, either being marketed or under development, which it
believes are functionally equivalent to the TurboChef cooking system (i.e., that
can produce the variety of food items, cooked to the same high quality
standards, at the same speeds), there can be no assurance that other companies
with greater financial resources would not attempt to develop competitive
products or that functionally equivalent products will not become available in
the near future. Most of the Company's competitors possess substantially greater
financial, marketing, personnel and other resources than TurboChef Technologies
and have established reputations relating to the development, manufacture,
marketing and service of cooking equipment. Among the Company's major
competitors in the cooking and warming segment of the foodservice equipment
market are: The Middleby Corporation and certain of its subsidiaries; the
commercial foodservice equipment division of Welbilt Corporation, including,
Lincoln Foodservice Products, Inc.; Quadlux, Inc.; Vulcan-Hart Corporation, a
subsidiary of Premark International, Inc.; Groen, Inc., a subsidiary of Dover
Corporation; and Amana.
The competitive activity has also increased in the emerging residential rapid
cook sector, and there can be no assurance that other companies with greater
financial resources and expertise would not attempt to develop or are currently
developing functionally competitive products that may become available in the
near future. The major competitors at this juncture include General Electric,
Thermador, Enersyst, Amana and Quadlux.
Regulation and Accreditation
The Company is subject to regulations administered by various federal,
state, local and international authorities, such as the United States Food and
Drug Administration, the Federal Communication Commission, the European
Community Council and the Japanese Government's Ministry of International Trade
(MITI) (including those limiting radiated emissions from the Company's cooking
system products), which impose significant compliance burdens on the Company.
Failure to comply with these regulatory requirements may subject the Company to
civil and criminal sanctions and penalties. While the Company believes that its
products are in compliance in all material respects with all laws and
regulations applicable to the Company and such products, there can be no
assurance of such compliance. The Company tests, from time to time, the cooking
systems in order to confirm continued compliance with applicable regulatory
requirements. Management believes that compliance with these laws and
regulations will not require substantial capital expenditures or have a material
adverse effect on the Company's future operations.
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New legislation and regulations, as well as revisions to existing laws and
regulations (at the federal, state and local levels, in the United States and/or
in foreign markets) affecting the foodservice equipment and residential
appliance industries may be proposed in the future. Such proposals could affect
the Company's operations, result in material capital expenditures, affect the
marketability of the Company's existing products and technologies and/or could
limit or create opportunities for the Company with respect to modifications of
its existing products or with respect to its new or proposed products or
technologies. In addition, an expanded level of operations of the Company in the
future could require the Company to modify or alter its methods of operation at
costs which could be substantial and could subject the Company to increased
regulation, and expansion of the Company's operations into additional foreign
markets may require the Company to comply with additional regulatory
requirements.
The Company has received certification from Underwriter's Laboratories,
Inc. ("UL(R)") as to compliance of the Company's Model D-2 and D-2 Max TurboChef
cooking system with applicable UL(R) requirements relating to product safety
accreditation standards and with the applicable requirements of the National
Sanitation Federation ("NSF") relating to cleanability and sanitation
accreditation standards. UL(R) and NSF are agencies which have established
certain standards for a variety of categorized products and can be engaged to
inspect a manufacturer's products for compliance with the applicable standards.
Certification by each agency authorizes the marking of any such product with the
agency's labels, which indicates that the product is approved by the agency for
such use. Such certifications, which require periodic renewal, only represent
compliance with established standards and are not legally required. However,
failure by the Company to comply with these accreditation standards in the
future could have a material adverse effect on the Company's marketing efforts.
In addition, the Company has met the requirements necessary to apply the "CE"
mark (which indicates compliance with the European Community Council directive
relating to electromagnetic compatibility and low voltage) to its Model D-2 and
D-2 Max TurboChef cooking systems. As an equipment manufacturer, the Company is
allowed to "self-certify" compliance with this directive and have a third party
attest to the results. The Company is required by law to meet this European
Community Council directive in order to apply the "CE" mark and thereby sell its
cooking systems in the European Union. The TurboChef model D-2 cooking system
has also been approved by the Japanese Government's MITI, thereby permitting
sale in Japan.
Warranty and Service
The Company offers to purchasers a one-year limited warranty covering the
TurboChef cooking system's workmanship and materials, during which period the
Company or its authorized service representative will make repairs and replace
parts which become defective due to normal use. Although the cost of servicing
TurboChef cooking systems under this one-year warranty has been in line with
expectations to date, there can be no assurance that future expenses incurred on
the one year warranty will not have an adverse effect on the Company.
The Company did allow the purchase of an extended warranty program for a
particular customer during 1998 and 1997, which covered units that were older
than one year. The Company recorded revenues of $417,000 in 1998 and $253,000
in 1997 for this extended warranty agreement. The costs
-10-
associated with this extended warranty agreement in excess of revenues was
$462,000 and $146,000 for the years ended December 31, 1998 and 1997,
respectively. The results of research associated with the extended warranty
program coupled with research findings from the Company's accelerated life cycle
testing facility have lead to design improvements that should improve both the
durability and reliability of the Company's products and will be incorporated
into future products.
In those areas where TurboChef cooking systems are located, the Company has
established relationships with independent factory authorized service
representatives who provide installation and repair services and carry a parts
inventory. In addition, the Company intends to establish a national and global
parts and service network of independent factory authorized service
representatives, capable of supporting a significant increase in TurboChef
cooking system installations. Currently, the Company is establishing a national
service arrangement through G.S. Blodgett.
Insurance
The Company is engaged in a business which could expose it to possible
liability claims from others, including from foodservice operators and their
staffs, as well as from consumers, for personal injury or property damage due to
design or manufacturing defects or otherwise. The Company maintains a general
liability insurance policy, which the Company believes is adequate coverage for
the type of products currently marketed. In addition, the Company believes that
its third party manufacturer currently maintains similar levels of liability
insurance.
Patents and Proprietary Rights
The Company holds three United States patents which cover certain
fundamental aspects of the Company's high-speed cooking technologies and the
Company has pending patent applications or patents corresponding to one or more
of these United States patents filed in at least seven countries (including the
various countries of the European Patent Convention). These United States
patents expire in 2011-2013. The Company further holds one pending United
States patent application on a catalytic converter for use in such high-speed
cooking technologies. The Company also holds one United States patent relating
to the Company's "par-baked" pizza dough setting technology, which patent
expires in 2014. The patent laws of other countries may differ from those of
the United States as to the patentability of the Company's technologies and
products and the degree of protection afforded. The Company believes that its
patents and patent applications provide it with a competitive advantage.
Accordingly, in the event the Company's products and technologies gain market
acceptance, patent protection would be important to the Company's business.
There can be no assurance as to the breadth or degree of protection which
existing or future patents, if any, may afford the Company, or that any patent
applications will result in issued patents, or that the Company's patent rights
will be upheld if challenged, or that competitors will not develop similar or
superior methods or products outside the protection of any patents issued to the
Company.
The Company believes that product and brand name recognition is an
important competitive factor in the foodservice equipment industry.
Accordingly, the Company promotes the TurboChef(R) name in connection with its
marketing activities. The Company holds a United States trademark for the
TurboChef(R) name. The Company also holds various other trademarks and has
pending applications on others.
-11-
The Company also relies on trade secrets and proprietary know-how, and
typically enters into confidentiality and non-competition agreements with its
employees and appropriate suppliers and manufacturers, to protect the concepts,
ideas and documentation relating to its proprietary technologies. However, such
methods may not afford the Company complete protection. There can be no
assurance that others will not independently obtain access to the Company's
trade secrets and know-how or independently develop products or technologies
similar to those of the Company. Since the Company believes that its proprietary
technologies are important to its business, failure to protect such information
could have a material adverse effect on the Company.
Employees
As of March 15, 1999, the Company employed 51 persons, all of whom are
full-time employees, including four executive officers and four senior managers.
Of its employees, nineteen are engaged in technological development, thirteen in
sales, marketing, and customer service development, and eleven are engaged in
administration. None of the Company's employees are represented by labor
unions. The Company considers its relations with its employees to be good.
Executive Officers of the Company
The executive officers of the Company as of March 15, 1999, are as follows:
Name Age Position(s)
---- --- -----------
Marion H. Antonini............... 68 Chairman of the Board of Directors
Richard N. Caron................. 42 President and Chief Executive Officer
Amit S. Mukherjee................ 40 Chief Technology and Strategy Officer
Dennis J. Jameson................ 45 Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer
-12-
Marion H. Antonini has served as Chairman of the Board of Directors since
March 1998. Mr. Antonini was Chairman, President and CEO of Welbilt Corp., a
$600 million commercial appliance manufacturer, from 1990 to 1997. From 1986 to
1990, he served as chairman and managing director of KD Equities, a merchant
banking firm in New York. He was with Xerox Corp. from 1975 to 1986, where he
served as group vice president, worldwide operations from 1982 to 1986.
Richard N. Caron was elected President and Chief Executive Officer and
appointed to the TurboChef Technologies Board in September 1998. Mr. Caron was
employed by Arthur D. Little, Inc., an international technology and innovation
consulting firm, from 1979 to 1998, holding the title of Director from 1991 and
Practice Leader for Consumer Goods in North America from 1997 until he joined
the Company.
Amit S. Mukherjee was elected Chief Technology and Strategy Officer in
October 1998. Mr. Mukherjee was employed by Arthur D. Little, Inc., an
international technology and innovation consulting firm, from 1994 to 1998,
holding the title of Director from 1997 to 1998. From 1992 to 1994 he was a
member of the INSEAD faculty in Fontainebleau, France where he taught Strategic
R&D Management, Quality Management and World-Class Manufacturing in the MBA,
Ph.D. and Executive Programs.
Dennis J. Jameson was elected Executive Vice President and Chief Financial
Officer of the Company in December 1995, Treasurer in 1996 and Secretary in
1997. From 1988 to 1995 he served as a director, Senior Vice President Finance
and Administration, and Chief Financial Officer of Black-eyed Pea Restaurants,
Inc. in Dallas, Texas, which operated casual dining and quick service Mexican
restaurants located primarily in the Southwest and Southeast.
-13-
Item 2 Properties
The Company owns no real estate. The Company leases approximately 13,600
square feet of space at 10500 Metric Drive, Dallas, Texas, which it uses for
executive offices, technology development, sales and marketing, limited assembly
and other purposes, under a lease agreement which expires on May 31, 2000. The
Company also leases approximately 3,000 square feet of space at 5151 Beltline
Road, Dallas, Texas, which is currently sub-leased to another firm. This lease
will expire on April 15, 2000.
The Company leases approximately 5,500 square feet of general office space
at 745 5th Avenue, New York, New York, pursuant to a lease that is scheduled to
expire on December 20, 2000.
The Company leases approximately 1,000 square feet of general office space
in the Cranfield Innovation Centre, in Cranfield, U.K. In addition, the Company
occupies approximately 1,000 square feet of office space, which is used as a
training facility, in Bedfordshire, U.K., pursuant to a lease that is scheduled
to expire on February 28, 2001.
The Company believes that its facilities are generally well maintained, in
good operating condition and adequate for its current needs.
Item 3 Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to any pending
legal proceedings, other than ordinary routine litigation incidental to its
business, none of which is material.
Item 4 Submission of Matters to a Vote of Security Holders
None.
-14-
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock has been traded on the NASDAQ Small Cap Market
under the symbol "TRBO" since the Company's initial public offering in April
1994. On March 1, 1999, the Company's stock began trading on the NASDAQ
National Market. The following table sets forth the high and low bid quotations
for the common stock for the periods indicated as reported by NASDAQ Small Cap
Market. The NASDAQ Small Cap Market per share quotations represent inter-dealer
prices without adjustment for retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
Per Share Price
---------------
Period High Low
------ ---- ---
Fiscal Year 1998
- ----------------
First Quarter $10 $7 7/16
Second Quarter $13 1/8 $7 3/8
Third Quarter $9 $4
Fourth Quarter $9 7/8 $5 7/8
Fiscal Year 1997
- ----------------
First Quarter $19 1/8 $11 7/8
Second Quarter $16 3/4 $12 5/8
Third Quarter $16 3/4 $10 1/8
Fourth Quarter $15 3/4 $7
As of March 15, 1999, there were approximately 110 shareholders of record of the
Company's common stock.
Dividends
The Company has not paid cash dividends on the common stock since its
organization and does not expect to pay any cash dividends on the common stock
in the foreseeable future. The Company instead intends to continue a policy of
retaining earnings for the Company's operations and planned expansion of its
business. The payment of any future cash dividends would be at the discretion of
the Company's Board of Directors and would depend on future earnings, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors.
-15-
Item 6 Selected Financial Data
The following selected financial data for each of the fiscal years ended
December 31, 1998, 1997 and 1996 have been derived from the Company's audited
financial statements, and should be read in conjunction with those statements,
which are included in this Form 10-K. The following selected financial data for
each of the fiscal years ended December 31, 1995 and 1994 have been derived from
the Company's audited financial statements, and should be read in conjunction
with those statements, which are not included in this Form 10-K. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto which are included elsewhere in this Form 10-K.
Year Ended December 31,
(Amounts in Thousands, Except Share Data)
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- ---------------
Statement of Operations
- -----------------------
Data:
- -----
Revenues $ 7,137 $ 4,222 $ 2,802 $ 1,228 $ 250
Operating Loss $ (4,152) $ (4,822) $ (3,197) $ (1,698) $ (2,914)
Net Loss $ (3,954) $ (4,662) $ (2,941) $ (1,585) $ (3,182)
Per Share Data (1)
Net Loss per Share basic $ (.27) $ (.33) $ (.22) $ (.13) $ (.29)
and diluted
Weighted Average Number
of Shares Outstanding 14,611,724 14,032,796 13,339,431 12,451,786 11,120,282
Balance Sheet Data:
- -------------------
Working Capital $ 18,566 $ 9,527 $ 8,523 $ 1,083 $ 1,029
Total Assets $ 20,800 $ 16,440 $ 9,743 $ 2,218 $ 1,966
Total Liabilities $ 1,607 $ 811 $ 810 $ 770 $ 1,736
Accumulated Deficit $ (21,231) $ (17,277) $ (12,615) $ (9,673) $ (8,088)
Total Stockholders' Equity $ 19,193 $ 15,629 $ (8,933) $ 1,448 $ 230
(1) On December 12, 1995, the Company's Board of Directors approved a two for
one stock split effective in the form of a stock dividend paid on January
11, 1996 to stockholders of record on December 29, 1995. Share data is
based upon the weighted average common shares and share equivalents
outstanding for each period, adjusted to reflect the split.
-16-
Item 7 Management Discussion and Analysis of Financial Condition and Results
of Operations
General
From its inception in April 1991 until March 1994, the Company was engaged
primarily in research and development, limited production operations and test
marketing of its cooking systems. In March 1994, the Company introduced its
first commercial product, the Model D-1 cooking system. In June 1995, the
Company entered into its first major contract with Whitbread PLC ("Whitbread")
and introduced an enhanced product, the Model D-2 cooking system. The Company
concentrated its efforts on the Whitbread rollout throughout 1996. Upon the
completion of the secondary public offering of Common Stock in June 1996 (the
"June 1996 Offering"), the Company began development of a direct sales
organization. By the end of the first quarter of 1997, the Company had
substantially developed a U.S. direct sales and European sales infrastructure
and marketing programs. However, the revolutionary nature of the Company's
technologies, coupled with large restaurant chain operators' historical
resistance to change and the Company's lack of brand strength has limited
commercial sales.
The Company believes its long-term success is dependent on its core
competencies of developing new technologies and products for the foodservice and
residential appliance industries. Consequently, the Company has sought to
establish alliances with major firms with strengths in manufacturing, sales,
marketing and distribution. An alliance of this nature was successfully
established in September 1997, when the Company announced a Strategic Alliance
with Maytag Corporation to jointly develop new products incorporating the
Company's technologies. The Alliance entailed a mutual exchange of each
Company's common stock valued at approximately $10 million and Maytag's payment
to TurboChef Technologies for certain research and development activities
related to targeted product initiatives. The Company also announced in July 1998
that the Maytag Alliance had been expanded to establish a cooperative effort to
market and sell commercial cooking products in North America. During the first
quarter of 1999, TurboChef Technologies and G.S. Blodgett Corporation, a wholly
owned subsidiary of Maytag engaged in the manufacturing and sales of commercial
foodservice equipment, began arranging for the transition of the manufacturing
of the Company's commercial unit to Blodgett's facilities. The Maytag Alliance
will enable the Company to focus on its core competency of technology
development while utilizing the strengths of well-established leaders within the
commercial and residential appliance industries to manufacture, market, and
distribute the Company's products in North America.
The Company has invested heavily in research, prototype development and
sales and marketing personnel. As a result of these investments, and the
heretofore limited revenues generated through sales of cooking systems, the
Company has incurred substantial operating losses in each year of its operations
(including net losses of $4.0 million, $4.7 million and $2.9 million for the
years ended December 31, 1998, 1997 and 1996, respectively) resulting in an
accumulated deficit of $21.2 million as of December 31, 1998.
The Company will continue to pursue business growth through implementation
of the following strategies: (i) joint development and commercialization of
residential and commercial
-17-
products in North America through the Maytag Alliance, (ii) pursuit of strategic
alliances and license agreements outside North America, (iii) continued
marketing to European and Japanese restaurants, hotels, convenience stores and
other foodservice operators, (iv) continued development of new hardware,
software and food solutions for residential and commercial applications
utilizing the Company's patented technology and (v) the development of new
technologies. The Company's future profitability will depend upon, among other
things, the successful implementation of these initiatives.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the financial statements and notes thereto contained elsewhere
in this report.
Results of Operations for the Year Ended December 31, 1998 Compared to the Year
Ended December 31, 1997
Revenues for the year ended December 31, 1998 are $7,137,000, an increase
of $2,915,000 when compared to revenues of $4,222,000 for the year ended
December 31, 1997. The increase is primarily due to payments to the Company for
research and development activities under the Maytag Alliance and an increase in
the average selling price of its cooking system, offset partially by a decrease
in commercial cooking system unit sales.
Cost of sales for the year ended December 31, 1998 are $2,677,000, a
decrease of $166,000 when compared to $2,843,000 for cost of sales in the prior
year. This decrease is attributable to the reduction in cooking system unit
sales, partially offset by an increase in costs associated with an extended
warranty program provided to one of the Company's major customers.
Gross profit on product sales for the year ended December 31, 1998
decreased to $385,000, when compared to gross profit on sales of $619,000 during
the prior year. Gross margin for the year ended December 31, 1998 was 13% of
sales, compared 18% of sales for the year ended December 31, 1997. The
reduction in gross profit was principally due to a decrease in oven sales,
higher average unit manufacturing costs and the higher costs of providing the
extended warranty program.
Research and development expenses for the year ended December 31, 1998
increased to $2,311,000. This represents an increase of $1,091,000 from
$1,220,000 for the year ended December 31, 1997. The increase is due to
significant additions of engineering and technical personnel to support the
Company's product development requirements associated with the Maytag Alliance.
Furthermore, the Company established an accelerated life cycle testing facility
for the durability and reliability testing of the Company's products.
Selling, general and administrative expenses for the year ended December
31, 1998 increased $1,320,000, to $6,301,000 from comparable expenses of
$4,981,000 for 1997. The increase over 1997 is due to the addition of executive
officers and other administrative support personnel
-18-
along with the transfer of the European sales and marketing organization to
TurboChef Technologies from its former joint venture, TurboChef Europe.
Other income was $198,000 for the year ended December 31, 1998 compared to
$160,000 for the year ended December 31, 1997. The increase is primarily due to
dividends received as a result of ownership of the Maytag stock for an entire
year compared to only the fourth quarter of 1997. Offsetting this increase was a
decrease in interest income due to reduced amounts of cash invested in
securities.
Results of Operations for the Year Ended December 31, 1997 Compared to the Year
Ended December 31, 1996
Revenues for the year ended December 31, 1997 are $4,222,000, an increase
of $1,420,000, when compared to revenues of $2,802,000 for the year ended
December 31, 1996. This increase is primarily attributable to payments to the
Company for research and development activities under the Maytag Alliance,
greater cooking system unit sales, higher average selling prices and revenues
generated by an extended warranty program established for one of the Company's
major customers.
Cost of sales for the year ended December 31, 1997 are $2,843,000, an
increase of $536,000 when compared to $2,307,000 for cost of sales in the prior
year. This increase is attributable to greater cooking system unit sales,
additional costs generated by the extended warranty program, and charges taken
during the third and fourth quarters for inventory obsolescence due to design
enhancements to the commercial cooking systems, an increase in the reserve for
future warranty expenses and disposal of the remaining Model D-1 cooking system
inventory.
Gross profit on sales for the year ended December 31, 1997 increased
$137,000 to $619,000, when compared to gross profit on sales of $482,000 during
the prior year. Gross margin for the year ended December 31, 1997 was 18% of
sales, compared to 17% of sales for the year ended December 31, 1996. Excluding
the effect of inventory and warranty charges in 1997 and 1996, gross margin was
27% for 1997, compared to 20% in 1996, reflecting higher average selling prices
and reduced manufacturing costs for the Model D-2 cooking system in 1997.
Research and development expenses for the year ended December 31, 1997
increased $539,000, to $1,220,000 from $681,000 for the year ended December 31,
1996. The increase was due to the Company's ongoing efforts to expand and
enhance its technologies and product offerings through several key initiatives.
Included in these initiatives was construction of a prototype self-serve cooking
system for convenience store and vending applications, a reduced size commercial
cooking system, enhancements to the Model D-2 cooking system, and continued
development and enhancement of a residential oven prototype.
Selling, general and administrative expenses for the year ended December
31, 1997 increased $1,970,000, to $4,981,000 from comparable expenses of
$3,011,000 for 1996. Consistent with the business plan outlined by the Company
in connection with the June 1996
-19-
Offering, the increased expense was primarily due to the Company's efforts in
1997 in developing a U.S. sales infrastructure. This initiative incorporated
several senior level staff additions as well as the establishment of a customer
service team and increased travel and trade show participation. Also
contributing to the increase in selling, general and administrative expenses are
costs associated with international business development in the UK and Japan not
incurred in 1996.
Interest income net of interest expense for the year ended December 31,
1997 was income of $269,000 compared to $256,000 for the year ended December 31,
1996.
Liquidity and Capital Resources
The Company's capital requirements in connection with its product and
technology development and marketing efforts have been and will continue to be
significant. In addition, capital is required to operate and expand the
Company's operations. Since its inception, the Company has been substantially
dependent on loans and capital contributions from its principal stockholders,
private placements of its securities, the proceeds from the initial public
offering of common stock in April 1994 (the "April 1994 IPO") and the June 1996
Secondary Offering to fund its activities.
Since October 1997, the Company's capital requirements have been met in part by
Maytag. In accordance with the Maytag Alliance, the Company has been paid an
aggregate of $5.9 million ($250,000 per month from October 1997 through March
1998, $300,000 from April through July 1998, $425,000 from August through
January 1999 and $300,000 through March 1999) for technology transfer
initiatives by the Company. In March 1998, the initial project was extended for
one year and Maytag increased the monthly payment from $250,000 to $300,000 per
month for the term of the extension. In July 1998, a commercial sales agreement
was announced and the monthly payment increased to $425,000 for six months. The
increase to $425,000 ended in January 1999. The remaining monthly payments of
$300,000 ended in March 1999. The Maytag Alliance, however, is ongoing, and
provides for the opportunity to establish additional residential and commercial
product development projects in the future. Accordingly, future revenues from
the Maytag Alliance will depend upon the establishment of additional fee based
research and development projects with Maytag and royalties from the successful
commercialization and sales of the products that embody the Company's
technologies. However, if additional projects are not initiated with Maytag
there is no assurance that the Company would be able to find alternate sources
of funding on acceptable terms for further research and development of current
and future products. This could have a significant adverse impact on the
Company's current and future operations. However, management is confident that
through sales of its commercial cooking system and its current credit
facilities, it will have adequate funding for further research and development
throughout 1999.
The Maytag Alliance called for the mutual exchange of each company's stock
with a value of approximately $10.0 million. Maytag purchased 564,668 shares of
the Company's common stock, and the Company purchased 293,846 shares of Maytag
common stock. According to the terms of the Strategic Alliance Agreement, the
Maytag stock owned by the
-20-
Company is subject to a general restriction placed on selling, pledging,
transferring or assigning such securities for a period of two years from the
date of the agreement. However, in accordance with the Agreement, the Company
gained the right to sell, pledge, transfer or assign up to 50% of the shares on
March 31, 1998 and will gain the right to sell, pledge, transfer or assign the
remaining 50% on September 30, 1999. As of March 15, 1999, the Maytag stock
owned by the Company had a market value of approximately $16.0 million.
In July 1998, the Company executed a revolving credit agreement with its
bank to support general corporate requirements, specifically, continued
investment in technology development. This credit agreement originally set to
expire on July 1, 1999 was terminated by the Company in January 1999 and
replaced by a new facility. This agreement, which was never utilized, was
secured by 90,000 shares of Maytag common stock owned by the Company. The
Company could have borrowed up to the lesser of $3.0 million or 75% of the
market value of the Maytag stock at market rates of interest.
In January 1999, the Company terminated the revolving credit agreement with
its bank and entered into an agreement with Banque AIG, London Branch (an
affiliate of American International Group, Inc. ("AIG")). The AIG facility
provides for the Company to pledge its Maytag shares in the form of a "Variable
Stock Transaction" and to receive cash advances against the value of the Maytag
shares. All advances mature within three years and bear interest at LIBOR plus
0.75%. At the end of the three-year term, the Company may satisfy any
outstanding obligation by surrendering Maytag shares equal to the fair value of
the obligation or with cash. The transaction allows the Company to benefit from
the appreciation over $63.25 per share in the Maytag share price over the three-
year period and provides down-side protection to the Company in the form of a
"put option" for the 293,846 shares of Maytag stock. The put option establishes
a minimum realizable value for the Maytag shares of
approximately $57 per share.
In January 1999, the Company had pledged 140,000 shares of the Maytag stock
and received advances totaling $3.0 million and has approximately $3.2 million
in advances available. Once the remaining 146,923 Maytag shares are available to
pledge, the Company will have available approximately $7.2 million in additional
advances.
In February 1999, the Company entered into an agreement with its bank to
support general corporate requirements. The credit agreement is set to expire
in February 2000. The agreement is secured by 6,923 shares of Maytag common
stock owned by the Company. The Company can borrow up to the lesser of $315,000
or 75% of the market value of the Maytag stock at market rates of interest.
At December 31, 1998, the Company had working capital of $18,566,000 as
compared to working capital of $9,527,000 at December 31, 1997. The $9,039,000
working capital increase from December 31, 1997 resulted primarily from the
Company's reclassification of the Company's investment in Maytag common stock to
a current asset, in accordance with the Maytag Alliance and the associated
appreciation of that investment.
-21-
For the year ended December 31, 1998, accounts receivable turnover was 3.7
compared to 7.3 during the year ended December 31, 1997. The decrease in
accounts receivable turnover principally relates to uncollected amounts from the
Company's former European joint venture.
Cash used in operating activities was $2,887,000 for the year ended
December 31, 1998 as compared to cash used in operating activities of $4,513,000
for the year ended December 31, 1997. The net loss in 1998 included $625,000 of
non-cash contributions to net loss, compared to $357,000 in 1997. Major
contributions to net cash used in operating activities in 1998 was an $722,000
increase in accrued expenses, partially offset by a $289,000 net increase in
accounts receivable and a $130,000 increase in inventory.
Cash provided by investing activities for the year ended December 31, 1998
was $1,464,000 and primarily resulted from net sales of marketable securities of
$1,795,000, equipment purchases of $186,000, and investments in TurboChef Europe
of $145,000.
Cash provided by financing activities was $190,000 for the year ended
December 31, 1998, which represents the net proceeds from exercises of stock
options and warrants.
At December 31, 1998, the Company had cash and cash equivalents of
$164,000, compared to cash and cash equivalents of $1,397,000 at December 31,
1997.
Year 2000 Issues
TurboChef Technologies, like other businesses, is facing the Year 2000
issue. The Year 2000 issue arises from the past practice of utilizing two digits
(as opposed to four) to represent the year in some computer programs and
software. If uncorrected, this could result in computational errors as dates
are compared across the century boundary. Since the software used in the
Company's patented cooking system does not utilize an internal calendar, the
Company believes that, for the most part, it will be unaffected by Year 2000
issues.
Through March 15, 1999, the Company has had the majority of its internal
software and hardware tested and made Year 2000 compliant, where necessary. The
Company currently plans to have all of its hardware, software and embedded
systems contained in the Company's equipment tested by June 30, 1999 and, if
necessary, made Year 2000 compliant no later than September 30, 1999.
While Year 2000 costs incurred to date have not been material, the Company
believes it will continue to incur costs related to Year 2000 readiness
throughout 1999. Furthermore, the Company believes that future costs associated
with achieving Year 2000 readiness will not be material, however, there is no
guarantee that the Company's operations will not be materially impacted by these
costs.
The failure of the Company's third party vendors to be Year 2000 ready
could prevent or delay the manufacturing or shipping products, providing
customer support and completing transactions, all of which could have a material
adverse affect on the Company's business, operating results and financial
condition. The Company is currently working on plans to assess
-22-
the Year 2000 readiness of its major third party vendors as well as developing
contingency plans as it relates to its operations and major third party vendors.
Authoritative Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". This Statement 130 requires the reporting of
comprehensive income and its components in the general-purpose financial
statements. This Statement also requires that an entity classify items of other
comprehensive income by their nature in an annual financial statement. The
Company has adopted this statement in 1998 and disclosed this information
through its statement of stockholders' equity.
The FASB has recently issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", and SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post-Retirement Benefits". These Statements are
effective for the Company in 1998. The adoption of these statements does not
have a material effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement is effective for the
Company on January 1, 2000. SFAS No. 133 requires companies to report
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The Company is currently reviewing
the standard and its effect on the financial statements.
In October 1998, the FASB issued SFAS No 134, "Accounting for Certain
Mortgage Banking Activities". This Statement is effective for the Company in
1999. The adoption of this statement is not expected to have a material effect
on the Company's financial statements.
The American Institute of Certified Public Accountants (AICPA) has issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition". The adoption
of this Statement does not have a material effect on the Company's financial
statements.
In 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", and SOP 98-5, "Reporting on
the Costs of Start-Up Activities". The adoption of these Statements does not
have a material effect on the Company's financial statements.
Forward Looking Statements
The Company has utilized the proceeds from the June 1996 Offering, and is
currently using proceeds received from the Maytag Alliance, to strengthen its
management team and support its product development activities. The Company has
completed the current phase of targeted research and development and the
associated per month payments ended in January and March 1999, respectively. The
Maytag Alliance, however, is ongoing, and provides for the opportunity to
establish additional residential and commercial product development projects in
the future. Accordingly, future revenues from the Maytag Alliance will depend
upon the establishment of additional fee based research and development projects
with Maytag and royalties from the successful commercialization and sales of the
products that embody the Company's technologies. The Company's goals are to
continue its development of innovative and commercially viable products, to
support the Maytag Alliance
-23-
efforts and to establish additional strategic alliances and license agreements
outside North America. In July 1998, the Company executed a revolving credit
agreement with its bank, secured by 90,000 shares of Maytag Corporation stock it
holds, to support general corporate requirements. This agreement was terminated
in January 1999 and replaced with a facility with Banque AIG, London Branch (an
affiliate of American International Group, Inc.). As of March 15, 1999, the
Company could receive minimum additional advances of $10.4 million through this
facility that expires in January 2002.
The Company's future performance will be subject to a number of business
factors, including those beyond the Company's control, such as economic
downturns and evolving industry needs and preferences, as well as to the level
of the Company's competition and the ability of the Company to successfully
market its products and effectively monitor and control its costs. The Company
believes that increases in revenues sufficient to offset its expenses could be
derived from its currently proposed plans within the next 12 to 18 months, if
such plans are successfully completed. These plans include: (i) joint
development and commercialization of residential and commercial products in
North America through the Maytag Alliance, (ii) pursuit of strategic alliances
and license agreements outside North America, (iii) continued marketing to
European and Japanese restaurants, hotels, convenience stores and other
foodservice operators, and (iv) continued development of new hardware, software
and food solutions for residential and commercial applications. However, there
can be no assurance that the Company will be able to successfully implement any
of the foregoing plans, that either its revenues will increase or its rate of
revenue growth will continue or that it will ever be able to achieve profitable
operations.
As of December 31, 1998, the amount of backlog orders believed to be firm
was approximately $0.4 million, as compared to approximately $2.1 million as of
December 31, 1997. The Company anticipates that the majority of this backlog
will be filled during the current year.
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward looking statements and
information that are based on the beliefs of the Company's management as well as
estimates and assumptions made by, and information currently available to, the
Company's management. When used in SEC Filings, the words "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan," and similar
expressions, as they relate to the Company or the Company's management, identify
forward looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, competitive factors and pricing pressures, shifts in market
demand, the performance and needs of the segments of the foodservice industry
served by the Company, the costs of product development and other risks and
uncertainties, in addition to any uncertainties specifically identified in the
text surrounding such statements, uncertainties with respect to changes or
developments in social, economic, business, industry, market, legal, and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties,
-24-
including the Company's stockholders, customers, suppliers, business partners,
and competitors, legislative, regulatory, judicial and other governmental
authorities and officials. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may vary significantly from those anticipated, believed, estimated,
expected, intended or planned.
Item 8 Financial Statements and Supplementary Data
The financial statements set forth herein commence on page F- 1 of this
report.
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective December 21, 1998, the Company appointed the accounting firm of
Arthur Andersen LLP as the Company's independent public accountants for fiscal
1998 to replace KPMG LLP which resigned on that same date. The Company's Board
of Directors approved the selection of Arthur Andersen LLP as independent public
accountants upon the recommendation of the Board's Audit Committee.
During the two most recent fiscal years and the period of January 1, 1998
through December 21, 1998, there were no disagreements with KPMG LLP on any
matter of accounting principle or practice, financial statement disclosure or
auditing scope or procedures, which disagreements, if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement. KPMG LLP's report on the
Company's financial statements for the past two years contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
-25-
Part III
Item 10 Directors and Executive Officers of the Registrant
The information required by this item is contained in the definitive proxy
materials of the Company to be filed in connection with its 1999 Annual Meeting
of Stockholders, except for the information regarding executive officers of the
Company which is contained in Part I of this Annual Report on Form 10-K. The
information required by this item contained in such definitive proxy material is
incorporated herein by reference.
Item 11 Executive Compensation
The information required by this item is contained in the definitive proxy
materials of the Company to be filed in connection with its 1999 Annual Meeting
of Stockholders, which information is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained in the definitive proxy
materials of the Company to be filed in connection with its 1999 Annual Meeting
of Stockholders, which information is incorporated herein by reference.
Item 13 Certain Relationships and Related Transactions
The information required by this item is contained in the definitive proxy
materials of the Company to be filed in connection with its 1999 Annual Meeting
of Stockholders, which information is incorporated herein by reference.
-26-
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
2. List of Financial Statement Schedules (None)
3. List of Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation. (1)
3.2 Restated By-Laws. (1)
4.1 Form of Certificate for Common Stock (1)
10.1 Form of Stock Option Agreement between stockholders of the
Company and certain other persons dated as of August 10, 1993. (1)
10.2 Stock Option Plan, as amended. (1)
10.4 Stock Purchase Agreement with Donald J. Gogel dated April
17, 1993, together with Amendment to Stock Purchase
Agreement dated as of December 31, 1993. (1)
10.5 Consulting Agreement with Whale Securities Co., L.P.
dated April 14, 1994. (2)
10.6 Warrant Agreement with Whale Securities Co., L.P.
dated April 7, 1994. (2)
10.7 Amendment No. 1 dated as of June 12, 1996 to the Warrant
Agreement between the Company and Whale Securities Co., L.P.
dated as of April 14, 1996. (6)
10.8 Warrant Agreement between the Company and Whale
Securities Co., L.P. dated as of June 17, 1996. (7)
10.11 Lease Agreement with The Fidelity Mutual Life Insurance
Company, in Rehabilitation, dated August 24, 1995. (5)
10.12 Lease Agreement with The Fidelity Mutual Life Insurance
Company, in Rehabilitation, dated March 21, 1996. (4)
-27-
10.14 Option Agreement between the Company and Acadia International
Limited dated as of March 31, 1995. (5)
10.18 Purchase Contract between the Company and Whitbread PLC
dated June 30, 1995. (4)
10.19 Purchase Contract between the Company and Whitbread PLC
dated December 27, 1995. (4)
10.20 Purchase Order from The Southland Corporation dated
December 13, 1996. (8)
10.21 Purchase Contract between the Company and Whitbread PLC
dated February 18, 1997. (8)
10.22 Employment Agreement with Philip R. McKee dated March 1, 1996. (1)
10.25 Lease Agreement with Prestonwood Tower dated March 19, 1997. (7)
10.26 Strategic Alliance Agreement dated as of September 26, 1997, by and
between TurboChef Technologies, Inc. and Maytag Corporation. (8)
10.27 Lease Agreement with Jonathan Woodner dated April 15, 1997. (9)
10.28 First Extension of the Project Agreement (RCAP-II) dated March 4, 1998
by and between TurboChef Technologies, Inc. and Maytag Corporation (9)
10.29 Employment agreement between TurboChef, Inc. and Marion H. Antonini.
(10)
10.30 Commercial Cooking Appliance Project Agreement dated as of July 29,
1998 by and between TurboChef Technologies, Inc. and Maytag
Corporation. (11)
10.31 Revolving Credit Agreement between Chase Bank of Texas NA and
TurboChef Technologies, Inc. dated July 1, 1998. (11)
10.32 Employment Letter between Richard N. Caron and TurboChef Technologies,
Inc. dated September 2, 1998. (12)
10.33 Master Agreement dated January 11, 1999 by and between TurboChef
Technologies, Inc. and AIG Financial Securities Corp. (13)
10.34 Variable Stock Agreement dated January 14, 1999 by and between
TurboChef Technologies, Inc. and AIG Financial Securities Corp. (13)
10.35 Pledge Agreement dated January 11, 1999 by and between TurboChef
Technologies, Inc. and AIG Financial Securities Corp. (13)
-28-
11 Statement Re: Computation of Per Share Earnings is not necessary
because the computation of per share earnings on both a basic and
diluted basis can be clearly determined from this report.
21 Subsidiaries of the Company. (9)
_______________
(1) Filed as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 33-75008), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1994, and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994, and incorporated herein by
reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-2992), and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995, and incorporated herein by
reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996, and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, and incorporated herein by
reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, and incorporated herein by
reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10K for
the fiscal year December 31, 1997, and incorporated herein by
reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, and incorporated herein by
reference.
(11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, and incorporated herein by
reference.
(13) Filed herewith.
-29-
(b) Reports on Form 8-K
During the quarter ending December 31, 1998, the Company filed a Form 8-K
dated December 23, 1998 reporting under Item 4 - "Changes in Registrant's
Certifying Accountant", the resignation of KPMG LLP as the Company's
independent public accountant and the appointment of Arthur Andersen LLP as
the Company's new independent public accountant. The Form 8-K was amended
pursuant to a Form 8-K/A dated January 6, 1999 to incorporate an exhibit
into such Form 8-K.
-30-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TURBOCHEF TECHNOLOGIES, INC.
By:/s/ Richard N. Caron
Richard N. Caron
President, Chief Executive Officer
and Director
Dated March 29, 1999
-31-
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Name Title Date
---- ----- ----
/s/ Marion H. Antonini Chairman of the Board and March 29, 1999
Marion H. Antonini Director
/s/ Richard N. Caron President, Chief Executive Officer March 29, 1999
Richard N. Caron and Director (Principal Executive
Officer)
/s/ Dennis J. Jameson Executive Vice President, Chief March 29, 1999
Dennis J. Jameson Financial Officer (Principal
Accounting and Financial Officer)
/s/ Donald J. Gogel Director March 29, 1999
Donald J. Gogel
/s/ Jeffery B. Bogatin Director March 29, 1999
Jeffery B. Bogatin
/s/ Sir Anthony Joliffe Director March 29, 1999
Sir Anthony Joliffe
-32-
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Independent Auditors' Report F-3
Financial Statements:
Balance Sheets as of December 31, 1998 and 1997 F-4
Statements of Operations for the years ended December 31, 1998,
1997 and 1996 F-5
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 F-6
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996 F-7
Notes to Financial Statements F-8
All financial statement schedules are omitted since the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
F-1
Report of Independent Public Accountants
The Board of Directors and Stockholders
TurboChef Technologies, Inc.:
We have audited the accompanying balance sheet of TurboChef Technologies, Inc.
(a Delaware corporation) as of December 31, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TurboChef Technologies, Inc. as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas
March 31, 1999
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TurboChef Technologies, Inc.:
We have audited the accompanying balance sheet of TurboChef Technologies, Inc.
as of December 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows) for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TurboChef Technologies, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
KPMG LLP
Dallas, Texas
January 30, 1998
F-3
TurboChef Technologies, Inc.
Balance Sheets
(Amounts in Thousands, Except Share data)
At December 31,
1998 1997
---- ----
Assets
------
Current assets:
Cash and cash equivalents $ 164 $ 1,397
Marketable securities available for sale, at fair value 18,292 7,277
Accounts receivable net of allowance for doubtful accounts of
$92 and $16 at December 31, 1998 and 1997, respectively 914 625
Inventories, net 762 935
Prepaid expenses 41 104
-------- --------
Total current assets 20,173 10,338
-------- --------
Marketable securities available for sale, at fair value -- 5,482
Property and equipment:
Leasehold improvements 130 110
Furniture and fixtures 475 345
Equipment 456 420
-------- --------
1,061 875
Less accumulated depreciation and amortization (563) (384)
-------- --------
Net property and equipment 498 491
-------- --------
Other assets 129 129
-------- --------
Total assets $ 20,800 $ 16,440
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 571 $ 519
Accrued payroll 223 86
Accrued warranty costs 259 145
Accrued expenses 474 3
Deferred revenue 49 22
Other 31 36
-------- --------
Total current liabilities 1,607 811
Commitments and contingencies -- --
Stockholders' equity
Common stock, $.01 par value. Authorized 50,000,000 shares
Issued 14,659,134 and 14,551,294 shares at December 31,
1998 and 1997 respectively 148 146
Additional paid-in capital 32,435 32,130
Accumulated deficit (21,231) (17,277)
Accumulated other comprehensive income 8,292 964
Treasury stock - at cost 32,130 and 17,382 shares in 1998
and 1997, respectively (451) (334)
-------- --------
Total stockholders' equity 19,193 15,629
-------- --------
Total liabilities and stockholders' equity $ 20,800 $ 16,440
======== ========
The accompanying notes are an integral part of these financial statements
F-4
TurboChef Technologies, Inc.
Statements of Operations
(Amounts in Thousands, Except Share Data)
Years Ended December 31,
1998 1997 1996
---- ---- ----
Product sales $ 3,062 $ 3,462 $ 2,789
Research and development fees 4,075 760 13
------------ ------------ ------------
Total revenues 7,137 4,222 2,802
Costs and expenses:
Cost of goods sold 2,677 2,843 2,307
Research and development expenses 2,311 1,220 681
Selling, general and administrative expenses 6,301 4,981 3,011
------------ ------------ ------------
Total costs and expenses 11,289 9,044 5,999
------------ ------------ ------------
Operating loss (4,152) (4,822) (3,197)
------------ ------------ ------------
Other income (expense):
Interest income 92 269 269
Interest expense -- -- (14)
Dividend income 200 47 --
Equity in loss of joint venture (105) (156) --
Other income 11 -- --
------------ ------------ ------------
198 160 255
------------ ------------ ------------
Net loss $ (3,954) $ (4,662) $ (2,942)
============ ============ ============
Loss per common share - basic and diluted $ (0.27) $ (0.33) $ (0.22)
============ ============ ============
Weighted average number of
common shares outstanding 14,611,724 14,032,796 13,339,431
============ ============ ============
The accompanying notes are an integral part of these financial statements
F-5
TurboChef Technologies, Inc.
Statements of Stockholders' Equity
(Amounts in Thousands, Except Share Data)
Accumulated
-----------
other Total
----- -----
Common stock Additional paid- comprehensive Accumulated Treasury stockholders'
------------ ---------------- ------------- ----------- -------- ------------
Shares Amount in capital income deficit stock equity
------ ------ ---------- ------ ------- ----- ------
Balance, December 31, 1995 12,867,078 $ 129 $ 10,993 $ - $ (9,673) $ - $ 1,449
Net loss - - - - (2,942) - (2,942)
--------
Comprehensive Income (Loss) - - - - - - (2,942)
Secondary public offering ($15.00 per share)
net of offering cost of $1,699 800,000 8 10,292 - - - 10,300
Issuance of stock in payment of director's fee 2,000 - 28 - - - 28
Exercise of stock options 116,166 1 264 - - - 265
Purchase of treasury stock (8,315 shares) - - - - - (167) (167)
---------- ----- -------- ------- --------- ------ --------
Balance, December 31, 1996 13,785,244 138 21,577 - (12,615) (167) 8,933
Net loss - - - - (4,662) - (4,662)
Net unrealized gain on marketable securities - - - 964 - - 964
--------
Comprehensive Income (Loss) - - - - - - (3,698)
Exercise of warrants 87,815 1 284 - - - 285
Issuance of stock in payment of director's fee 1,960 - 30 - - - 30
Exercise of stock options 111,607 1 244 - - - 245
Issuance of common stock 564,668 6 9,995 - - - 10,001
Purchase of treasury stock (9,067 shares) - - - - - (167) (167)
---------- ----- -------- ------- --------- ------ --------
Balance, December 31, 1997 14,551,294 146 32,130 964 (17,277) (334) 15,629
Net loss - - - - (3,954) - (3,954)
Net unrealized gain on marketable securities - - - 7,328 - - 7,328
--------
Comprehensive Income (Loss) - - - - - - 3,374
Exercise of warrants 51,014 1 164 - - - 165
Exercise of stock options 56,826 1 141 - - - 142
Purchase of treasury stock (14,748 shares) - - - - - (117) (117)
---------- ----- -------- ------- --------- ------ --------
Balance, December 31, 1998 14,659,134 $ 148 $ 32,435 $ 8,292 $ (21,231) $ (451) $ 19,193
========== ===== ======== ======= ========= ====== ========
The accompanying notes are an integral part of these financial statements
F-6
TurboChef Technologies, Inc.
Statements of Cash Flows
(Amounts in Thousands)
Years Ended December 31,
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net loss $ (3,954) $ (4,662) $ (2,941)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in loss of joint venture 105 156 -
Depreciation and Amortization 505 172 104
Provision for doubtful accounts 76 - 16
Amortization of director compensation 15 29 14
Increase in accounts receivable (365) (62) (27)
Increase in inventories (130) (274) (147)
Decrease (increase) in prepaid expenses 47 174 (164)
Decrease (increase) in other assets 18 (47) 3
Increase (decrease) in accounts payable 52 60 (64)
Increase (decrease) in accrued expenses 722 (62) 380
Increase in deferred revenue 27 11 11
Decrease in other liabilities (5) (8) (10)
-------------- -------------- ---------------
Net cash used in operating activities (2,887) (4,513) (2,825)
-------------- -------------- ---------------
Cash flows from investing activities:
Sales (purchases) of marketable securities 1,795 5,514 (7,309)
Purchase of equipment (186) (327) (194)
Investment in joint venture (145) (117) -
-------------- -------------- ---------------
Net cash provided by (used in) investing activities 1,464 5,070 (7,503)
-------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable to stockholders - - 285
Repayments from notes payable to stockholders - - (570)
Issuances of common stock - - 12,000
Offering costs - - (1,651)
Proceeds from the exercise of stock options 26 78 98
Proceeds from the exercise of stock warrants 164 285
-------------- -------------- ---------------
Net cash provided by financing activities 190 363 10,162
-------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,233) 920 (166)
Cash and cash equivalents at beginning of period 1,397 477 643
-------------- -------------- ---------------
Cash and cash equivalents at end of period $ 164 $ 1,397 $ 477
============== ============== ===============
Supplemental disclosures of noncash activities:
Noncash investing activity - net unrealized gain on
marketable securities $ 7,328 $ 964 $ -
============== ============== ===============
Noncash financing activities:
Issuance of stock in payment of director's fee $ - $ 30 $ 28
============== ============== ===============
Issuance of stock to Maytag $ - $ 10,000 $ -
============== ============== ===============
Supplemental disclosures of cash flow information -
Interest paid $ - $ - $ 13
============== ============== ===============
The accompanying notes are an integral part of these financial statements
F-7
TURBOCHEF TECHNOLOGIES, INC.
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
TurboChef Technologies, Inc. (the Company) was incorporated on April 3, 1991.
Prior to its name change in July 1998, the Company operated under the name
TurboChef, Inc. The Company is a foodservice technology company engaged
primarily in designing, developing and marketing high-speed cooking systems.
The Company believes its primary markets are with both residential and
commercial food service operators domestic and international
In April 1994, the Company completed an underwritten initial public offering
(IPO) of 2,600,000 shares of its common stock resulting in aggregate proceeds
of approximately $5.2 million, which is net of the underwriter's discount and
other IPO offering costs totaling $1.3 million.
In June 1996, the Company consummated an underwritten public offering (June
1996 Offering) of 800,000 shares of its common stock resulting in aggregate
proceeds of approximately $10.3 million, which is net of underwriter's
discount and other offering costs totaling $1.7 million.
In September 1997, the Company and Maytag Corporation (Maytag) entered into a
"Strategic Alliance Agreement" (Alliance) for the purpose of the development
and commercialization of innovative products based on new technologies in the
areas of heat transfer and thermodynamics. In connection with the Alliance,
the Company issued 564,668 shares of common stock with an aggregate fair
market value of approximately $10.0 million for 293,846 shares of Maytag
common stock at the same aggregate market value. In addition, the Company
received fees from Maytag for research and development activities incurred in
connection with the first research and development project of $250,000 per
month for a term of six months. The total amount of fees received as of
December 31, 1997 was $750,000 which has been included in research and
"development fees" in the accompanying 1997 statement of operations. In March
1998 this project was extended for one year. Beginning in April 1998, the
monthly payment increased to $300,000 and is scheduled to end in March 1999.
In July 1998, the Company announced a commercial sales agreement with Maytag
whereby Maytag will lead the Company's North American commercial sales and
marketing initiatives. With the addition of the commercial relationship, the
research and development funding was increased to $425,000 per month
beginning August 1998 and ending January 1999.
The Company is nearing completion of the Alliance's first product development
phase, and the Alliance is now focusing on the commercialization and launch
of the first residential cooking product incorporating the Company's
technologies under Maytag's Jenn-Air cooking brand. As the Company has
previously reported, this completes the current phase of targeted research
and development and the associated $125,000 and $300,000 per month payments
ended in January and March 1999, respectively. The Alliance, however, is
ongoing, and provides for the opportunity to establish additional residential
and commercial product development projects in the future. Accordingly,
future revenues from the Alliance will depend upon the establishment of
additional
F-8
fee based research and development projects with Maytag and royalties from
the successful commercialization and sales of the products that embody the
Company's technologies.
However, if additional projects are not initiated with Maytag there is no
assurance that the Company would be able to find alternate sources of funding
on acceptable terms for further research and development of current and
future products. The failure to find acceptable alternative financing could
have a significant adverse impact on the Company's current and future
operations. However, management is confident that through sales of its
commercial cooking system and financing agreements, it will have adequate
funding for further research and development throughout 1999.
Cash Equivalents
Cash equivalents of $1,091,000 at December 31 1997, consisted of U.S.
Treasury securities, which matured in less than three months. For purposes
of the statement of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents. As of December 31, 1998, there were no cash equivalents of this
nature in the ending balance.
Investments in Marketable Securities
Investments in marketable securities at December 31, 1998 consisted of Maytag
common stock. Investments in marketable securities at December 31, 1997
consisted of U.S. Government Agency securities and Maytag common stock. These
securities are classified as available-for-sale under Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and are stated at fair value. Unrealized holding gains and
losses on available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.
Inventories
Inventories are valued at the lower of cost or market and primarily consist
of completed cooking systems and replacement parts. The Company determines
cost for cooking systems by the specific cost method. Cooking systems used
for demonstration and testing (demo systems) are generally depreciated over a
one-year period. Depreciation for demo systems was $303,000 and $25,000 for
the years ended December 31, 1998 and 1997 respectively. There was no
depreciation for demo systems for the year ended December 31, 1996. The
following table details the various components of inventory for the years
ended December 31, 1998 and 1997, respectively (Amounts shown in Thousands):
1998 1997
----------- ------------
Cooking systems $ 633 $ 450
Parts, net 82 339
Demo systems, net 47 146
----- -----
Total Inventory $ 762 $ 935
===== =====
F-9
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets. Computer equipment is generally depreciated over a three-year
period. All other property and equipment is generally depreciated over a
five-year period. Depreciation for all property and equipment was $179,000,
$141,000 and $88,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Sales Deposits
Sales deposits consist of amounts received from customers for future
purchases of cooking systems. Deferred amounts will be recognized as revenue
when the cooking systems are shipped to the customer.
Revenue Recognition
The Company records product sales when the product is shipped to the
customer. Fees for research and development services or technology transfers
are recorded when the Company has met all its related contractual
obligations, which generally coincides with the collection of such funds.
Reserves for sales returns and allowances are recorded in the same accounting
period as the related revenues. As of December 31, 1998 and 1997, there were
no reserves established as sales returns and allowances were not significant.
Other Assets and Related Amortization Expense
Other assets consist primarily of patents. Generally, amortization is
computed on the straight-line method over ten years. Patent amortization was
$23,000, $5,000 and $9,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Research and Development
Research and development costs consist of all costs incurred in planning,
design and testing of the high-speed commercial cooking systems, including
salary costs related to research and development, and are expensed as
incurred.
Product Warranty
The Company's cooking systems are under warranty against defects in material
and workmanship for a period of one year. Anticipated future warranty costs
are estimated, based upon historical experience, and are recorded in the
period cooking systems are sold. Extended warranty coverage has been sold to
a major customer in Europe. The costs associated with this extended warranty
agreement in excess of revenues were $462,000 and $146,000 for the years
ended December 31, 1998 and 1997, respectively. There were no revenues or
expenses for the extended warranty program for the year ended December 31,
1996.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
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bases and operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Loss Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share (EPS), during the fourth quarter
of 1997, and all previous references to per share amounts were retroactively
restated. The Statement requires basic EPS to be computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in earnings of the entity.
Adoption of this statement did not impact previously recorded net loss per
common share for the years ended December 31, 1998, 1997 and 1996.
Basic net loss per common share is based on 14,611,724, 14,032,796, and
13,339,431 weighted average shares outstanding for the years ended December
31, 1998, 1997 and 1996, respectively. For the years ended December 31,
1998, 1997 and 1996, diluted earnings per share is the same as basic earnings
per share because the effect of all other dilutive securities on the net loss
was antidilutive. Other potentially dilutive securities (warrants and
options) as of December 31, 1998, 1997 and 1996 totaled 3,278,239, 2,363,079
and 2,380,833, respectively.
Stock Option Plans
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, and related interpretations.
Compensation expense is recorded on the date of grant only if the market
price of the underlying stock exceeds the exercise price. Since the Company
grants substantially all stock options with an exercise price equal to or
greater than the current market price of the stock on the grant date, no
compensation expense is recorded. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123"). Under SFAS 123 the Company has elected the
disclosure provisions, rather than the recognition provision, and will
continue to account for stock-based compensation under APB 25.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Instruments
The carrying amount of cash and cash equivalents, marketable securities
available for sale (U.S. Government Agency Securities), accounts receivable,
note payable to shareholder, accounts
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payable and accrued expenses approximates fair value due to the short
maturity of these instruments.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less estimated sales expenses. Adoption of this Statement did
not have a material impact on the Company's financial position, results of
operations, or liquidity.
Reclassifications
Certain amounts in prior periods financial statements have been reclassified
to conform to current year presentation.
2. LIQUIDITY
The Company has historically incurred significant losses and thus anticipates
that its current cash and equivalent balances on hand will not be sufficient
to fund its operations and satisfy its current contemplated capital
requirements. Therefore, in July 1998, the Company executed a revolving
credit agreement with its bank to support general corporate requirements,
specifically, continued investment in technology development. This agreement,
which was set to expire on July 1, 1999 was secured by 90,000 shares of
Maytag common stock owned by the Company. The Company was able to borrow up
to the lesser $3.0 million or 75% of the market value of the Maytag stock at
market rates of interest. In January 1999, the Company terminated the
revolving credit agreement with its bank and entered into an agreement with
Banque AIG, London Branch (an affiliate of American International Group, Inc.
("AIG")). The AIG facility provides for the Company to pledge its Maytag
shares in the form of a "Variable Stock Transaction" and to receive cash
advances against the value of the Maytag shares. All advances mature within
three years and bear interest at LIBOR plus 0.75%. At the end of the three-
year term, the Company may satisfy any outstanding obligation by surrendering
Maytag shares equal to the fair value of the obligation or with cash. The
transaction allows TurboChef to benefit from any appreciation in the Maytag
share price over $63.25, over a the three-year period and provides down-side
protection to the Company in the form of a "put option" for the 293,846
shares of Maytag stock. The put option establishes a minimum realizable value
for the Maytag shares of approximately $57 per share.
In January 1999, the Company had pledged 140,000 shares of the Maytag stock
and received advances totaling $3.0 million and has approximately $3.2
million in advances available. Once the remaining 146,923 Maytag shares are
available to pledge, the Company will have available approximately $7.2
million in additional advances.
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In February 1999, the Company entered into an agreement with its bank to
support general corporate requirements. The credit agreement is set to
expire in February 2000. The agreement is secured by 6,923 shares of Maytag
common stock owned by the Company. The Company can borrow up to the lesser
of $315,000 or 75% of the market value of the Maytag stock at market rates of
interest.
Management believes that cash flows from operations and the advances from the
AIG facility and borrowings under the bank agreement will be adequate to
fund the Company's operations in fiscal year 1999.
3. MARKETABLE SECURITES
In 1998, the Company's marketable securities consist of shares of Maytag
common stock. For 1997 marketable securities consist of shares of Maytag
common stock and U.S. Government Agency Securities. These securities were
classified as available-for-sale by major security type and class of security
and unrealized gains and losses are recorded as other accumulated
comprehensive income. At December 31, 1998 and 1997, the amounts of
marketable securities were as follows (Amounts shown in Thousands):
Gross Gross
unrealized unrealized
holding holding Fair
December 31, 1998: Cost gains losses value
------------------ ---------------- ------------- ------------ --------------
Equity securities (Maytag) $10,000 8,292 -- $18,292
======= ===== ======= =======
December 31, 1997
-----------------
U.S. Government Agency
Securities $ 1,795 -- -- $ 1,795
Equity securities (Maytag) 10,000 964 -- 10,964
------- ----- ------- -------
$11,795 964 -- $12,759
======= ===== ======= =======
Equity securities are generally subject to a general restriction placed
on selling, pledging, transferring or assigning such securities for a period
of 21 months from December 31, 1997; however, the Company received the
ability, in accordance with the Alliance, to cause 50% of such securities to
be sold, pledged, transferred or assigned, subject to certain requirements,
after March 31, 1998. According to the Alliance, the Company will gain the
right to sell, pledge, transfer or assign the remaining 50% on September 30,
1999. Unrealized gains on equity investments are included in stockholder's
equity.
Proceeds from the sale of investment securities available for sale were
$1,795,000 in 1998 and resulted in no gain or loss.
4. INVESTMENT IN JOINT VENTURE
During 1997, the Company contributed $117,000 for a 50% interest in a joint
venture, TurboChef Europe, created for the purpose of establishing
distributorships and direct sales relationships within certain Western
European countries. The Company's share of the net loss of TurboChef Europe
for the year ended December 31, 1997 was $156,000.
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During 1998, the Company contributed $145,000 to its joint venture. The
Company's net loss in the joint venture for the year ended December 31, 1998
was $105,000. In June 1998, the joint venture was terminated.
5. CERTAIN TRANSACTIONS WITH STOCKHOLDERS
Notes Payable
On March 30, 1996, a major shareholder and an officer of the Company loaned
the Company the sums of $200,000 and $85,000, respectively. These loans were
evidenced by promissory notes bearing interest at the rate of 6.5% per annum.
Each of these notes was payable on demand. These loans were made to satisfy
certain eligibility requirements in order for the Company's common stock to
continue to be listed on NASDAQ. These notes were repaid in full (an
aggregate of $289,000, including accrued interest) prior to the consummation
of the June 1996 Offering.
6. LEASE COMMITMENTS
The Company is obligated under certain non-cancelable leases for office space
and equipment, the majority of which have remaining terms of less than one
year. Obligations for office space, which extends beyond one year, are
$341,000, $288,000 and $9,000 in 1999, 2000, and 2001 respectively. The
Company has sub-let one of the properties thus reducing the actual net rent
expense by $69,000 and $23,000 for the years ended December 31, 1999 and
2000. Rent expense was $325,000, $323,000, and $148,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
7. INCOME TAXES
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the Statements
of Operations:
1998 1997 1996
------------------ ------------------ ------------------
Computed "expected" tax benefit $(1,344) $(1,585) $(1,000)
Research and development credit (98) (47) (39)
Other 83 132 5
Valuation Allowanc 1,359 1,500 1,034
------- ------- -------
Income tax benefit $ -- $ -- $ --
======= ======= =======
The components of the Company's net deferred tax asset were as follows:
December 31
----------------------------------------
1998 1997
-------------------- ------------------
Deferred tax assets:
Accounts receivable $ 31 $ --
Accrued bonuses 36 --
Inventory reserves 150 --
Warranty reserves 39 --
Research and development credit carryforwards 245 158
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Net operating loss carryforwards 5,518 5,183
Other 17 --
------- -------
Total gross deferred tax assets 6,036 5,341
Less valuation allowance (6,036) (5,322)
------- -------
Net deferred tax assets -- 19
------- -------
Deferred tax liabilities:
Equipment principally due to difference
In depreciation -- (10)
Other -- (9)
------- -------
Total gross deferred tax liabilities (19)
------- -------
Net $ -- $ --
======= =======
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Due to the historical operating results of the Company,
management is unable to conclude on a more likely than not basis that
deferred income tax assets will be realized.
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of $16.2 million, which may be used against
future taxable income, if any, and which expire in years 2009 to 2013. Any
change in ownership under Internal Revenue Code Section 382 could limit the
annual utilization of these carryforwards and cause some amount of the
carryforwards to expire unutilized.
The Company also has research and development credit carryforwards of
approximately $245,000 which may be used to offset future federal tax
liability, if any.
8. STOCKHOLDERS' EQUITY
Authorized Shares
In June 1997, the Board of Directors of the Company approved a proposal to
increase the number of authorized shares of common stock from 20,000,000
shares to 50,000,000 million shares.
Stock Option Plan
The Company adopted the 1994 Stock Option Plan ("the Stock Option Plan"),
which was amended in March 1994, June 1995, February 1997, June 1997, June
1998 and October 1998, pursuant to which stock options covering an aggregate
of 3,650,000 shares of the Company's common stock may be granted. Options
awarded under the Stock Option Plan (i) are generally granted at exercise
prices which equate to or are above quoted market price on the date of the
grant; (ii) generally become exercisable over a period of one to four years;
and (iii) generally expire five or seven years subsequent to award.
At December 31, 1998 there were 88,334 shares available for grant under the
Plan. The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $3.28, $5.16, and $5.53, respectively, on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: For 1998, Risk-free interest rate, ranging from
F-15
4.02% to 5.63%; expected life, seven years; expected dividend yield, 0% and
volatility, 41%. For 1997, Risk-free interest rate, ranging from 5.77% to
6.56%; expected life, seven years; expected dividend yield, 0% and
volatility, 45%. For 1996, the Risk-free interest rate of was 6%, expected
life was five years, expected dividend yield was 0% and volatility was 50%.
The Company applies APB Opinion 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below (Amounts shown in thousands except share amounts).
1998 1997 1996
------------------ ------------------ ------------------
Net loss:
As reported $(3,954) $(4,662) $(2,941)
Loss per common share - basic
and diluted $ (.27) $ (.33) $ (.22)
Pro forma $(5,448) $(5,959) $(3,588)
Loss per common share - basic
and diluted $ (.37) $ (.42) $ (.27)
Pro forma net loss reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the options
vesting period of up to four years and compensation cost for options granted
prior to January 1, 1995 is not considered.
A summary of stock option activity follows:
Weighted
Number of Average
Shares Exercise Price
------------------ ------------------
Options outstanding at December 31, 1995 1,500,666 $ 3.36
========= ======
Options granted 949,000 11.02
Options exercised (116,166) 2.29
Options cancelled (292,667) 7.99
--------- ------
Options outstanding at December 31, 1996 2,040,833 $ 6.32
========= ======
Options granted 424,500 9.61
Options exercised (111,607) 2.19
Options cancelled (242,833) 9.17
--------- ------
Options outstanding at December 31, 1997 2,110,893 $ 6.87
========= ======
Options granted 1,245,000 6.40
Options exercised (56,826) 2.50
Options cancelled (222,000) 9.51
--------- ------
Options outstanding at December 31, 1998 3,077,067 $ 6.57
========= ======
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.50 - $15.00 and 3.6
years, respectively. The following table summarizes information about the
Company's stock options outstanding at December 31, 1998:
F-16
Options Outstanding Options Exercisable
------------------- -------------------
Range of Exercise Prices Outstanding as Weighted Weighted Exercisable as Weighted
of December 31, Average Average of December Average
1998 Remaining Exercise 31, 1998 Exercise
Contractual Price Price
Life
-------------------------------------------------------------------------------------------------------------
1.50-5.00 1,148,067 1.6 $ 2.85 948,067 $ 2.45
5.01-10.00 1,349,000 6.2 $ 6.92 218,499 $ 7.68
10.01-15.00 580,000 2.2 $12.60 125,000 $11.59
At December 31, 1998, 1997 and 1996, the number of options exercisable was
1,291,566, 1,146,970 and 1,095,826 respectively, and the weighted-average
exercise price of those options was $4.22, $2.88 and $3.08, respectively.
In addition, a former joint venture partner has the option to purchase
262,500 shares of common stock at $2.50 per share and expiring March 31,
2002. As of December 31, 1998, no options have been exercised.
Stock Issuances
During 1997, the Company issued 564,668 shares of stock to Maytag in exchange
for 293,846 shares of Maytag's common stock under the terms of the "Strategic
Alliance Agreement." The Company stock was valued at $17.71 per share and
the Maytag stock was valued at $34.03 per share both of which approximates
the fair value of the respective stocks at the issuance date.
During 1996, the Company issued 2,000 shares of stock to a director in
payment of director fees. The stock was valued at $13.88 per share, which
approximates the fair value of the stock at the issuance date. During 1997,
the Company issued 1,960 shares of stock to a director in payment of director
fees. The stock was valued at $15.25 per share, which approximates the fair
value of the stock at the issuance date.
Treasury Stock
During the years ended December 31, 1998, 1997 and 1996 the Company accepted
issued shares of stock, at market value, as payment to exercise vested stock
options at their granted price. Treasury stock transactions for the years
ended December 31, 1998, 1997 and 1996 were $117,000, $167,000 and $167,000.
Stock Warrants
In connection with the IPO, the Company sold the underwriters warrants to
purchase 260,000 shares at $3.25 per share (the IPO Warrants) of which 51,014
warrants were exercised in 1998 and 87,814 warrants were exercised in 1997.
F-17
In June 1996, the Company sold the underwriters of the secondary public
offering warrants to purchase 80,000 shares at $24.00 per share (the June
1996 Warrants). None of the June 1996 Warrants had been exercised as of
December 31, 1998.
9. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the fourth quarter of 1998, the Company incurred aggregate charges in the
amount of $53,000 relating to the termination of its manufacturing
relationship with a European company.
In the third and fourth quarters of 1996, the Company incurred aggregate
charges in the amount of $467,000 for the field upgrade of systems sold to a
major customer with performance enhancing technological improvements and
charged operations for such charges.
10. RELATED PARTY TRANSACTIONS
Since inception of the Company, an entity (which was founded and is
principally owned by the Company's former Vice President - Engineering) has
performed engineering and development work for the Company. During the years
ended December 31, 1998, 1997 and 1996, the Company paid the entity fees of
$112,000, $256,000, and $345,000, respectively, relating primarily to
research and development charges incurred on behalf of the Company.
For the years ended December 31, 1998 and 1997, the Company made net
purchases of cooking system inventory and related equipment from Techniform
Waterford Ltd. ("Techniform"), an Ireland based manufacturer, in the amounts
of $1,523,000 and $1,032,000, respectively. In 1999, the Company purchased
from Techniform $773,000 in cooking systems, parts and manufacturing
tooling. All transactions with Techniform were considered to be arms length
transactions. The manufacturing relationship with Techniform was terminated
in March 1999. Techniform is owned and operated by The Queally Group, a 50%
owner of the Company's former joint venture, TurboChef Europe.
For the years ended December 31, 1998 and 1997, the Company had net cooking
system sales of $572,000 and $226,000, respectively, to its European joint
venture, TurboChef Europe. This joint venture was terminated in June 1998.
11. CONCENTRATION OF BUSINESS RISKS
For the years ended December 31, 1998, 1997 and 1996, product sales from a
customer in the United Kingdom represented $59,000 or 1%, $1,576,000 or 37%
and $2,108,000 or 75%, respectively, of the total revenues of the Company.
The loss of this customer, in the absence of significant additional
customers or revenue sources, could have a material adverse effect on the
Company.
For the years ended December 31, 1998 and 1997, the Company received
$4,075,000 and $750,000, respectively, in fees for research and development
services and technology transfers from the Maytag Alliance. This represents
57% and 18% of the Company's total revenues for the years ended December 31,
1998 and 1997, respectively. As the Company has previously reported, it has
completed the current phase of targeted research and development and the
associated $125,000 and $300,000 per month payments ended in January and
March 1999, respectively. The Alliance, however, is ongoing, and provides
for the opportunity to establish additional residential and commercial
product development projects in the future. Accordingly, future revenues
from
F-18
the Alliance will depend upon the establishment of additional fee based
research and development projects with Maytag and royalties from the
successful commercialization and sales of the products that embody the
Company's technologies.
However, if additional projects are not initiated with Maytag 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. The failure to find acceptable alternative financing
could have a significant impact on the Company's current and future
operations. However, management is confident that through sales of its
commercial cooking system and the AIG financing agreement, it will have
adequate funding for further research and development throughout 1999. The
termination of the Maytag Alliance could have a material adverse effect on
the Company.
During 1998, the Company relied upon a single source for the manufacturing
of its commercial cooking systems, Techniform. In 1999, the Company began
transitioning its manufacturing requirements to G.S. Blodgett, a subsidiary
of Maytag. The Company will continue to rely upon a single source for the
manufacture of its commercial cooking systems at this time.
As of December 31, 1998, 100% of marketable equity securities and 91% of
current assets are comprised of Maytag common stock. The Company has taken
steps to partially reduce this concentration of risk through its financing
agreement with AIG.
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement under which it is obligated to
supply a fixed number of cooking systems at a price specifically stated on
the contract. A total of 48 units remain to be shipped under the contract,
with an option for 40 additional units at the sole discretion of the buyer.
13. AUTHORITATIVE PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". This Statement 130 requires the reporting of
comprehensive income and its components in the general-purpose financial
statements. This Statement also requires that an entity classify items of
other comprehensive income by their nature in an annual financial statement.
The Company has adopted this statement in 1998 and disclosed this
information through its statement of stockholders' equity.
The FASB has recently issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", and SFAS No. 132, "Employers'
Disclosure about Pensions and Other Post-Retirement Benefits". These
Statements are effective for the Company in 1998. The adoption of these
statements does not have a material effect on the Company's financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement is effective for the
Company on January 1, 2000. SFAS No. 133 requires companies to report
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The Company is currently
reviewing the standard and its effect on the financial statements.
F-19
In October 1998, the FASB issued SFAS No 134, "Accounting for Certain
Mortgage Banking Activities". This Statement is effective for the Company in
1999. The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
The American Institute of Certified Public Accountants (AICPA) has issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition". The
adoption of this Statement does not have a material effect on the Company's
financial statements.
In 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", and SOP 98-5, "Reporting
on the Costs of Start-Up Activities". The adoption of these Statements does
not have a material effect on the Company's financial statements.
F-20