funds allocated for the
completion of development of a particular product or technology. The occurrence of any of these risks could cause a substantial change in the design,
delay in the development, or abandonment of new technologies and products. Consequently, there can be no assurance that we will develop oven
technologies superior to our current technologies, successfully bring to market new commercial ovens, or develop and successfully commercialize our
residential line of ovens. Additionally, there can be no assurance that, if developed, new technologies or products will meet our current price or
performance objectives, be developed on a timely basis or prove to be as effective as products based on other technologies. The inability to
successfully complete the development of a product, or a determination by us, for financial, technical or other reasons, not to complete development of
a product, particularly in instances in which we have made significant expenditures, could have a material adverse effect on our operating
results.
If we are unable to keep up with evolving technology,
our products may become obsolete.
The market for our products and
technologies is characterized by evolving technology. We will not be able to compete successfully unless we continually enhance and improve our
existing products, complete development and introduce to the market in a timely manner our proposed products, adapt our products to the needs and
standards of our customers and potential customers, and continue to improve operating efficiencies and lower manufacturing costs. Moreover, competitors
may develop technologies or products that render our products obsolete or less marketable.
We may not be able to compete effectively because our
target markets are highly competitive, and some of our competitors have greater financial or technological resources.
Both the speed cook sector of the
commercial cooking equipment market and the residential oven market are characterized by intense competition. We compete, and will in the future
compete, with numerous well-established manufacturers and suppliers of commercial and residential ovens, including manufacturers and suppliers whose
ovens have been developed under licenses of our proprietary speed cook technologies. We also are aware of others who are developing, and in some cases
have introduced, new ovens based on other speed cook methods and technologies. There can be no assurance that other companies do not have or are not
currently developing functionally equivalent products, or that functionally equivalent products will not become available in the near future. In
addition, there can be no assurance that the products that we develop will be functionally superior to, or gain more commercial acceptance than,
products currently being produced by third parties who have exclusive licenses to some of our proprietary technologies. Most of our competitors possess
substantially greater financial, marketing, personnel and other resources than we do, and have established reputations relating to product design,
development, manufacture, brand recognition, marketing and service of cooking equipment.
We are subject to potential disruptions in material
and component supply and other potential adverse effects.
We do not maintain supply
agreements with third parties for raw materials or components. Instead, we purchase these items pursuant to purchase orders in the ordinary course of
business. We attempt to maintain multiple sources of supply for these items, but some of the specially-designed components used in our ovens are
sourced from a limited number of suppliers. We may utilize contract manufacturers to fabricate components and assemble our residential oven, and we may
outsource fabrication of parts or components to foreign operations.
We are and will continue to be
dependent on the ability of these third parties to, among other things, meet our design, performance and quality specifications, provide components
and, in the case of residential products, produce finished ovens in a timely manner. Events beyond our control could have an adverse effect on the cost
or availability of raw materials and components. Shipment delays, unexpected price increases or changes in payment terms from our suppliers of
components could impact our ability to secure necessary components. The occurrence of any of these events would have a material adverse effect on our
financial performance, competitive position and reputation.
Depending upon supply from
foreign countries also subjects us to various risks inherent in foreign manufacturing, including increased credit risks, tariffs, duties and other
trade barriers, fluctuations in foreign currency exchange rates, shipping delays, acts of terrorism and international political, regulatory and
economic developments. Any of these risks could increase our costs of goods, interrupt our operations or have a significant impact on our foreign
suppliers’ ability to deliver components.
16
We may need additional capital to finance growth and
to execute our business plan, and we may be unable to obtain additional capital under terms acceptable to us or at all.
Our capital requirements in
connection with the execution of our business plan, including our marketing and sales efforts, continuing commercial and residential product
development and working capital needs, are expected to be significant for the foreseeable future. In addition, unanticipated events could cause our
revenues to be lower and our costs to be higher than expected, resulting in the need for additional capital. While we believe that our present capital,
together with our bank credit facility, provides us the ability to execute our business plan, we cannot make assurances in this regard. Further, if we
do not have sufficient funds available, or are unable to obtain capital necessary to meet our future requirements, we may be unable to fund the
research, development and sale of ovens, and we may have to delay or abandon one or more aspects of our business plan, any of which could harm our
business.
Our financial performance is subject to significant
fluctuations.
Our financial performance is
subject to quarterly and annual fluctuations due to a number of factors, including:
• |
|
our lengthy, unpredictable sales cycle
for commercial ovens; |
• |
|
the gain or loss of significant
customers; |
• |
|
unexpected delays in new product
introductions; |
• |
|
level of market acceptance of our
residential ovens and any new or enhanced versions of our products; |
• |
|
unexpected changes in the levels of our
operating expenses including increased research and development and sales and marketing expenses associated with new product
introductions; |
• |
|
competitive product offerings and
pricing actions; and |
• |
|
general economic
conditions. |
The occurrence of any of these
factors could materially and adversely affect our operating results and the price of our common stock.
We rely heavily on our senior management team and the
expertise of management personnel.
Our operations will depend for
the foreseeable future on the efforts of our executive officers and our other senior management to execute our business plan, and any of our executive
officers or senior management can terminate his relationship with us at any time. Our business and prospects could be adversely affected if these
persons, in significant numbers, do not perform their key roles as expected, or terminate their relationships with us, and we are unable to attract and
retain qualified replacements.
We may not realize the potential benefit of our
patents, trademarks and other intellectual property.
There can be no assurance as to
the breadth or degree of protection which existing or future patents, if any, may afford us, that any patent applications will result in issued
patents, that our patents, pending patent applications, registered trademarks or service marks, pending trademark applications or trademarks will be
upheld if challenged or that competitors will not develop similar or superior methods or products outside the protection of any patent issued to us.
There can be no assurance that we will have all of the resources necessary to enforce or defend a patent infringement or proprietary rights violation
action.
We also rely on trade secrets and
proprietary know-how and employ various methods to protect the concepts, ideas and documentation of our proprietary technologies. However, those
methods may not afford complete protection and there can be no assurance that others will not independently develop similar know-how or obtain access
to our know-how, concepts, ideas and documentation.
If our products or intellectual property violate the
rights of others, we may become liable for damages.
If any of our existing or future
products, trademarks, service marks or other proprietary rights infringe patents, trademarks, service marks or proprietary rights of others, including
others to which we have exclusively licensed some of our proprietary cooking technologies, we could become liable for damages and may be required to
modify
17
the design of our products,
change the name of our products or obtain a license for the use of our products. There can be no assurance that we would be able to make any of these
modifications or changes in a timely manner, upon acceptable terms and conditions, or at all. The failure to do any of the foregoing could have a
material adverse effect upon our ability to manufacture and market our products.
Our business subjects us to significant regulatory
compliance burdens.
We are subject to regulations
administered by various federal, state, local and international authorities, including those administered by the United States Food and Drug
Administration, the Federal Communications Commission and the European Community Council. These regulations impose significant compliance burdens on us
and there can be no assurance that we will be able to comply with such regulations. Failure to comply with these regulatory requirements may subject us
to civil and criminal sanctions and penalties. Moreover, new legislation and regulations, as well as revisions to existing laws and regulations, at the
federal, state, local and international levels may be proposed in the future affecting the foodservice equipment industry. These proposals could affect
our operations, result in material capital expenditures, affect the marketability of our existing products and technologies and/or limit opportunities
for us with respect to modifications of our existing products or with respect to our new or proposed products or technologies. In addition, expansion
of our operations into new markets may require us to comply with additional regulatory requirements. There can be no assurance that we will be able to
comply with additional applicable laws and regulations without excessive cost or business interruption, and failure to comply could have a material
adverse effect on us.
A product liability claim in excess of our insurance
coverage, or an inability to acquire insurance at commercially reasonable rates, could have a material adverse effect upon our
business.
We are engaged in a business
which could expose us to various claims, including claims by foodservice operators and their staffs, as well as by consumers, for personal injury or
property damage due to design or manufacturing defects or otherwise. We maintain reserves and liability insurance coverage at levels based upon
commercial norms and our historical claims experience. However, a material product liability or other claim could be brought against us in excess of
our insurance coverage, or could not be covered by our then-existing insurance. Additionally, a material product liability or other claim could be
brought against us that damages the reputation of our technologies or products in the market. Any of these types of claims could have a material
adverse effect upon our business, operating results and financial condition.
We are dependent on a limited number of customers for
a significant portion of our revenues.
We have been dependent on a
limited number of customers for a significant portion of our revenues. Sales to three customers accounted for 66%, 55% and 60% of our total revenues in
the years ended December 31, 2007, 2006 and 2005, respectively. Dependence on a few customers could make it difficult to negotiate attractive prices
for our products and could expose us to the risk of substantial losses if a single dominant customer stops purchasing our products. While we believe it
is important to our success that we continue to sell to our existing base of commercial customers to meet their expansion or replacement needs, we are
focused on extending our customer base by concentrating our internal sales efforts on major foodservice operators and by supporting our networks of
manufacturer’s representatives and equipment distributors. We expect that an expanding number of customers will contribute to a growing number of
sales. Our ability to maintain close relationships with these top customers is important to the growth and profitability of our business. If we fail to
sell our products to one or more of these top customers in any particular period, or if a large customer purchases fewer of our products, defers orders
or fails to place additional orders with us, and if we fail to replace that business with sales to other existing and/or new customers, our revenue
could decline, and our results of operations could be adversely affected.
Risks Related To Ownership Of Our Common
Stock
Our recent restatement may continue to negatively
impact our stock.
We were required to restate
certain prior financial statements upon conclusion of our internal investigation relating to past stock option practices. This investigation, which was
undertaken in response to an informal SEC inquiry we received in February 2007, resulted in our concluding that the measurement dates for financial
accounting
18
purposes for a number of
stock option grants differed from the recorded grant dates for such awards and, as a consequence, material amounts of stock compensation expenses were
not properly recognized in our previously issued financial statements. Although we believe we have appropriately addressed all issues regarding the
improper accounting and reporting of these option grants in our restatement of the affected periods in our Form 10-K filing for our 2006 fiscal year,
we have not yet received notice of what regulatory action, if any, will be taken by the SEC. We have incurred significant expenses relating to legal,
accounting, tax, and other professional services in connection with the review of our stock option grant practices and the related restatement, and may
incur significant expenses in the future with respect to such matters if the SEC disagrees with the manner in which the issues were resolved and
continues its investigation. We could also be exposed to litigation or additional regulatory proceedings relating to our past stock option practices.
If any litigation or government enforcement action is instituted against us, the resolution of these matters will be time consuming, expensive, and
distract management from the conduct of our business. Such proceedings could also result in adverse findings which could require us to pay damages or
penalties or have other remedies imposed, all of which could harm our business, financial condition, results of operations, and cash
flows.
We are subject to review by taxing authorities,
including the Internal Revenue Service.
We are subject to review by
domestic and foreign taxing authorities, including the Internal Revenue Service. We understand the IRS intends to focus on issues relating to stock
option grants. We believe the investigation of our stock option practices, the re-measurement of various historic stock option grants and our handling
of related tax issues may subject us to a higher risk of inquiry or audit with its attendant potential costs.
The market price of our common stock has been
volatile and difficult to predict and may continue to be volatile and difficult to predict.
The market price of our common
stock has been volatile in the past and may continue to be volatile in the future. The market price of our common stock will be affected by, among
other things:
• |
|
variations in quarterly operating
results; |
• |
|
potential initiation and subsequent
changes in financial estimates by securities analysts; |
• |
|
changes in general conditions in the
economy or the financial markets; |
• |
|
changes in accounting standards,
policies or interpretations; |
• |
|
other developments affecting us, our
industry, clients or competitors; and; |
• |
|
the operating and stock price
performance of companies that investors deem comparable to us. |
Any of these factors could have a
negative effect on the price of our common stock on The NASDAQ Global Market, make it difficult to predict the market price for our common stock and
cause the value of your investment to decline.
The exercise of options or vesting and payout of
restricted stock units will result in dilution to you.
At March 1, 2008, 2.8 million
shares of our common stock were subject to issuance upon exercise of outstanding stock options, 626,000 shares were subject to issuance upon vesting
and payout under outstanding restricted stock units, and an indeterminate number of shares issuable in the future to settle the dollar denominated
restricted stock units issued in connection with the tender offer and amendment of options completed in December 2007. Your ownership will be diluted
by the exercise of any of these outstanding stock options and the vesting and payout of the restricted stock units.
If equity research analysts do not publish research
or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could
decline.
The liquidity of the trading
market for our common stock may be affected in part on the research and reports that equity research analysts publish about us and our business. We do
not control the opinions of these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those
analysts issue other unfavorable commentary or cease publishing reports about us or our business.
19
Certain provisions of our corporate governing
documents and Delaware law could make an acquisition of our company more difficult.
Certain provisions of our
organizational documents and Delaware law could discourage potential acquisition proposals, delay or prevent a change in control of us or limit the
price that investors may be willing to pay in the future for shares of our common stock. For example, our restated certificate of incorporation and
restated bylaws:
• |
|
authorize the issuance of preferred
stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as “blank check”
preferred stock, with rights senior to those of our common stock; |
• |
|
limit the persons who can call special
stockholder meetings; |
• |
|
do not provide for cumulative voting in
the election of directors; and |
• |
|
provide for the filling of vacancies on
our board of directors by action of a majority of the directors then in office, although less than a quorum, or by the stockholders at a
meeting. |
These and other provisions in our
organizational documents could allow our board of directors to affect your rights as a stockholder in a number of ways, including making it more
difficult for stockholders to replace members of the board of directors. Because our board of directors is responsible for approving the appointment of
members of our management team, these provisions could in turn affect any attempt to replace the current management team. These provisions could also
limit the price that investors would be willing to pay in the future for shares of our common stock.
Section 203 of the Delaware
General Corporation Law also imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our
common stock.
Failure to maintain an effective system of internal
control over financial reporting could harm stockholder and business confidence in our financial reporting, our ability to obtain financing and other
aspects of our business.
Maintaining an effective system
of internal control over financial reporting is necessary for us to provide reliable financial reports. Section 404 of the Sarbanes-Oxley Act of 2002
and the related rules and regulations promulgated by the SEC require us to include in our Form 10-K a report by management regarding the effectiveness
of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control
over financial reporting as of the end of the respective fiscal year, including a statement as to whether or not our internal control over financial
reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified
by management. In addition, components of our internal control over financial reporting may require improvement from time to time. If management is
unable to assert that our internal control over financial reporting is effective now or in any future period, or if our auditors are unable to express
an unqualified opinion on the effectiveness of those internal controls, investors may lose confidence in the accuracy and completeness of our financial
reports, which could have an adverse effect on our stock price.
Evolving regulation of corporate governance and
public disclosure may result in additional expenses and continuing uncertainty.
During fiscal 2005, 2006 and
2007, we incurred substantial costs in complying with Section 404 of the Sarbanes-Oxley Act of 2002 relating to the evaluation of our internal control
over financial reporting and having our independent auditor attest to that evaluation. Compliance with these requirements has been and is expected to
continue to be expensive and time consuming. We also incurred substantial costs associated with our review of historical stock options and stock
grants, and the resulting restatements described in our Annual Report on Form 10-K for 2006.
Changing laws, regulations and
standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market
rules are creating uncertainty for public companies. We continually evaluate and monitor developments with respect to new and proposed rules and cannot
predict or estimate the amount of the additional costs we may incur or the timing of such costs. These
20
new or changed laws,
regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in
practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We are committed to maintaining
high standards of corporate governance and public disclosure. If our efforts to comply with new or changed laws, regulations and standards differ from
the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings
against us and we may be harmed.
Item
1B. |
|
Unresolved Staff
Comments |
None
We own no real estate. We
currently lease two facilities in Dallas, Texas, one in Atlanta, Georgia, and one in New York City, New York. In Dallas, we occupy approximately
135,000 square feet of space, which we use for administrative and sales offices, technology development, product assembly and distribution and other
purposes. The lease agreements for these properties provide for aggregate annual base rental of approximately $875,000 and will terminate in
2012.
We also lease office space in
Atlanta, Georgia for our executive offices and headquarters, and we lease office space in New York. The Atlanta lease includes approximately 7,000
square feet, the lease runs until 2009 and it has annual base rental of approximately $135,000. The New York lease includes approximately 3,000 square
feet, runs until 2009 and has annual base rental of $180,000.
We believe that our facilities
are generally well maintained, in good operating condition and adequate for our current needs.
Item
3. |
|
Legal
Proceedings |
The Company filed suit August 1,
2007 in the U.S. District Court, Northern District of Texas, against the defendants, Garland Commercial Industries LLC (“Garland”) and AGA
Commercial Products (“AGA”) for infringement by their oven products of several patents owned by the Company and its subsidiary, Enersyst
Development Center L.L.C. (“Enersyst”). The speed cook ovens involved are sold by Garland under the Merrychef brand and are or were sold by
AGA under the Amana brand. The Company is seeking unspecified damages and injunctions. The defendants seek a judgment denying the claims, dismissing
the complaint, declaring all of the asserted patents invalid or unenforceable or that the defendants do not infringe. They also seek costs and legal
fees.
Lincoln Foodservice Products LLC
(“Lincoln”) filed suit against the Company and Enersyst on October 9, 2007 in the U.S. District Court, Northern District of Texas, for patent
infringement of one U.S. patent owned by Lincoln. Lincoln is a subsidiary or affiliate of Enodis PLC, parent of Garland (Merrychef), and filed this
suit at the time Garland answered the Company’s suit. Lincoln is seeking damages, including treble damages, fees, interest and costs as well as to
enjoin the Company from further infringement by its products, including the Tornado® speed cook oven.
The Company is party to legal
proceedings from time to time that arise in the ordinary course of our business. The Company believes an unfavorable outcome of any such existing
proceedings should not have a material adverse effect on our operating results or future operations.
Item
4. |
|
Submission of Matters to a Vote of
Security Holders |
We held our annual meeting of
stockholders on December 5, 2007. The stockholders voted on two proposals, as more fully described in our definitive Proxy Statement, dated October 31,
2007. The votes were as follows:
21
Proposal 1: Election of
Directors
Nominee
|
|
|
|
For
|
|
Withheld
|
|
Abstain
|
Richard E.
Perlman |
|
|
|
|
25,599,865 |
|
|
|
1,744,864 |
|
|
|
1,375,052 |
|
James K.
Price |
|
|
|
|
24,503,079 |
|
|
|
1,841,650 |
|
|
|
1,471,838 |
|
James W.
DeYoung |
|
|
|
|
24,047,582 |
|
|
|
2,297,147 |
|
|
|
1,927,335 |
|
Sir Anthony
Jolliffe |
|
|
|
|
23,985,102 |
|
|
|
2,359,627 |
|
|
|
1,989,815 |
|
J. Thomas
Presby |
|
|
|
|
25,934,520 |
|
|
|
410,479 |
|
|
|
40,667 |
|
William A.
Shutzer |
|
|
|
|
25,563,311 |
|
|
|
781,418 |
|
|
|
411,406 |
|
Raymond H.
Welsh |
|
|
|
|
25,564,454 |
|
|
|
780,275 |
|
|
|
410,463 |
|
Proposal 2: Ratification of the
appointment of Ernst & Young LLP as the Company’s Independent Registered Public Accounting Firm for fiscal year 2007.
|
|
|
|
For
|
|
Withheld
|
|
Abstain
|
|
|
|
|
|
26,097,207 |
|
|
|
228,554 |
|
|
|
18,978 |
|
Part II
Item
5. |
|
Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
On June 20, 2005, our common
stock commenced trading on the NASDAQ National Market and now trades on the NASDAQ Global Market under the symbol “OVEN.” From November 2,
2004 until June 20, 2005 our common stock traded on the American Stock Exchange under the trading symbol “TCF”. The table below sets forth
the high and low sales prices for our common stock for the periods indicated, as reported by NASDAQ or the American Stock Exchange.
|
|
|
|
Price Range of Common Stock
|
|
Period
|
|
|
|
High
|
|
Low
|
Year Ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
$ |
15.37 |
|
|
$ |
10.24 |
|
Second
Quarter |
|
|
|
|
13.35 |
|
|
|
10.50 |
|
Third Quarter
|
|
|
|
|
13.90 |
|
|
|
7.84 |
|
Fourth
Quarter |
|
|
|
|
17.10 |
|
|
|
12.33 |
|
Year Ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
$ |
16.36 |
|
|
$ |
13.96 |
|
Second
Quarter |
|
|
|
|
15.50 |
|
|
|
11.69 |
|
Third Quarter
|
|
|
|
|
15.28 |
|
|
|
11.96 |
|
Fourth
Quarter |
|
|
|
|
17.00 |
|
|
|
13.61 |
|
The number of record holders of
our common stock as of March 1, 2008 was 79 (excluding individual participants in nominee security position listings).
Dividends
We have not paid cash dividends
on our common stock since our organization, and we do not expect to pay any cash dividends on the common stock in the foreseeable future. Rather, we
intend to use all available funds for our operations and planned expansion of our business. The payment of any future cash dividends is at the
discretion of our Board of Directors and will depend on our future earnings, capital requirements and financial condition and other factors deemed
relevant by the Board of Directors. The payment of future cash dividends is also restricted under the terms of the Company’s credit agreement with
its lender. The Company would not be able to pay a cash dividend without permission of the lender or a waiver under the credit
agreement.
Equity Compensation Plan Table
See Item 12 in Part
III.
22
Item
6. |
|
Selected Financial
Data |
The following selected
consolidated financial data as of December 31, 2007 and 2006, and for each of the years ended December 31, 2007, 2006, and 2005 has been derived from
the Company’s audited financial statements and should be read in conjunction with the consolidated financial statements and notes thereto and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on
Form 10-K for the year ended December 31, 2007. The following selected financial data as of December 31, 2005, 2004 and 2003, and for each of the
fiscal years ended December 31, 2004 and 2003, has been derived from the Company’s financial statements on Form 10-K for the year ended December
31, 2006.
Statements of Operations Data (in thousands except share
and per share data):
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004 (b)
|
|
2003
|
Revenues
|
|
|
|
$ |
108,106 |
|
|
$ |
48,669 |
|
|
$ |
52,249 |
|
|
$ |
70,894 |
|
|
$ |
3,690 |
|
Costs and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
product sales |
|
|
|
|
66,645 |
|
|
|
31,929 |
|
|
|
43,532 |
|
|
|
44,047 |
|
|
|
1,946 |
|
Research and
development expenses |
|
|
|
|
5,177 |
|
|
|
4,357 |
|
|
|
4,307 |
|
|
|
1,202 |
|
|
|
897 |
|
Purchased
research and development (a) |
|
|
|
|
— |
|
|
|
7,665 |
|
|
|
6,285 |
|
|
|
— |
|
|
|
— |
|
Selling,
general and administrative expenses |
|
|
|
|
53,427 |
|
|
|
28,986 |
|
|
|
34,398 |
|
|
|
19,191 |
|
|
|
7,747 |
|
Compensation
and severance expenses related to termination of former officers and directors |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,585 |
|
Total costs
and expenses |
|
|
|
|
125,249 |
|
|
|
72,937 |
|
|
|
88,522 |
|
|
|
64,440 |
|
|
|
18,175 |
|
Operating
(loss) income |
|
|
|
|
(17,143 |
) |
|
|
(24,268 |
) |
|
|
(36,273 |
) |
|
|
6,454 |
|
|
|
(14,485 |
) |
Interest
expense and other (c) |
|
|
|
|
(729 |
) |
|
|
(436 |
) |
|
|
(332 |
) |
|
|
(8 |
) |
|
|
(1,105 |
) |
Interest
income |
|
|
|
|
638 |
|
|
|
1,300 |
|
|
|
1,536 |
|
|
|
169 |
|
|
|
17 |
|
Total other
income (expense) |
|
|
|
|
(91 |
) |
|
|
864 |
|
|
|
1,204 |
|
|
|
161 |
|
|
|
(1,088 |
) |
(Loss) income
before taxes |
|
|
|
|
(17,234 |
) |
|
|
(23,404 |
) |
|
|
(35,069 |
) |
|
|
6,615 |
|
|
|
(15,573 |
) |
Provision for
income taxes |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
301 |
|
|
|
— |
|
Net (loss)
income |
|
|
|
|
(17,234 |
) |
|
|
(23,404 |
) |
|
|
(35,069 |
) |
|
|
6,314 |
|
|
|
(15,573 |
) |
Preferred
stock dividends |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(195 |
) |
Beneficial
conversion feature
of preferred stock (d) |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12,605 |
) |
Net (loss)
income applicable to common stockholders |
|
|
|
$ |
(17,234 |
) |
|
$ |
(23,404 |
) |
|
$ |
(35,069 |
) |
|
$ |
6,314 |
|
|
$ |
(28,373 |
) |
Net (loss)
income per share applicable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$ |
(0.59 |
) |
|
$ |
(0.81 |
) |
|
$ |
(1.25 |
) |
|
$ |
0.52 |
|
|
$ |
(4.17 |
) |
Diluted
|
|
|
|
|
(0.59 |
) |
|
|
(0.81 |
) |
|
|
(1.25 |
) |
|
|
0.25 |
|
|
|
(4.17 |
) |
Basic
|
|
|
|
|
29,294,596 |
|
|
|
28,834,821 |
|
|
|
28,034,103 |
|
|
|
12,256,686 |
|
|
|
6,797,575 |
|
Diluted
|
|
|
|
|
29,294,596 |
|
|
|
28,834,821 |
|
|
|
28,034,103 |
|
|
|
25,626,215 |
|
|
|
6,797,575 |
|
(a) |
|
During the year ended December 31, 2005,
we purchased the patents and technology assets of Global Appliance Technologies, Inc. (Global). The agreement provided for payment of additional
consideration contingent on filing a specific number of patent applications within 18 months of the closing date of the transaction. At the time of
closing, approximately $6.3 million of the purchase price was allocated to purchased research and development. In 2006, the contingencies were resolved
and an additional $7.7 million of the additional consideration payable was allocated to purchased research and development. |
23
(b) |
|
During the year ended December 31, 2004,
we completed the acquisition of Enersyst Development Center, L.L.C. in a transaction accounted for as a purchase. The results of operations of Enersyst
have been included in our consolidated results of operations since the May 21, 2004 purchase date. |
(c) |
|
Amount for 2003 primarily represents
$1.1 million of debt extinguishment costs incurred in 2003. |
(d) |
|
During 2003, we incurred a non-cash
charge of $12.6 million to record a deemed dividend in recognition of the beneficial conversion feature intrinsic in the terms of our Series D
Convertible Preferred Stock. The Series D Convertible Preferred Stock was considered redeemable until July 19, 2004 when shareholders approved an
amendment to increase the number of authorized shares of our common stock to 100,000,000 and a sufficient number of shares of common stock were
subsequently reserved to permit the conversion of all outstanding shares of our Series D Convertible Preferred Stock into shares of common stock. As of
October 28, 2004, all shares of Series D Convertible Preferred Stock had been converted to shares of common stock. |
Balance Sheet Data (in thousands):
|
|
|
|
As of December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005 (a)
|
|
2004
|
|
2003
|
Cash and cash
equivalents |
|
|
|
$ |
10,149 |
|
|
$ |
19,675 |
|
|
$ |
40,098 |
|
|
$ |
12,942 |
|
|
$ |
8,890 |
|
Working
capital (deficit) |
|
|
|
|
11,358 |
|
|
|
25,677 |
|
|
|
43,745 |
|
|
|
17,399 |
|
|
|
(5,685 |
) |
Total assets
|
|
|
|
|
88,721 |
|
|
|
72,201 |
|
|
|
86,150 |
|
|
|
50,687 |
|
|
|
11,420 |
|
Total
liabilities, including mezzanine equity |
|
|
|
|
56,214 |
|
|
|
26,496 |
|
|
|
21,378 |
|
|
|
17,088 |
|
|
|
18,155 |
|
Accumulated
deficit |
|
|
|
|
(142,026 |
) |
|
|
(124,792 |
) |
|
|
(101,388 |
) |
|
|
(66,319 |
) |
|
|
(72,633 |
) |
Total
stockholders’ equity (deficit) |
|
|
|
|
32,507 |
|
|
|
45,705 |
|
|
|
64,772 |
|
|
|
33,779 |
|
|
|
(6,735 |
) |
(a) |
|
During the year ended December 31, 2005,
we purchased the patents and technology assets of Global Appliance Technologies, Inc. (Global). The agreement provided for payment of additional
consideration contingent on delivery of a specific number of patent applications within 18 months of the closing date of the transaction. At the time
of closing, approximately $6.3 million of the purchase price was allocated to purchased research and development. In 2006, the contingencies were
resolved and an additional $7.7 million of the additional consideration payable was allocated to purchased research and development. |
Item
7. |
|
Management’s Discussion and
Analysis of Financial Condition and Results of Operations |
Overview
TurboChef Technologies, Inc. is a
leading provider of equipment, technology and services focused on the high-speed preparation of food products. Our user-friendly speed cook ovens
employ proprietary combinations of heating technologies, such as convection, air impingement, microwave energy and other advanced methods, to cook food
products at speeds up to 12 times faster than, and to quality standards that we believe are comparable or superior to, that of conventional heating
methods. We offer three primary speed cook countertop models: the C3 and Tornado® combination air and microwave batch ovens and the High h Batch
(air only) model. In 2007, we began to expand our commercial offerings with the development of a new air/microwave combination countertop batch oven
and high speed impingement air-only conveyor ovens, both floor model sized and countertop versions. These new products are expected to be available to
the marketplace in early 2008.
In 2007 we entered the domestic
residential oven market with the introduction of our first speed cook oven model for the home. Our first residential products target the premium
segment of the residential oven market and are priced at a point that we believe is appropriate for a high-end consumer purchase. We are selling a
30″ double wall oven model and we expect to be selling a single wall version of the speed cook oven by Spring 2008. We are working to develop a
range model, and over time we intend to develop other configurations designed to satisfy consumer needs for residential oven
appliances.
We currently derive revenue
primarily from the sale of our ovens to commercial foodservice operators worldwide. In North America we sell our equipment through our internal sales
force as well as through manufacturer’s representatives and for the rest of the world, we utilize a network of equipment distributors.
We
24
also derive revenues from
licensing our technologies to food service equipment manufacturers. We also derive revenue form the sale of our residential product through a network
of over 160 high-end consumer appliance dealers throughout the U.S.
We believe it is important to our
success that we continue to sell to our existing base of commercial customers to meet their expansion or replacement needs, while at the same time
extending that customer base by concentrating our internal sales efforts on major foodservice operators and by supporting our networks of
manufacturer’s representatives and equipment distributors. We must strive to do that while maintaining a cost structure for our products and
controlling our operating expenses to provide a satisfactory return on sales. We must compete effectively in the marketplace on the basis of price,
quality and product performance, and we must meet market demand through development and improvement of our speed cook ovens and introduction of new
oven products. These same marketplace and product development factors will apply to our achieving success with the launch of our residential speed cook
oven products; however, the residential market is new to us and there may be factors important to our success that are unknown to us at present. See
“Risk Factors” in Part I, Item 1A of this annual report on Form 10-K.
Our financial results in 2007 as
compared to 2006 and 2005 reflect our efforts to strengthen our operating systems and infrastructure and to solidify our sales and marketing efforts to
support the significant growth experienced in our commercial business and to support the development and launch of our new residential ovens. In 2007,
we focused on executing on the expansion plans of our contract customers and expanding our revenues from our non-contract customers. During 2008, we
intend to return to profitability. We will accomplish this by growing the top line in both of our operating segments, expanding the profitability of
our commercial business, reducing our residential segment marketing and promotional costs, and tightening control of spending across the entire
business while continuing to expand our product offerings.
The following sets forth, as a
percentage of revenue, consolidated statements of operations data for the years ended December 31:
|
|
|
|
2007
|
|
2006
|
|
2005
|
Revenues
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of
product sales |
|
|
|
|
62 |
|
|
|
66 |
|
|
|
83 |
|
Research and
development expenses |
|
|
|
|
5 |
|
|
|
9 |
|
|
|
8 |
|
Purchased
research and development |
|
|
|
|
— |
|
|
|
16 |
|
|
|
12 |
|
Selling,
general and administrative expenses |
|
|
|
|
49 |
|
|
|
59 |
|
|
|
65 |
|
Restructuring
charges |
|
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Total costs
and expenses |
|
|
|
|
116 |
|
|
|
150 |
|
|
|
169 |
|
Operating
loss |
|
|
|
|
(16 |
) |
|
|
(50 |
) |
|
|
(69 |
) |
Interest
income |
|
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
Interest
expense and other |
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Total other
income |
|
|
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
Net loss
|
|
|
|
|
(16 |
)% |
|
|
(48 |
)% |
|
|
(67 |
)% |
We have observed the following
trends and events that are likely to have an impact on our financial condition and results of operations in the future:
• |
|
During 2007, we grew our total revenue
by 122% over 2006. This was due to growth in sales to three contract customers totaling $44.0 million and growth in sales to non-contract customers
totaling $15.4 million. Contract customers are those commercial customers for whom we have an executed agreement addressing, among other items, service
requirements and purchase price. We generated 66%, 55%, and 60% of our revenue from three contract customers for each of the years ended 2007, 2006 and
2005, respectively. No other single customer accounted for more than 10% of our total 2007, 2006 or 2005 revenues. We expect our non-contract customer
revenue to continue to increase in 2008. As our customer base continues to grow, we expect our customer concentration levels to
decline. |
• |
|
During 2007, we continued to experience
a decrease in our cost of product sales as a percentage of revenue (and an improvement in our gross profit percentage) as compared to 2006. The
improvement is primarily |
25
|
|
due to favorable sales mix resulting in
higher average selling prices per unit, offset by an increase of 4% in component pricing over 2006. In 2008, we expect gross profit percentages
consistent with 2007 levels. |
• |
|
During 2007, we increased our research
and development expenditures primarily as the result of our residential oven initiative and new commercial projects. In 2008, we expect our research
and development expenditures to approximate the 2007 levels as we develop additional residential and commercial products. |
• |
|
During 2007, we increased our selling,
general and administrative expenses and depreciation and amortization, by $24.4 million over 2006 primarily due to costs related to our residential
segment and expenses incurred in relation to the option review investigation. We expect a decrease in 2008 compared to 2007 primarily due to the
absence of $7.7 million in option investigation related costs incurred in 2007. |
Based on our analysis of the
aforementioned trends and events, it is likely that we will continue to generate net losses on a quarterly basis during the early part of 2008
primarily due to our continued investment in the residential product launch coupled with the uncertainty as to market acceptance of this new product
offering and the volume of sales that can be generated. We anticipate that the business will achieve profitability in the latter part of 2008 based
primarily on our anticipated growth in commercial revenue. Our future results will be affected by many factors, some of which are identified below and
in Part I, Item 1A of this report entitled “Risk Factors,” including our ability to:
• |
|
increase our commercial revenue across
our customer base; |
• |
|
manage costs related to the commercial
business segment; |
• |
|
successfully launch our residential
product line; |
• |
|
manage costs related to the residential
product launch; |
As a result, there is no
assurance that we will achieve our expected financial objectives.
Application of Critical Accounting
Policies
Overview and Definitions
Our discussion and analysis of
our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America which require us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include
those related to revenue recognition, warranty reserves, accounts receivable reserves, goodwill and other intangible assets, stock-based compensation
other equity instruments, income and other taxes, and contingent obligations. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and the impact of changes in key
assumptions may not be linear. Our management has reviewed the application of these policies with the audit committee of our board of directors. For a
complete description of our significant accounting policies, see Note 2 to our consolidated financial statements included in this annual report on Form
10-K.
We define our “critical
accounting policies” as those accounting principles generally accepted in the United States of America that require us to make highly judgmental
estimates about matters that are uncertain and are likely to have a material impact on our financial position and results of operations as well as the
specific manner in which we apply those principles. Our estimates are based upon assumptions and judgments about matters that are highly uncertain at
the time the accounting estimate is made and require us to continually assess a range of potential outcomes.
Revenue Recognition
Revenue from product sales, which
includes all revenues except royalty revenues, are recognized when no significant vendor obligation remains, title to the product passes (depending on
terms, either upon shipment or delivery), and the customer has the intent and ability to pay in accordance with contract payment terms that are fixed
and determinable. Certain customers may purchase installation services. Revenue from these services are
26
deferred and recognized when
the installation service is performed. Certain customers may purchase extended warranty coverage. Revenue from sales of extended warranties is deferred
and recognized in product sales on a straight-line basis over the term of the extended warranty contract. Royalty revenues are recognized based on the
sales dates of licensees’ products, and services revenues are recorded based on attainment of scheduled performance milestones. We report revenue
net of any sales tax collected.
Our product sales sometimes
involve multiple elements (i.e., products, extended warranties and installation services). Revenue under multiple element arrangements is accounted for
in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables”. Under this method, for elements determined to be separate units of accounting, revenue is allocated based upon the relative
fair values of the individual components.
We provide for returns on product
sales based on historical experience and adjust such reserves as considered necessary. To date, there have been no significant sales
returns.
Deferred revenue includes amounts
billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of sales deposits, unearned revenue from extended
warranty contracts and other amounts billed to customers where the sale transaction is not yet complete and, accordingly, revenue cannot be
recognized.
Goodwill and Other Intangible
Assets
Goodwill represents the excess
purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair values. Statement of Financial
Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, requires goodwill and other acquired intangible assets
that have an indefinite useful life no longer to be amortized; however, these assets must undergo an impairment test annually or more frequently if
facts and circumstances warrant. Goodwill is allocated and reviewed for impairment by reporting units, which consists of the operating segments. We
completed our annual goodwill impairment test in October 2007 and determined that the carrying amount of goodwill was not impaired, and there have been
no developments subsequently that would indicate an impairment exists. We will continue to perform our goodwill impairment review annually or more
frequently if facts and circumstances warrant.
SFAS No. 142 also requires that
intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. We are currently amortizing acquired developed technology and covenants
not-to-compete using the straight line method over estimated useful lives of 10 years.
Stock-Based Compensation and Other Equity
Instruments
Effective January 1, 2006, we
adopted SFAS No. 123 (revised 2004), Share-Based Payment, a revision of SFAS No. 123 (SFAS No. 123R), using the modified prospective method.
SFAS No. 123R requires measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation
expense over the requisite service period for awards expected to vest. The fair value of stock option grants is determined using the Black-Scholes
valuation model, which is consistent with the valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123,
Accounting for Stock Based Compensation, (“SFAS No. 123”) as amended by SFAS No. 148, Accounting for Stock-Based Compensation
— Transition and Disclosure (“SFAS No. 148”). The fair value of restricted stock awards is determined based on the number of shares
granted and the quoted price of our common stock on the grant date. Such fair values will be recognized as compensation expense over the requisite
service period, net of estimated forfeitures, using the straight-line method under SFAS No. 123R.
Prior to January 1, 2006, we
accounted for stock-based awards under the intrinsic value method. Under the intrinsic value method, no compensation expense was recognized for stock
options granted to employees with exercise prices equal or greater than the market value of the underlying stock on the dates of grant. Compensation
expense, net of forfeitures, has been recognized for periods prior to January 1, 2006; for certain stock options granted with an exercise price lower
than the fair market value of our common stock on the measurement date as determined by the findings of a recently completed review of our option
grants since 1994. The compensation expense is equal to the excess of fair market value of our common stock over the exercise price on the measurement
date. The
27
compensation expense was
amortized on a straight-line basis over the vesting period, all of which was recognized when we accelerated the vesting terms of all outstanding
options at December 31, 2005.
We account for transactions in
which services are received in exchange for equity instruments issued based on the fair value of the equity instruments issued in accordance with SFAS
No. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services.
The two factors which most affect
charges or credits to operations related to stock-based compensation are the fair value of the underlying equity instruments and the volatility of the
underlying equity. We believe our prior and current estimates of these factors have been reasonable.
We account for transactions in
which we issue convertible securities in accordance with EITF Issues No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios and No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments and
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
Deferred Income Taxes
In preparing our financial
statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual
current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting
purposes. These differences result in deferred income tax assets and liabilities. In addition, as of December 31, 2007, we have net operating losses
(“NOLs”) of approximately $99.1 million, of which $21.1 million are subject to annual limitations resulting from the change in control
provisions in Section 382 of the Internal Revenue Code. These NOLs begin to expire in 2011. Additionally, the Company has $8.8 million in income tax
deductions related to stock option exercises the tax effect of which will be reflected as additional paid- in capital when realized.
We currently have significant
deferred tax assets, including those resulting from NOLs, tax credit carryforwards and deductible temporary differences. We provide a full valuation
allowance against our deferred tax assets. Management weighs the positive and negative evidence to determine if it is more likely than not that some or
all of the deferred tax assets will be realized. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative
evidence such as cumulative losses in past years. Despite our profitability in 2004 and our future plans and prospects, we have continued to maintain a
full valuation allowance on our tax benefits until profitability has been sustained over a time period and in amounts that are sufficient to support a
conclusion that it is more likely than not that a portion or all of the deferred tax assets will be realized. A decrease in our valuation allowance
would result in an immediate material income tax benefit, an increase in total assets and stockholder’s equity, and could have a significant
impact on earnings in future periods.
We adopted the provisions of
FIN 48 effective January 1, 2007. No cumulative adjustment was required or recorded as a result of the implementation of FIN 48. As of December 31,
2007, we had no unrecognized tax benefits. We are no longer subject to U.S. federal income or state tax return examinations by tax authorities for tax
years before 2003. However, since we have substantial tax net operating losses originating in years before 2003, the tax authorities may review the
amount of the pre-2003 net operating losses. We are not currently under examination by any tax authority. We will recognize accrued interest and
penalties related to unrecognized tax benefits in income tax expense when and if incurred. We had no interest or penalties related to unrecognized tax
benefits accrued as of December 31, 2007. We do not anticipate that the amount of the unrecognized benefit will significantly increase or decrease
within the next 12 months.
Loss Contingencies
We define a loss contingency as a
condition involving uncertainty as to a possible loss related to a previous event that will not be resolved until one or more future events occur or
fail to occur. Our primary loss contingencies relate to pending or threatened litigation. We record a liability for a loss contingency when we believe
that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. When we believe the likelihood of a loss is
less than probable and more than remote, we do not record a liability but we disclose material loss contingencies in the notes to the consolidated
financial statements. We make these assessments based on facts and circumstances and in some instances based in part on the advice of outside legal
counsel.
28
Purchase of Patent and Technology Assets and Research
and Development
On September 12, 2005, we entered
into an Asset Purchase Agreement (the “Purchase Agreement”) with Global Appliance Technologies, Inc. (“Global”) and stockholders of
Global. Pursuant to the Purchase Agreement, we acquired the patent and technology assets of Global further expanding our ownership of proprietary
commercial and residential speed cook technologies. These technologies will allow us to enhance our products with additional or different features as
well as enable us to expand the range of product offerings.
At the closing of the
transaction, Global received $5.0 million in cash and 60,838 shares of the Company’s common stock with a value of $993,000 at the date of
acquisition. Additionally, the Company entered into services agreements with the principals of Global which provided, among other things, for delivery
of three patent applications by the end of the first year, and two additional patent applications by the end of the eighteenth month following closing.
Upon timely delivery of these patent applications, the Company was obligated to pay Global three nearly-equal installment payments totaling $8.0
million, payable on each of the first three anniversaries of the closing date (the payments will be made 38% in cash and 62% in stock). In September
2006, all of the patent applications required under the terms of the agreement were delivered. The transaction was accounted for as an asset
acquisition. The aggregate consideration for the assets acquired is comprised of $6.3 million, including transaction costs, given at closing and $7.7
million for the estimated fair value of the contingent consideration which became payable upon delivery of the patent applications. The Company
allocated the consideration for these technology assets to IPRD and expensed $7.7 million and $6.3 million for the years ended December 31, 2006 and
2005, respectively.
Amounts allocated to IPRD include
the value of products in the development stage that are not considered to have reached technological feasibility or to have alternative future use.
Accordingly, this item was expensed as research and development in the consolidated statement of operations for the quarter ended September 30, 2005,
upon the completion of the asset acquisition. Technology development and IPRD were identified and valued by an independent valuation firm through
extensive interviews, analysis of data provided by Global concerning development projects, their stage of development, the time and resources needed to
complete them, if applicable, and their expected income generating ability and associated risks. No development projects had reached technological
feasibility; therefore, all the intangible assets were deemed to be purchase of IPRD. The income approach, which includes an analysis of the cash flows
and risks associated with achieving such cash flows, was the primary technique utilized in valuing acquired IPRD. Key assumptions for IPRD included a
discount rate of 34% and estimates of revenue growth, cost of sales, operating expenses and taxes. The purchase allocation is based on a preliminary
valuation and is subject to change based on completion of the final valuation. Any changes could be material to our consolidated statement of
operations.
In connection with this
transaction, we also entered into Restrictive Covenant Agreements (the “Restrictive Covenant Agreements”) with each of the two principals of
Global. Under the Restrictive Covenant Agreements, the principals agreed to certain covenants regarding the disclosure of trade secrets and
confidential information, and to covenants restricting their ability to compete with us. As consideration for these covenants, each principal received
$1.0 million in cash at closing, and each can receive additional cash payments totaling $2.0 million, which are payable in equal portions on the first
three anniversaries of the closing date. The estimated fair value of these agreements, $5.6 million, will be amortized over the agreements’
ten-year term.
Results of Operations
Revenues
Total revenues increased 122%, or
$59.4 million, to $108.1 million for 2007 as compared to $48.7 million for 2006. Total revenues decreased $3.6 million for 2006, from $52.2 million in
2005.
We currently derive the majority
of sales, cost of product sales and gross profit from our Commercial segment. Total Commercial revenues increased 121%, or $58.9 million, to $107.6
million for 2007 as compared to $48.7 million for 2006. Total revenues decreased $3.6 million for 2006, from $52.2 million for 2005. The increase in
total revenues from 2006 to 2007 is primarily attributable to increased unit sales volume and, to a lesser extent, increased average sale prices.
Excluding royalty revenues, in 2007, sales to contract customers increased by 164%
29
over 2006 and sales to
non-contract customers increased by 76% over 2006. The decrease in total revenues from 2005 to 2006 is primarily attributable to decreased sales
volumes. Excluding royalty revenues, in 2006, sales to contract customers decreased by 14% over 2005 and sales to non-contract customers increased by
8% over 2005. Contract customers are those commercial customers for whom we have an executed agreement addressing, among other items, service
requirements and purchase price.
Royalty revenues, which consists
of revenue from licensing our technology to third parties, was $1.1 million for the year ended December 31, 2007 as compared to $1.3 million for the
year ended December 31, 2006. Royalty revenues decreased $700,000 for 2006, from $2.0 million for 2005. We expect further diminution in royalty
revenues as the resources which generate this revenue are repurposed to support our commercial oven business and to benefit our residential speed cook
oven initiative.
Cost of Product Sales and Gross
Profit
Cost of product sales for 2007
was $66.6 million, an increase of $34.7 million compared to $31.9 million for 2006. Cost of product sales for 2006 was $31.9 million, a decrease of
$11.6 million compared to $43.5 million for 2005. The variability in cost of product sales in 2007 compared to 2006 and 2005 was due primarily to
increases in the number of ovens sold and, to a lesser extent, increases in our warranty provision of $9.6 million recorded in 2005. Excluding the $9.6
million increase to our warranty provision recorded in 2005, we experienced comparable cost of product sales as a percentage of product sales for 2006
and 2005. In 2007, we experienced a decrease in cost of product sales as a percentage of product sales primarily due to increased average sales prices
resulting from improved sales mix, offset by increases in component pricing.
Gross profit on product sales for
2007 was $40.4 million, an increase of $24.9 million, compared to gross profit on product sales of $15.5 million for 2006. Gross profit on product
sales increased $8.8 million for 2006, from $6.7 million for 2005. The variability in the gross profit on product sales was due primarily to the number
of ovens sold and, to a lesser extent, a $9.6 million increase in our warranty provision recorded in 2005. Gross profit on product sales as a
percentage of product sales revenue, excluding the effects of the $9.6 million increase in our warranty provision in 2005, improved during 2007 due to
increased average sales prices resulting from improved sales mix, and remained constant for 2006 as compared to 2005. We expect gross margins on
commercial oven sales consistent with those experienced in 2007.
Research and Development
Research and development expenses
consist primarily of payroll and benefits, consulting services paid to third parties, supplies, facilities and other administrative costs for support
of the engineers, scientists and other research and development personnel who design, develop, test and enhance our ovens and oven-related services.
Research and development costs are expensed as incurred.
Research and development expenses
increased 19%, or $820,000, to $5.2 million for 2007 as compared to $4.4 million for 2006. Research and development expenses increased 1%, or $49,000,
to $4.4 million for 2006 as compared to $4.3 million for 2005. The increase in 2007 as compared to 2006, as well as 2006 as compared to 2005, was
attributable to an expanded scope of research activities to support new product development in both our commercial and residential
segments.
The following table quantifies
the net increase in research and development expenses over periods presented (in thousands):
|
|
|
|
Increase (Decrease) in
Research and Development
Expenses
|
|
|
|
|
|
2007 to 2006
|
|
2006 to 2005
|
Design,
prototype and other related expenses |
|
|
|
$ |
394 |
|
|
$ |
(608 |
) |
Payroll and
related expenses |
|
|
|
|
250 |
|
|
|
612 |
|
Engineering
related general and administrative expenses |
|
|
|
|
176 |
|
|
|
45 |
|
Total
increase |
|
|
|
$ |
820 |
|
|
$ |
49 |
|
30
We believe that research and
development expenses for 2008 will approximate 2007 levels, as we continue our development efforts for residential speed cook ovens and related
products and for new commercial ovens.
Purchased Research and
Development
Purchased research and
development expenses for 2006 and 2005 were $7.7 million and $6.3 million, respectively, and related to the acquisition of technology assets from
Global. This charge is an allocation of the purchase price, based on a valuation, to recognize the fair value of in-process research and development
for new products and modifications to existing products that have not reached technological feasibility or were not ready for commercial production.
The 2006 expense represents the fair value of the liability incurred for additional consideration payable now that certain contingencies are resolved.
There are no further consideration contingencies associated with the Global acquisition.
Selling, General and
Administrative
Selling, general and
administrative expenses, or SG&A, consist primarily of payroll and related costs; variable commissions and bonuses for personnel and third-party
representatives engaged in sales functions; marketing, advertising and promotional expenses; legal and professional fees; travel; communications;
facilities; insurance and other administrative expenses; depreciation of equipment and amortization of intangible assets. These expenses are incurred
to support our sales and marketing activities and our executive, finance, legal, business applications, human resources and other administrative
functions.
SG&A expenses increased 84%,
or $24.4 million to $53.4 million for 2007 as compared to $29.0 million for 2006 (excluding restructuring charges as discussed below). These increases
were due primarily to increased selling, marketing and related expenses of $9.7 million due to increased sales activity in our commercial business and
the residential oven initiative and increased legal and professional fees of $8.1 million principally related to the option review investigation.
Payroll and related expenses increased by $4.1 million, of which approximately two-thirds is attributable to the Commercial segment, one-quarter is
attributable to the Corporate resource and the remainder is attributable to the Residential segment. Additionally, non-cash stock compensation expense
increased $1.4 million due to an additional RSU grant in March 2007. Finally, travel and related expenses increased $672,000 in association with the
increased sale activity as noted above, and depreciation and amortization and rent and occupancy costs increased nominally as compared to the prior
year.
SG&A expenses decreased 14%,
or $4.8 million to $29.0 million for 2006 as compared to $33.8 million for 2005 (excluding restructuring charges as discussed below). These decreases
were due to a reduction in non-cash stock compensation expense of $6.8 million and a $2.9 million reduction in legal and professional fees, offset by
increased sales activity driven by non-Subway related business and the residential oven initiative. Payroll and related expenses increased by $2.2
million, of which one-half is attributable to the Commercial segment and the remainder is equally attributable to the Residential segment and to the
Corporate resource. Depreciation and amortization expense increased $1.1 million related to leasehold improvements and furniture, fixtures and
equipment in the new facilities and increased amortization related to the acquisition of technology assets. Rent and occupancy costs increased $544,000
attributable to the Commercial segment operations center in Dallas, Texas, which opened in June 2005. Selling, marketing and related expenses increased
$1.1 million, primarily due to increased marketing and advertising expenses in the Residential segment related to the anticipated launch of our new
residential oven, offset by a reduction in marketing and advertising expenses in our Commercial segment.
31
The following table quantifies
the net change in general and administrative expenses for the periods presented (in thousands):
|
|
|
|
Increase (Decrease) in
General and Administrative
Expenses
|
|
|
|
|
|
2007 to 2006
|
|
2006 to 2005
|
Selling,
marketing and related expenses |
|
|
|
$ |
9,751 |
|
|
$ |
1,056 |
|
Legal and
professional fees |
|
|
|
|
8,047 |
|
|
|
(2,912 |
) |
Payroll and
related expenses |
|
|
|
|
4,129 |
|
|
|
2,194 |
|
Non-cash
stock compensation |
|
|
|
|
1,394 |
|
|
|
(6,824 |
) |
Travel and
related expenses |
|
|
|
|
672 |
|
|
|
100 |
|
Depreciation
and amortization |
|
|
|
|
216 |
|
|
|
1,058 |
|
Rent and
occupancy costs |
|
|
|
|
191 |
|
|
|
544 |
|
Other
|
|
|
|
|
— |
|
|
|
34 |
|
Total
(decrease) increase |
|
|
|
$ |
24,400 |
|
|
$ |
(4,750 |
) |
For 2007, we have continued to
augment our SG&A infrastructure to support increased activity contemplated in our Commercial business and in contemplation of the launch of our
residential speed cook oven products resulting in an increase of SG&A expenses, excluding the effects of non-cash compensation and option
investigation related expenses. Excluding the option investigation related expense incurred in 2007, overall, we expect SG&A to increase somewhat
in 2008 as compared to 2007, principally the result of increased selling, marketing and related costs resulting from increased commercial business and
the launch of our residential ovens.
Restructuring Charges
In the fourth quarter of 2005, we
closed our underperforming operation in the Netherlands and re-aligned the resources and cost structure. We now direct the activities of all of our
international distributors directly from our domestic operations center. Since we continue to have a presence in the markets previously managed by our
Netherlands operation, the results of that unit’s operations are included in continuing operations. The closing of the Netherlands operations
resulted in restructuring charges in the fourth quarter of 2005 of $621,000 including $125,000 of non-cash charges, principally related to impairment
of fixed assets. In the first quarter of 2006, the Company negotiated to terminate the lease of the closed facility and recorded a reduction in the
restructuring reserve of $41,000. The lease termination payment was made in April 2006 and concludes the restructuring plan initiated in the fourth
quarter of 2005.
Interest Income
Interest income includes amounts
earned on invested cash balances. Interest income was $638,000 for 2007 as compared to $1.3 million for 2006 and $1.5 million for 2005, representing
earnings on available cash, including proceeds from the February 2005 public offering of our common stock.
Interest Expense and Other
Interest expense includes
interest and other costs paid and incurred on our debt obligations, interest on installment payments, and amortization of deferred financing costs. We
have a credit facility which has been in place since February 2005. Although we did not access the facility through 2006, there are fees and
availability costs associated with having the facility in place. Net other income (expense) represents foreign exchange gains and losses incurred
during the periods presented. Variations during the periods are attributable to exchange rate fluctuations and the volume of transactions denominated
in foreign currencies. Interest expense and other was $729,000 in 2007 as compared to $436,000 for 2006 and $332,000 for 2005.
Provision for Income Taxes
There was no provision for income
taxes required for 2007, 2006 or 2005. At December 31, 2007, the Company has net operating loss carryforwards (“NOL’s”) for federal
income tax purposes of $99.1 million, which may be used against future taxable income, if any, and which begin to expire in 2011. Additionally, the
Company has $8.8
32
million in income tax
deductions related to stock option exercises the tax effect of which will be reflected as additional paid- in capital when realized. In October 2003, a
change in ownership took place, which for income tax purposes under Internal Revenue Code Section 382, limits the annual utilization of $21.1 million
of the loss carryforwards and could cause some amount of the carryforwards to expire before they are utilized. As described in Note 10 to the
Consolidated Financial Statements, a valuation allowance has been recorded to reduce our net deferred income tax assets to the amount that is more
likely than not to be realized. Based on our previous history of losses, we have recorded a valuation allowance as of December 31, 2007, equal to the
full amount of our net deferred income tax assets including those related to our NOLs. Future profitable operations would permit recognition of these
net deferred income tax assets, which would have the effect of reducing our income tax expense. Future operations could also demonstrate a return to
profitability sufficient to warrant a reversal of the valuation allowance, which would positively impact our financial statements.
Liquidity and Capital Resources
Our capital requirements in
connection with our product and technology development and marketing efforts have been significant. In light of the expected growth in both our
Commercial and Residential business and planned launch in 2008 of our new residential speed cook single wall oven and new commercial ovens, the capital
requirements for these efforts likely will continue to be significant.
On February 8, 2005, we closed a
public offering of 5,000,000 shares of our common stock at $20.50 before discounts and commissions to underwriters and other offering expenses. Of the
shares sold, 2,925,000 were sold by the Company and 2,075,000 were sold by certain selling stockholders. We used the net proceeds, approximately $54.8
million, to finance the development and introduction of our residential speed cook ovens, for strategic investments and for working capital and other
general corporate purposes.
Our management anticipates that
current cash on hand, including availability under our credit facility with Bank of America, provides sufficient liquidity for us to execute our
business plan and expand our business as needed in the near term. This facility was renewed and extended through February 28, 2009 and provides
stand-by credit availability to augment the cash flow anticipated from operations. As of December 31, 2007, we had outstanding $9.0 million with an
additional $10.1 million available under the credit facility. The outstanding amount of $9.0 million was repaid on February 28, 2008 and we now have
the $20.0 million available under the credit facility. However, should the launch of our residential speed cook oven products or a significant increase
in demand for commercial products engender significant expansion of our operations, we may require additional capital in future
periods.
Cash used in operating activities
was $(17.3) million for the year ended December 31, 2007 as compared to $(17.1) million for the year ended December 31, 2006. Net cash used in
operating activities for 2007 resulted from our net loss of $(17.2) million less non-cash charges of $7.0 million (including $4.1 million in
depreciation and amortization and $2.4 million in non-cash compensation expense), offset by an increased investment in working capital of $7.1 million.
The change in working capital items included cash used for an increase in accounts receivable (primarily from one customer); offset by cash provided by
increases in trade accounts payable, deferred revenue, and accrued expenses and warranty. Cash used in operating activities was $(17.1) million for the
year ended December 31, 2006 as compared to $(20.2) million for the year ended December 31, 2005. Net cash used in operating activities for 2006
resulted from our net loss of $(23.4) million less non-cash charges of $12.1 million (including IPRD charge of $7.7 million and $3.9 million in
deprecation and amortization), offset by an increased investment in working capital of $5.8 million. The change in working capital items included cash
used for increases in accounts receivable, inventories, prepaid expenses and other receivables and to reduce accrued expenses and warranty; offset by
cash provided by increases in trade accounts payable and deferred revenue.
Cash used in investing activities
for the year ended December 31, 2007 was $3.1 million compared to $5.5 million for the year ended December 31, 2006. In 2007, we expended $2.3 million
of net cash related to the acquisition of intangible assets from Global, and $768,000 for capital expenditures, primarily related to tooling equipment
for the new residential and commercial product lines. In 2006, we expended $2.3 million of net cash related to the acquisition of intangible assets
from Global, and $3.1 million for capital expenditures, primarily related to tooling equipment for the new residential product line. We anticipate
capital expenditures of approximately $5.0 million during 2008. We anticipate funding these expenditures from working capital.
33
Cash provided by financing
activities for the year ended December 31, 2007 was $10.9 million compared to $2.2 million for the year ended December 31, 2007. In 2007, we received
$9.0 million in proceeds from borrowing under our credit facility and $2.0 million in proceeds from the exercise of options and warrants. In 2006, we
received proceeds of $2.2 million in proceeds from the exercise of options and warrants.
At December 31, 2007 we had cash
and cash equivalents of $10.1 million and working capital of $11.4 million as compared to cash and cash equivalents of $19.7 million and working
capital of $25.7 million at December 31, 2006.
Contractual Cash Obligations
As of December 31, 2007, our
future contractual cash obligations are as follows (in thousands):
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
Installment
Payments for Covenants Not-to-Compete |
|
|
|
$ |
1,330 |
|
|
$ |
1,330 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Installment
Payments for Contingent Consideration Due Under Asset Purchase Agreement* |
|
|
|
|
2,665 |
|
|
|
2,665 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amounts
outstanding under credit facility |
|
|
|
|
9,000 |
|
|
|
9,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Operating
Leases |
|
|
|
|
5,080 |
|
|
|
1,293 |
|
|
|
1,170 |
|
|
|
895 |
|
|
|
896 |
|
|
|
826 |
|
|
|
— |
|
Total
|
|
|
|
$ |
18,075 |
|
|
$ |
14,288 |
|
|
$ |
1,170 |
|
|
$ |
895 |
|
|
$ |
896 |
|
|
$ |
826 |
|
|
$ |
— |
|
* |
|
62% of this obligation is to be settled
by issuance of common stock |
We believe that existing working
capital and together with availability under our credit facility with Bank of America will provide sufficient cash flow to meet our contractual
obligations and provide cash for operations. We intend to seek financing for any amounts that we are unable to pay from operating cash flows. Financing
alternatives are routinely evaluated to determine their practicality and availability in order to provide us with additional funding at the least
possible cost.
We believe that our existing
cash, credit availability and anticipated future cash flows from operations will be sufficient to fund our working capital and capital investment
requirements for the next twelve months and a reasonable period of time thereafter.
Off-Balance Sheet Arrangements
We do not have any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material.
New Accounting Pronouncements
In July 2006, the Financial
Accounting Standards Board (“FASB”) issued Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109. This interpretation clarifies the application of SFAS No. 109 by defining a
criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial
statements. The interpretation would require us to review all tax positions accounted for in accordance with SFAS No. 109 and apply a
more-likely-than-not recognition threshold. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority
that has full knowledge of all relevant information. Subsequent recognition, de-recognition, and measurement is based on management’s best
judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years
34
beginning after December 15,
2006. We adopted the requirements of this statement as of January 1, 2007. The adoption of FIN 48 did not have a material effect on our financial
position or results of operations.
In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value
measurements; however, this statement does not require any new fair value measurements. The definition of fair value retains the exchange price notion
in earlier definitions of fair value. This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and
establishes a fair value hierarchy that distinguishes between (1) market participant assumptions based on market data and (2) the reporting
entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. This
Statement clarifies that market participant assumptions include assumptions about risk and assumptions about the effect of a restriction on the sale or
use of an asset and clarifies that a fair value measurement for a liability reflects its nonperformance risk. This Statement expands disclosures about
the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of this statement to have
a material effect on our financial position or results of operations.
In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other
items at fair value. The objective of which is to improve financial reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Eligible
items for the measurement option include all recognized financial assets and liabilities except: investments in subsidiaries, interests in variable
interest entities, employers’ and plans’ obligations for pension benefits, assets and liabilities recognized under leases, deposit
liabilities, financial instruments that are a component of shareholder’s equity. Also included are firm commitments that involve only financial
instruments, nonfinancial insurance contracts and warranties and host financial instruments. The statement permits all entities to choose at specified
election dates, after which the entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings,
at each subsequent reporting date. The fair value option may be applied instrument by instrument; however, the election is irrevocable and is applied
only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Adoption
of this statement will not have a material effect on our financial position or results of operations.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business Combinations. SFAS No. 141R changes accounting for business combinations through a requirement to
recognize 100 percent of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100
percent controlling interest when the acquisition constitutes a change in control of the acquired entity. Other requirements include capitalization of
acquired in-process research and development assets, expensing, as incurred, acquisition-related transaction costs and capitalizing restructuring
charges as part of the acquisition only if requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, are
met. SFAS No. 141R is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The implementation of this guidance will affect our results of operations and financial
position after its effective date only to the extent it completes applicable business combinations and therefore the impact can not be determined at
this time.
In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160
establishes the economic entity concept of consolidated financial statements, stating that holders of residual economic interest in an entity have an
equity interest in the entity, even if the residual interest is related to only a portion of the entity. Therefore, SFAS No. 160 requires a
noncontrolling interest to be presented as a separate component of equity. SFAS No. 160 also states that once control is obtained, a change in control
that does not result in a loss of control should be accounted for as an equity transaction. The statement requires that a change resulting in a loss of
control and deconsolidation is a significant event triggering gain or loss recognition and the establishment of a new fair value basis in any remaining
ownership interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 160
to have a material impact on our results of operations and financial position.
35
Item
7A. |
|
Quantitative and Qualitative
Disclosures about Market Risk |
For the year ended December 31,
2007, approximately 12% of our revenues were derived from sales outside of the United States. For the years ended December 31, 2006 and 2005,
approximately 18% and 22%, respectively, of the Company’s revenues were derived from sales outside of the United States. Less than 10% of these
sales and subsequent accounts receivable and selling, general and administrative expenses for the years ended December 31, 2007, 2006 and 2005 were
denominated in foreign currencies. The Company is subject to risk of financial loss resulting from fluctuations in exchange rates of foreign currencies
against the US dollar. At this time, the Company does not engage in any hedging activities.
The Company believes that
revenues from sources outside of the United States will increase during 2008. There is no assurance that the Company will not be subject to foreign
exchange losses in the future.
The Company’s outstanding
debt of $9.0 million at December 31, 2007 related to indebtedness under our credit agreement with Bank of America and contains a floating interest
rate. Thus, our interest rate is subject to market risk in the form of fluctuations in interest rates. The effect of a hypothetical one percentage
point increase in our variable rate debt would result in an increase of $90,000 in our annual pre-tax loss assuming no further changes in the amount of
borrowings subject to variable rate interest from amounts outstanding at December 31, 2007.
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 |
Not applicable.
Item
9A. |
|
Controls and
Procedures |
Evaluation of Disclosure Controls and
Procedures
Disclosure controls and
procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Our management evaluated, with
the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer have
concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over
Financial Reporting
The Company’s management is
responsible for establishing and maintaining adequate internal control over the company’s financial reporting. There are inherent limitations in
the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further because of
changes in conditions, the effectiveness of internal control may vary over time. A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a timely basis.
The Company assessed the
effectiveness of its internal control over financial reporting as of December 31, 2007. In making this assessment, we used the criteria set forth by
the Committee of Sponsoring Organizations of
36
the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on our assessment using those criteria, management concluded that our internal control over
financial reporting is effective as of December 31, 2007.
TurboChef Technologies,
Inc.’s independent registered public accounting firm, Ernst & Young LLP, has audited the financial statements included in this Annual Report
on Form 10-K and has issued its report on the Company’s internal control over financial reporting as of December 31, 2007. This report appears on
page F-3 of this Annual Report on Form 10-K.
Changes in internal control over financial
reporting
There have been no significant
changes in our internal controls during the most recent fiscal quarter, or in any other factors that could affect these controls, including any
corrective actions with regard to significant deficiencies and material weaknesses, that have affected or are reasonably likely to materially affect
our internal control over financial reporting during TurboChef’s most recent fiscal quarter covered by this report.
Item
9B. |
|
Other
Information |
None.
Part III
Item
10. |
|
Directors, Executive Officers and
Corporate Governance |
The directors and executive
officers of TurboChef are as follows:
Name
|
|
|
|
Age
|
|
Position
|
Richard E.
Perlman |
|
|
|
|
61 |
|
|
Chairman of the Board of Directors |
James K. Price
|
|
|
|
|
49 |
|
|
President, Chief Executive Officer and Director |
James A.
Cochran |
|
|
|
|
60 |
|
|
Senior Vice President, Corporate Strategy and Investor Relations |
Paul P. Lehr
|
|
|
|
|
61 |
|
|
Vice President and Chief Operating Officer |
Joseph T.
McGrain |
|
|
|
|
60 |
|
|
Vice President and President, Residential Oven Division |
Stephen J.
Beshara |
|
|
|
|
47 |
|
|
Vice President and Chief Branding Officer |
J. Miguel
Fernandez de Castro |
|
|
|
|
35 |
|
|
Vice President and Chief Financial Officer |
Dennis J.
Stockwell |
|
|
|
|
54 |
|
|
Vice President and General Counsel |
William A.
Shutzer |
|
|
|
|
60 |
|
|
Director |
Raymond H.
Welsh |
|
|
|
|
76 |
|
|
Director |
J. Thomas
Presby |
|
|
|
|
68 |
|
|
Director |
Sir Anthony
Jolliffe |
|
|
|
|
69 |
|
|
Director |
James W.
DeYoung |
|
|
|
|
64 |
|
|
Director |
Richard E.
Perlman has been Chairman of the Board since October 2003. He was formerly chairman of PracticeWorks, Inc. from March 2001 until its
acquisition by The Eastman Kodak Company in October 2003. Mr. Perlman served as chairman and treasurer of AMICAS, Inc. (formerly VitalWorks Inc.) from
January 1998 and as a director from March 1997 to March 2001, when he resigned from all positions with that company upon completion of the spin-off of
PracticeWorks, Inc. from VitalWorks. From December 1997 until October 1998, Mr. Perlman also served as VitalWorks’ chief financial officer. Mr.
Perlman is the founder of Compass Partners, L.L.C., a merchant banking and financial advisory firm specializing in corporate restructuring and middle
market
37
companies, and has served as
its president since its inception in May 1995. From 1991 to 1995, Mr. Perlman was executive vice president of Matthew Stuart & Co., Inc., an
investment banking firm. Mr. Perlman is currently a director of Alloy Inc., a media and marketing services company. Mr. Perlman received a B.S. in
Economics from the Wharton School of the University of Pennsylvania and a Masters in Business Administration from the Columbia University Graduate
School of Business.
James K. Price has
been our President and Chief Executive Officer and a director since October 2003. From March 2001 until its acquisition by The Eastman Kodak Company in
October 2003, Mr. Price was the president and chief executive officer and a director of PracticeWorks, Inc. Mr. Price was a founder of VitalWorks Inc.
and served as its executive vice president and secretary from its inception in November 1996 to March 2001, when he resigned from all positions with
VitalWorks upon completion of the spin-off of PracticeWorks from VitalWorks. Mr. Price served as an executive officer of American Medcare from 1993 and
co-founded and served as an executive officer of International Computer Solutions from 1985, in each instance until American Medcare and International
Computer Solutions merged into VitalWorks in July 1997. Mr. Price holds a B.A. in Marketing from the University of Georgia.
James A. Cochran,
Senior Vice President, Corporate Strategy and Investor Relations since October 2007, served as our Senior Vice President and Chief Financial Officer
October 2003 to October 2007. He served as chief financial officer of PracticeWorks, Inc. from its formation in August 2000 until its acquisition by
The Eastman Kodak Company in October 2003. He was VitalWorks Inc.’s chief financial officer from August 1999 to March 2001, when he resigned from
all positions with VitalWorks upon completion of the spin-off of PracticeWorks from VitalWorks. From 1992 until joining VitalWorks, Mr. Cochran was a
member of the accounting firm of BDO Seidman, LLP, serving as a partner since 1995. He is a Certified Public Accountant and received a B.B.A. in
Accounting and an M.B.A. in Corporate Finance from Georgia State University.
Paul P. Lehr has
served as our Vice President and Chief Operating Officer since October 2004, and from November 2003 to October 2004, Mr. Lehr served as our Vice
President of Operations. From December 2001 until joining us in November 2003, Mr. Lehr was self-employed. Mr. Lehr also served as executive vice
president — commercial sales of CSK Auto, Inc., a publicly traded automotive parts distribution company, from February 2000 to December 2001.
Before joining CSK Auto, in 1980 Mr. Lehr founded Motor Age, Inc., a distributor of automotive replacement parts. Motor Age became part of Parts Plus
Group, Inc. in 1997, and Mr. Lehr served as president and chief executive officer of that industry roll-up until he joined CSK Auto in February 2000.
He received a B.S. in Economics and an M.B.A. from City University of New York.
Joseph T. McGrain
became a Vice President and President of our Residential Oven Division in April, 2005. Formerly, since 1998, Mr. McGrain was President of Wolf Range
Company LLC, a division of ITW Food Equipment Group and a U.S. manufacturer of commercial cooking equipment, marketing to commercial dealers and
national chain accounts in the U.S. and export markets in Asia, South America and Europe. From 1995 to 1998 he was President of Gaggenau USA
Corporation, a subsidiary of Bosch Siemens Group and a distributor of high quality European residential cooking equipment. Mr. McGrain had other
management positions with Bosch Siemens from 1987 to 1995.
Stephen J. Beshara
joined TurboChef in November 2003 as a Vice President and its Chief Branding Officer. He was formerly the founder and President of Vista, Inc., an
Atlanta-based brand consultancy helping senior leadership teams of companies such as The Coca-Cola Company, UPS and IBM. Mr. Beshara served as Managing
Partner at EAI, Inc. from 1995-1997. He studied at the University of Georgia majoring in design and advertising, with continuing studies abroad in
Cortona, Italy. He also studied at Harvard Business School Executive Education Program and the AIGA Design Perspectives Conference. Mr. Beshara speaks
at the Gouzieta Business School at Emory University on the subject of brand communications.
J. Miguel Fernandez de
Castro has been Vice President and Chief Financial Officer of the Company since October 2007. Previously, he was Vice President, Finance of the
Company and the Company’s Controller since April 2004. Prior to joining the Company, he was Controller of PracticeWorks, a dental information
management software division of The Eastman Kodak Company. Mr. Fernandez served as PracticeWorks’ Director of Financial Reporting from 2000 to
2003 prior to its acquisition by Kodak, during which time PracticeWorks was a publicly-traded company. From 1996 to 2000, he was employed by BDO
Seidman, LLP in their audit services group.
38
Mr. Fernandez is a Certified
Public Accountant and received B.A. degrees in Economics and Spanish and a Masters degree in Accounting from the University of North Carolina at Chapel
Hill.
Dennis J. Stockwell
has been Vice President and General Counsel of the Company since November 2003. He was previously Vice President and General Counsel of PracticeWorks,
Inc., a publicly traded company, from June 2001 to November 2003. Prior to joining PracticeWorks, Mr. Stockwell was counsel to the corporate and
securities practice group of the law firm Kilpatrick Stockton LLP in Atlanta, Georgia, and is a registered patent lawyer. Mr. Stockwell has a B.S.
degree from the U.S. Naval Academy and is a former naval officer. He also has a master’s degree from the University of Rhode Island and a J.D.
degree from Harvard Law School.
William A. Shutzer
has been a director of TurboChef since October 2003. Mr. Shutzer is a senior managing director of Evercore Partners, a financial advisory and private
equity firm. Mr. Shutzer was a managing director of Lehman Brothers, Inc. from October 2000 to November 2003 and a partner in Thomas Weisel Partners,
LLC, an investment banking firm, from September 1999 to October 2000. From March 1994 until October 1996, Mr. Shutzer was executive vice president of
Furman Selz, Inc. and thereafter until the end of December 1997, he was its president. From January 1998 until September 1999, he was chairman of ING
Barings LLC’s Investment Banking Group. From September 1978 until February 1994, Mr. Shutzer was a managing director of Lehman Brothers and its
predecessors. From March 2001 to October 2003 he was a director of PracticeWorks, Inc. Mr. Shutzer is currently a director of Tiffany & Co., CSK
Auto, Inc., and Jupitermedia Corp. Mr. Shutzer received a B.A. from Harvard University and an M.B.A. from Harvard Business School.
Raymond H. Welsh
has been a director of TurboChef since October 2003. Since January 1995, Mr. Welsh has been a senior vice president of UBS Financial Services, Inc.
From January 1970 to June 1986, Mr. Welsh was a Managing Director of Kidder, Peabody & Co., Inc., serving on the firm’s executive committee
and Board of Directors. From June 1986 to June 1990, Mr. Welsh served as National Marketing Director for Kidder, Peabody & Co., Inc. During the
period of July 1990 to December 1994, he served as a Senior Vice President in sales with Kidder, Peabody & Co., Inc. From March 2001 to October
2003 he was a director of PracticeWorks, Inc. Mr. Welsh is a Trustee of the University of Pennsylvania and PennMedicine. He serves as a Trustee of
Episcopal Community Services and is involved with serving not-for-profit organizations in the Philadelphia, PA area. Mr. Welsh received a B.S. in
Economics from the Wharton School of the University of Pennsylvania.
J. Thomas Presby
became a director of TurboChef in December 2003. He has used his business experience and professional qualifications to forge a second career of
essentially full-time board service since he retired in 2002 as a partner in Deloitte Touche Tohmatsu. At Deloitte he held numerous positions in the
United States and abroad, including the posts of Deputy Chairman and Chief Operating Officer. He now serves as a director and audit committee chair for
the Company, American Eagle Outfitters, Inc., First Solar, Inc., Invesco Ltd., Tiffany & Co. and World Fuel Services, Inc. As Mr. Presby has no
significant business activities other than board service, he is available full time to fulfill his board responsibilities. Further, he finds that he is
able to leverage the experience of managing this particular set of audit committees to the benefit of each board on which he serves and the efficient
use of his own time and that of his colleagues. He is a certified public accountant and a holder of the NACD Certificate of Director
Education.
Sir Anthony
Jolliffe became a director of TurboChef in December 2003. He was previously a director from November 1998 until 2001. Sir Anthony Jolliffe is a
citizen of the United Kingdom and an independent international business consultant. Until his retirement from the accounting profession in 1982, Sir
Anthony Jolliffe was a Chartered Accountant in the United Kingdom for 18 years, during which time he grew his accounting firm into a multi-national
operation with offices in 44 countries with over 200 partners. His firm eventually merged with Coopers & Lybrand and Grant Thornton. He remained
with Grant Thornton for two years until he retired. Since that time, Sir Anthony has built a number of businesses, two of which have been listed on the
London Stock Exchange. He is currently involved in several business projects in China, the Middle East, the United States and the United Kingdom. Sir
Anthony has held, and currently holds, numerous positions with governmental and charitable entities in the United Kingdom and China, including being
the former Lord Mayor of London and the chairman of the Special Advisory Board to the Governor of Yunnan Province in China and advisor to the Governor
of Shandong Province in China.
James W. DeYoung
became a director of TurboChef in December 2003. Mr. DeYoung is the founder and President of Winston Partners Incorporated, which provides strategic
corporate advisory, corporate disclosure and
39
investor relations services
to select private and publicly-owned companies. Mr. DeYoung also plays a central role in the management of D-W Investments, LLC, a closely held limited
liability company with investments targeted across a broad spectrum of asset classes. Mr. DeYoung also is a general partner of Resource Ventures L.P.,
a private equity/venture fund. Prior to forming Winston Partners in 1984, Mr. DeYoung spent 14 years with Baxter International, Inc., serving in a
senior capacity in marketing, investor relations, public relations and corporate financial management functions. Mr. DeYoung is currently a director of
several private companies and is involved with numerous not-for-profit organizations in the Chicago, Illinois area, including as a trustee of Rush
University Medical Center and Rush North Shore Medical Center. Mr. DeYoung is also vice chairman and a director of the Chicago Horticultural Society.
Mr. DeYoung received a B.A. degree from Washington and Lee University and a J.D. degree from Northwestern University School of Law.
Audit Committee Financial Expert
We have a standing audit
committee of our Board of Directors established in accordance with section 3(a)(58)(A) of the Securities Exchange Act. The following directors, all of
whom are independent, comprise our audit committee: Messrs. Presby, Shutzer and Welsh. The audit committee reviews, acts on and reports to our board of
directors on various auditing and accounting matters, including the election of our independent registered public accounting firm (“accounting
firm”), the scope of our annual audits, fees to be paid to our accounting firm, the performance of our accounting firm and our accounting
practices and internal controls. The Board of Directors has determined that J. Thomas Presby, chairman of the Audit Committee, is an audit committee
financial expert and is an independent member of the Board.
Directors serve until the next
Annual Meeting of Stockholders or their resignation. Officers serve the Company at the discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Company’s executive officers, directors and persons who beneficially own more than ten percent
(10%) of a registered class of the Company’s equity securities (“ten percent stockholders”) to file initial reports of ownership and
changes in ownership with the Securities and Exchange Commission (the “SEC”). Executive officers, directors and ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the
copies of such forms furnished to the Company, the Company believes that during the fiscal year ended December 31, 2007, no filings applicable to its
executive officers, directors and ten percent stockholders were late, except one filing of a Form 4 reporting the award of restricted stock units to a
director, James DeYoung, was late, and two transfers of stock to beneficiaries out of a grantor retained annuity trust reportable on a Form 4 by a
director, Raymond Welsh, were reported late.
Code of Ethics
The Company has adopted a code of
ethics that applies to our executive officers, including our Chairman, Chief Executive Officer, Chief Financial Officer and Controller. The
Company’s code of ethics, which we call the “Guide for Business Conduct” (the “Ethics Code”) is available on the
Company’s website (www.turbochef.com). We will post any amendment to or waiver from the Ethics Code on the Company’s website as well. We will
provide a copy of our Ethics Code without charge upon written request to Secretary, TurboChef Technologies, Inc., Suite 1900, Six Concourse Parkway,
Atlanta, Georgia 30328.
Item
11. |
|
Executive
Compensation |
Compensation Discussion and
Analysis
Overview
We seek to provide a compensation
package for executives reasonably sufficient to attract and hold talented, experienced, energetic, and entrepreneurial-minded individuals for key
management positions with our Company. We balance offering a competitive level of compensation for the executive marketplace with common
sense
40
affordability for a Company
of our size, revenues, market position and growth opportunities. Management strives to hire and maintain an executive workforce with individuals having
the abilities and capacities to manage the Company today as well as carry it through significant growth tomorrow and beyond. We also want to align the
interests of our managers with the interests of our stockholders, so we follow a compensation strategy that includes a meaningful equity component for
future value. Accordingly, our philosophy is to provide reasonably competitive salaries and potential cash bonuses with growth potential through equity
incentives. While executive compensation structures and changes are typically initiated by senior management, we have an active Compensation Committee
of our Board of Directors (the “Compensation Committee” or “Committee”) that reviews and approves salary, bonus and equity
incentive proposals prior to implementation. In this discussion and analysis, we focus on the compensation of our executive officers named in the
Summary Compensation Table below.
The Compensation Committee looks
first at base salary as a component of compensation designed to reflect the executive’s relative level of responsibilities and value to the
organization and as a reflection of market competition for individuals with similar skill sets and experience. The Company is not tied to a specific
ratio of amounts among the three main components of executive compensation, but the Committee believes base salary presents the threshold level
necessary to compensate and retain qualified individuals before any consideration of the other components of compensation. Bonuses are considered by
the Compensation Committee next and as no less important to encouraging and rewarding extraordinary performance and results. Bonuses typically are in
the form of cash, but they could be paid in stock or combinations thereof. The Company has moved away from a purely subjective, individualized approach
to bonuses for executives in favor of including executive bonuses within a more broadly considered and applied, formalized written incentive-based
compensation plan adopted at the beginning of a year. Executive compensation for 2007 reflects the results from the 2007 Incentive-Based Compensation
Plan adopted in March 2007. Finally, the Committee believes an equity component of compensation provides a dual benefit of aligning the interests of
executives with those of other stockholders as well as providing a longer-term retention benefit through a properly structured vesting
feature.
Executive
Salaries
Executive base salaries are
recommended by our Chairman and Chief Executive Officer and are subject to review and approval by the members of our Compensation Committee. All
current executive officers are parties to executive employment agreements with the Company. These agreements set forth the initial base pay and
benefits. The Compensation Committee in 2007 approved the annual renewal of the agreements and also approved amending the agreements primarily to bring
certain provisions of the agreements in line with Section 409A of the Internal Revenue Code concerning deferred compensation. The agreements with
executives also all were realigned to have renewal anniversaries coincide with the end of the calendar year rather than occur at various times during
the year. The agreements with the Chairman and Chief Executive Officer were at the same time modified to eliminate any allowance payments in favor of
base salary only, which was adjusted for the change. The formulaic bonus structure of these two agreements also was dropped in favor of including the
two executives in the Company’s annual incentive-based compensation plan.
In recommending cash compensation
levels for executives, senior management considers the qualifications of the executive, the current needs and expected future needs of the Company, the
competitive opportunities for individuals with similar executive skill sets and experience and the expected fiscal budget. The Compensation Committee
considers the recommendations of senior management in determining whether to renew an executive employment agreement and whether to adjust the salary
component of overall compensation in light of the overall compensation package and how the balance of the components for an individual matches the
overall compensation philosophy of the Committee.
The employment agreements for
Messrs. Perlman, Price, Cochran and Fernandez de Castro provide for an initial annual base salary amount subject to an annual adjustment for changes in
the Consumer Price Index. The annual base salary for Mr. Perlman, Chairman, was adjusted upward for 2008 by $14,078 under the CPI adjustment provision
of his agreement and by an additional $28,800 in connection with the removal of stated allowances, for a current total base salary of $441,024. The
Chief Executive Officer, Mr. Price, has an adjusted base salary of $439,324 for 2008, including an increase of $14,078 under his contractual CPI
adjustment and an additional $27,100 to replace a previous allowance. Mr. Cochran, formerly the Chief Financial Officer, has a base salary for 2008
of
41
$274,439, reflecting a $9,372 increase over 2007 under his CPI annual adjustment
provision. The decision to renew these employment agreements was considered in April 2007, six months prior to the renewal date, as provided in the
employment agreements. Under the amended agreements, the Compensation Committee will consider renewal of these agreements in June, six months prior to
the amended January 1 renewal dates.
In 2007, the Compensation
Committee approved a new employment agreement with Mr. Fernandez de Castro, formerly Vice President Finance and Controller, who became the
Company’s new Chief Financial Officer. That approval included raising his base salary to $200,000 and adding certain provisions to his employment
agreement, including future salary adjustments under a CPI adjustment provision. Upon a recommendation from senior management, the Compensation
Committee approved the new compensation package for Mr. Fernandez de Castro based on a comparison with the compensation structure and benefits of the
former Chief Financial Officer.
The base salaries for Messrs.
Lehr and Beshara were increased from $200,000 to $300,000 effective January 1, 2007. The Committee concurred with the increase being a reasonable
reflection of the increased authority and responsibilities of the two executives and consistent with the Committee’s philosophy regarding the
purpose and effect of base salary levels, as described above. The Compensation Committee, based upon recommendations from senior management, determined
to renew these employment agreements for 2008.
Cash Bonus
Incentives
The Compensation Committee
considers management’s proposal for an incentive plan on an annual basis. For 2007 and again for 2008, the Company has proposed a written plan
that while still contemplating the possibility of discretionary awards by the Compensation Committee sets forth a comprehensive performance-based
approach to cash bonuses for management personnel, including executive officers. In adopting the 2007 plan, the Compensation Committee considered the
financial targets proposed by senior management as well as the individuals eligible under that plan to receive a bonus and the potential dollar amounts
that could be earned. The plan generally provided a two-tiered system. The first tier was bonuses based upon attaining certain financial results or
targets for 2007 for the participants’ business segment or function, or for certain participants a blend of targeted financial results for
business segments and functions and the Company as a whole. Targets for the commercial business included EBITDA, adjusted to remove the effects of
certain extraordinary items, such as the legal and accounting costs of the Company’s investigation in 2007 of its historical stock option grants
and practices (“EBITDA”) and revenue numbers for the year. Targets for the residential business and the residential marketing function were
based on EBITDA. The 2007 plan further provided for an additional annual bonus if financial targets or budgeted results were exceeded by fixed
percentages of targeted amounts, for commercial and corporate employees, including Messrs. Perlman, Price, Cochran and Lehr. An additional annual bonus
for residential business and marketing employees, including Mr. Beshara, for exceeding targets would be determined by the Compensation Committee
considering a proposal from management based upon actual results exceeding the targets and other qualitative and quantitative factors that the
Committee believes reasonably supports approval. The additional bonuses are payable in cash, stock or immediately exercisable stock equivalents, at the
Company’s option.
Because the base bonuses were
based on revenue and EBITDA targets that reflected carefully considered projections for 2007, the Compensation Committee understood it was reasonably
likely that the targets would be met and the bonuses earned. The amount of the bonuses was less than 20% of the executive’s base salary, and the
Committee believed those amounts were well within a reasonable range for the size of the Company and its industry. The Committee considered the excess
targets for the additional annual bonuses and believed those targets presented an exceptional challenge. While the amounts that could be earned by
executives under the additional annual bonus were potentially significant and limited only by the extent by which financial targets were exceeded, the
Compensation Committee believed the plan was fair to the Company in light of the significance of the positive results required to earn the additional
bonus. Both the regular bonus level and a significant amount of additional bonus were earned for 2007 by each of the named executive officers, and the
amounts are reflected in the Summary Compensation Table below.
The Compensation Committee
adopted a new incentive plan for 2008. The 2008 plan provides for a performance-based annual bonus for participants if the Company reaches certain
financial results, meets certain financial targets (revenue, gross margin and EBITDA) and attains certain operational goals for 2008. Under the 2008
plan, Messrs. Perlman and Price each could receive base bonuses of up to $120,000, and Messrs. Fernandez
42
and Cochran could receive a
base bonus of up to $85,000 and $70,000, respectively, if the Company attains certain financial results blended across the Company’s business
targets and as a whole. Mr. Lehr could receive a base bonus of up to $150,000 if certain commercial products financial results are achieved and certain
operational goals in the residential product business are accomplished. Mr. Beshara could receive a base bonus under the 2008 plan of up to $75,000, if
the Company achieves certain revenue and gross margin targets in the residential product business. The 2008 plan further provides for two levels of an
additional annual bonus if financial and in some cases operational targets are exceeded by set amounts for employees in all categories, including
executive officers.
For the 2008 plan, the
Compensation Committee approached the consideration of the bonus awards in the same manner as for the 2007 plan. The Committee concluded that providing
additional cash compensation based on achieving performance goals that were reasonably difficult but aimed at financial achievement that would be to
the benefit of the Company’s stockholders was an appropriate incentive. The Committee noted that the proposed base bonuses ranged up to 50% of
base salary, but the Committee believes the difficulty of reaching the full base bonus amount is high and the potential amounts are in line for a
company of the size and at the stage of development as the Company. In addition, the 2008 plan also includes a number of specific operational goals in
addition to financial targets, and these operational goals are aimed at operational accomplishments that are significant to the Company’s intended
progress in its residential product business.
Equity
Incentives
The Company views equity
incentives as a means for aligning one aspect of executive compensation with stockholders’ interests. In addition, vesting of equity incentives
over a continued period of employment can assist in the Company’s efforts to retain qualified executive personnel. The amount of an equity award
given to an executive officer normally is proposed by senior management to the Compensation Committee for its consideration and approval. While equity
incentives are viewed by the Company as longer term, forward-looking, forms of compensation, the recommendation by senior management to award equity
incentives, other than in connection with the hiring of a new executive, generally is based on past performance of the executive, on the needs of the
Company to retain that executive and the expected contribution from that executive to the Company’s success going forward. Proposals for incentive
equity awards to executive officers beginning with 2007 have been part of the more comprehensive incentive plan proposed by senior management to the
Compensation Committee.
With changes in accounting for
stock options in 2006, the Company has moved to using only restricted stock units (“RSUs”) for long-term equity compensation. The RSUs are
typically paid out in shares of common stock upon vesting, and the vesting to date has not been based on any performance metrics, but rather time-based
and scheduled over a five-year period. The executive must be employed at the scheduled (or accelerated) vesting date to receive the shares. The
Compensation Committee believes RSUs vesting over a significant time period are an appropriate vehicle for the equity component of executive
compensation.
In its adoption of the incentive
plan for 2007, the Compensation Committee considered and approved certain equity incentives in the form of RSUs for named executives for 2007. The
Compensation Committee noted that, except in one instance with Mr. Beshara in May 2006, the Company had not made an award of equity incentives to any
executive officers since May 2005, and none to the Chairman or Chief Executive Officer since options were awarded in connection with the change of
control in 2003. Accordingly, in approving the equity awards under the 2007 plan the Committee viewed the amounts of the proposed awards for executive
officers as a “catch up” in equity incentives. The awards vest ratably over a five-year period, with acceleration for a change of control or
termination of the executive without cause, and in the Committee’s view provide an appropriate stock-based incentive as well as a retention tool
consistent with our stockholders’ best interests.
Under the incentive plan for
2008, the Compensation Committee expects again to consider a proposal from senior management for the award of RSUs to officers, including executive
officers, and other management employees. Prior to its first regular meeting in 2008, the Committee was presented with a summary of the proposed and
historic total compensation package (base salary, bonuses, realized gains from stock option exercises or RSU payouts, unrealized value of stock options
and RSU awards and contractual severance payment obligations) for executives. The Committee took no action to approve equity awards under the 2008 plan
at the first regular meeting in 2008. The Committee has asked management for its proposal for either an annual award to management personnel or for
longer-term equity incentive awards aimed at retention of key senior managers, including for the Chairman
43
and Chief Executive Officer.
Upon receiving the proposal, the Committee intends to consider the effect of adding equity award payouts would have on the entire compensation package
for the individual executive officers going forward and the retention benefit built into the proposed vesting structure. It also will consider the
reasonableness of any executive’s compensation package for a company of the size and financial resources and at the stage of its development in
its industry as the Company. The Committee as well will consider the balance between base salary, potential cash bonuses and equity payouts against the
Company’s compensation philosophy in arriving at its decision to approve any equity incentives under the 2008 plan.
Perquisites
Other payments or benefits in the
form of perquisites are not a significant component of executive compensation. Any financial allowances previously included in the compensation package
for certain senior executives have been eliminated and base salaries adjusted commensurately. Executives enjoy the same insurance coverages as other
employees, except that the Company pays for additional life insurance (two times annual salary up to $200,000) for certain key employees, which
includes the executive officers. Executive employment agreements and the Company’s general policies applicable to all employees govern paid
vacation and other time off. The Company offers executives as well as all participants in the Company’s 401(k) plan at its discretion an annual
matching grant to the individual accounts of an amount equal to 50% of the participant’s contribution to the plan, with the Company’s
contribution capped at 3% of the participant’s salary.
The Compensation Committee
through the executive employment agreements has approved certain other benefits designed to help retain qualified executive personnel through uncertain
operational periods and the entire period of a change of control transaction. Under their employment agreements, the executive officers are entitled to
receive severance pay under certain conditions of termination of employment. Messrs. Perlman, Price and Cochran will receive cash equal to three times
their total annual compensation (base salary, bonus and benefits) as severance. Mr. Fernandez de Castro will receive three times his total annual
compensation for termination in connection with a change of control, or one times his total annual compensation in the case of termination without
cause otherwise. The other executive officers will receive one-half of the annual base salary as severance. The executive employment agreements also
provide for an additional, tax gross-up payment to be made by the Company to the executive in the event that, upon a change in control, any payments
made to the executive are subject to an excise tax under Section 4999 of the Internal Revenue Code.
Impact of Accounting and
Tax Considerations
The Compensation Committee
maintains awareness of the accounting and tax implications of Sections 162(m) and 409A of the Internal Revenue Code. Section 162(m) limits the
Company’s deduction of certain non-performance based compensation paid to executive officers in excess of $1 million per year. The Committee
believes the full deductibility for federal income tax purposes of the executive compensation it has approved is not adversely impacted by Section
162(m).
Base salary and bonuses are
expensed by the Company when the services are rendered (base bonuses are expenses ratably and incentive bonuses are expensed when attainment of
financial or operational goals is determinable). For long-term incentive compensation, such as the RSUs awarded to executives, the fair market value,
determined as of their grant dates, is amortized on a straight-line basis over the term of the vesting period. Management and the Compensation
Committee consider the compensation costs of equity awards under FAS Statement 123R in evaluating long-term equity awards for executives and other
employees.
Section 409A creates adverse tax
consequences with respect to certain non-qualified deferred compensation. The Committee approved amendments to executive employment agreements to
adjust certain provisions regarding deferred payments, such as severance and bonus payments, to avoid adverse impacts under Section 409A. The Company
also determined during its investigation in 2007 of its historic stock option grants and practices that certain stock options held by employees,
including ones held by certain executive officers, for financial reporting purposes should be re-measured to a different measurement date than that
which was documented as the grant date. Such re-measurement caused those options to be considered as having been awarded at an exercise price
discounted from fair market value on the proper measurement date and thereby subjecting the holder to the adverse tax consequences of Section 409A.
Employees holding affected stock options, including executive officers who had been granted
44
those options at a time when
they were not executive officers, were permitted by the Compensation Committee to amend their options to the proper, higher market price to remove
those options from the effect of the adverse provisions of Section 409A. The Committee agreed that the Company could compensate those affected option
holders to offset the increased exercise prices. Messrs. Fernandez de Castro, Beshara and Lehr participated in that offer. See the Summary Compensation
Table and footnotes 3, 4 and 5 thereto, as well as the Grants of Plan-based Awards table and footnote 4 thereto for further details of the option
amendments and compensation awards to these executives.
Role of Management and
Compensation Committee
Individual plans for compensating
executive officers as well as broader compensation plans that would include executive officers are proposed by senior management and reviewed and
considered for approval by the Compensation Committee. The Compensation Committee also reviews existing executive agreements for consideration of
renewal once each year prior to a time six months in advance of the renewal anniversary. The Compensation Committee considers competitive trends in
executive management compensation of which it becomes aware in the marketplace, the financial position of the Company and its projected budgets, and
progress management personnel have made or are making toward expected goals.
The Compensation Committee has
adopted in principal a policy for the formal consideration of management’s proposals for annual incentive awards and bonuses for executives and
other employees. Annual grants of equity incentive awards will be considered by the Compensation Committee only at the first regularly scheduled
meeting of the Board of Directors each year. Management’s proposals are expected to be presented to the Committee prior to the meeting and with
full detail. The Committee will favor proposals for incentive compensation to be performance based, with a portion based on defined metrics and the
balance on qualitative aspects of performance. Management’s proposal also must specify any annual cash bonuses proposed with specific targets and
allocations. The Compensation Committee received a proposal, considered and adopted the incentive plan for 2008 consistent with this
policy.
Summary Compensation
The following table summarizes
compensation awarded to, earned by or paid to the Company’s principal executive officer, its principal financial officer, its former principal
financial officer and its three other most highly compensated executive officers serving as such at the end of 2007 (collectively, the “Named
Executive Officers”) for services rendered to the Company during the last fiscal year.
Summary Compensation Table
Name and Principal Position
|
|
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock
Awards(1)
|
|
Non-Equity
Incentive Plan
Compensation
|
|
All Other
Compensation
|
|
Total
|
Richard E.
Perlman |
|
|
|
|
2007 |
|
|
$ |
399,770 |
|
|
|
|
|
|
$ |
134,154 |
|
|
$ |
220,057 |
|
|
$ |
29,629 |
(2) |
|
$ |
783,610 |
|
Chairman
|
|
|
|
|
2006 |
|
|
$ |
393,608 |
|
|
$ |
75,000 |
|
|
|
|
|
|
|
|
|
|
$ |
35,862 |
|
|
$ |
504,470 |
|
| |
James K.
Price |
|
|
|
|
2007 |
|
|
$ |
474,770 |
|
|
|
|
|
|
$ |
134,154 |
|
|
$ |
220,157 |
|
|
$ |
7,500 |
|
|
$ |
836,481 |
|
Chief
Executive Officer
|
|
|
|
|
2006 |
|
|
$ |
393,608 |
|
|
$ |
75,000 |
|
|
|
|
|
|
|
|
|
|
$ |
23,130 |
|
|
$ |
491,738 |
|
| |
J. Miguel
Fernandez de Castro |
|
|
|
|
2007 |
|
|
$ |
159,038 |
|
|
|
|
|
|
$ |
150,945 |
(3) |
|
$ |
83,912 |
|
|
$ |
3,995 |
|
|
$ |
397,890 |
|
Chief
Financial Officer
|
|
|
|
|
2006 |
|
|
$ |
135,000 |
|
|
$ |
25,000 |
|
|
|
|
|
|
|
|
|
|
$ |
3,995 |
|
|
$ |
163,995 |
|
| |
James A.
Cochran |
|
|
|
|
2007 |
|
|
$ |
266,148 |
|
|
|
|
|
|
$ |
46,260 |
|
|
$ |
70,571 |
|
|
$ |
7,500 |
|
|
$ |
390,479 |
|
Sr. Vice
President
|
|
|
|
|
2006 |
|
|
$ |
262,046 |
|
|
$ |
25,000 |
|
|
|
|
|
|
|
|
|
|
$ |
17,739 |
|
|
$ |
304,785 |
|
(former Chief
Financial Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Paul P. Lehr
|
|
|
|
|
2007 |
|
|
$ |
296,154 |
|
|
|
|
|
|
$ |
152,926 |
(4) |
|
$ |
520,376 |
|
|
$ |
2,769 |
|
|
$ |
972,225 |
|
Chief
Operating Officer
|
|
|
|
|
2006 |
|
|
$ |
200,000 |
|
|
$ |
50,000 |
|
|
|
|
|
|
|
|
|
|
$ |
19,682 |
|
|
$ |
269,682 |
|
| |
Stephen J.
Beshara |
|
|
|
|
2007 |
|
|
$ |
296,154 |
|
|
|
|
|
|
$ |
524,613 |
(5) |
|
$ |
100,000 |
|
|
$ |
6,000 |
|
|
$ |
926,767 |
|
Chief
Branding Officer
|
|
|
|
|
2006 |
|
|
$ |
200,000 |
|
|
$ |
50,000 |
|
|
$ |
176,400 |
|
|
|
|
|
|
$ |
6,000 |
|
|
$ |
432,400 |
|
45
(1) |
|
The amount recognized for financial
statement reporting purposes under FAS 123R for restricted stock unit awards, including for certain named executives the effect of option amendments
(see footnotes 3, 4 and 5). Assumptions used in calculation of these amounts are included in Note 2 to the Company’s audited financial statements
in this Annual Report on Form 10-K. |
(2) |
|
Includes amounts for automobile
allowance, life and disability insurance premiums, credit card fees and a matching grant under the Company’s 401(k) plan. |
(3) |
|
Includes the incremental combined value
under FAS 123(R) of restricted stock units awarded to compensate for the aggregate difference in exercise prices of certain stock options that were
re-priced upwards to avoid adverse tax consequences under IRC Section 409A and the difference in value under FAS 123(R) of those re-priced options. The
RSUs awarded in connection with the options amendment are valued at $187,998 under FAS 123(R), but the newly-price options are valued under FAS 123(R)
at $106,443 less than they were pre-modification, netting $81,555 of incremental value. See footnote 4 to the Grants of Plan-Based Awards table
below. |
(4) |
|
Includes the incremental combined value
under FAS 123(R) of restricted stock units awarded to compensate for the aggregate difference in exercise prices of certain stock options that were
re-priced upwards to avoid adverse tax consequences under IRC Section 409A and the difference in value under FAS 123(R) of those re-priced options. The
RSUs awarded in connection with the options amendment are valued at $20,437 under FAS 123(R), but the newly-price options are valued under FAS 123(R)
at $20,169 less than they were pre-modification, netting $268 of incremental value. See footnote 4 to the Grants of Plan-Based Awards table
below. |
(5) |
|
Includes the incremental combined value
under FAS 123(R) of restricted stock units awarded to compensate for the aggregate difference in exercise prices of certain stock options that were
re-priced upwards to avoid adverse tax consequences under IRC Section 409A and the difference in value under FAS 123(R) of those re-priced options. The
RSUs awarded in connection with the options amendment are valued at $300,602 under FAS 123(R), but the newly-price options are valued under FAS 123(R)
at $193,247 less than they were pre-modification, netting $107,355 of incremental value. See footnote 4 to the Grants of Plan-Based Awards table
below. |
46
Grants of Plan-Based Awards
Name
|
|
|
|
Grant Date
|
|
Estimated Future
Payouts
Under Non-Equity
Incentive Plan Awards
|
|
Estimated
Future
Payouts
Under
Equity
Incentive
Plan Awards(1)
|
|
All Other
Stock
Awards;
Number of
Shares
of
Stock
Or Units
(#)
|
|
All Other
Option
Awards;
Number of
Securities
Underlying
Options (#)
|
|
Exercise or
Base Price
of Option
Awards
($/Sh)
|
|
Grant Date
Fair
Value of
Stock And
Option
Awards
|
|
|
|
|
|
|
|
Target ($) |
|
Maximum ($) |
|
Target (#) |
|
|
|
Richard E.
Perlman |
|
|
|
March 29, 2007 |
|
$ |
75,000 |
|
|
|
(2 |
) |
|
|
58,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
894,360 |
|
James K. Price
|
|
|
|
March 29, 2007 |
|
$ |
75,000 |
|
|
|
(2 |
) |
|
|
58,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
894,360 |
|
J. Miguel
Fernandez
de Castro |
|
|
|
March 29, 2007 |
|
$ |
25,000 |
|
|
|
(2 |
) |
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
462,600 |
|
|
|
|
|
December 7, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
33,333 |
|
|
$ |
14.58 |
(5) |
|
$ |
71,559 |
(5) |
|
|
|
|
December 7, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
15,000 |
|
|
$ |
11.95 |
(5) |
|
$ |
9,996 |
(5) |
James A. Cochran
|
|
|
|
March 29, 2007 |
|
$ |
30,000 |
|
|
|
(2 |
) |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
308,400 |
|
Paul P. Lehr
|
|
|
|
March 29, 2007 |
|
$ |
50,000 |
|
|
|
(3 |
) |
|
|
66,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,017,720 |
|
|
|
|
|
December 7, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
4,666 |
|
|
$ |
14.58 |
(5) |
|
$ |
268 |
(5) |
Stephen J.
Beshara |
|
|
|
March 29, 2007 |
|
$ |
50,000 |
|
|
|
(4 |
) |
|
|
66,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,017,720 |
|
|
|
|
|
December 7, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
46,667 |
|
|
$ |
12.99 |
(5) |
|
$ |
80,698 |
(5) |
|
|
|
|
December 7, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
40,000 |
|
|
$ |
11.95 |
(5) |
|
$ |
26,657 |
(5) |
(1) |
|
Restricted stock unit awards granted
under the 2007 Incentive-based Compensation Plan for retention purposes with time-based (not performance based) vesting. |
(2) |
|
Maximum cash bonuses under the 2007
Incentive-based Compensation Plan are determined by allocating a share of a pool comprised of 15% of the excess EBITDA, if EBITDA results are 15 –
25% better than budgeted, or 25% of the excess EBITDA, if EBITDA results are more than 25% better than budgeted. The additional bonus amounts are
calculated from the foregoing formula applied to each of four categories of results –commercial, residential, marketing and consolidated —
and weighing each at 25% of the total possible pool. Actual bonuses earned under this plan are set forth above in the Summary Compensation
Table. |
(3) |
|
Maximum cash bonus under the 2007
Incentive-based Compensation Plan is determined by allocating a share of a pool comprised of 15% of the excess EBITDA, if EBITDA results are 15 –
25% better than budgeted, or 25% of the excess EBITDA, if EBITDA results are more than 25% better than budgeted applied to commercial business results.
The actual bonus earned under this plan is set forth above in the Summary Compensation Table. |
(4) |
|
Maximum cash bonus under the 2007
Incentive-based Compensation Plan is determined under a subjective analysis by the Compensation Committee of qualitative and quantitative results for
residential business and marketing results, with 25% of additional EBITDA serving as a maximum measure of possible additional bonus. The actual bonus
earned under this plan is set forth above in the Summary Compensation Table. |
(5) |
|
Under transition rules of IRC Section
409A, options previously awarded to these named executive officers were amended to fair market value on their new measurement date, increasing the
exercise price, and the option holder was awarded restricted stock units under the Company’s 2003 Stock Incentive Plan. The restricted stock units
are denominated in dollars (reflecting the aggregate difference in the exercise prices) and payable in shares on March 7, 2008. The number of shares
underlying the restricted stock units to match the dollar denomination will be determined from the closing price on the last trading day before March
7, 2008. The combination of the restricted stock unit award and amendment of the options to increase the exercise price compared to the
pre-modification stock options netted a positive incremental compensation value under FAS 123R, which is reported in this table. See footnotes 3, 4 and
5 to the Summary Compensation Table above. The amended exercise prices of the prior option awards are as follows: |
Old Price
|
|
|
|
New Price
|
$ 7.92 |
|
|
|
$12.99 |
$ 9.66 |
|
|
|
$14.58 |
$10.35 |
|
|
|
$11.95 |
47
Narrative to Summary Compensation Table and Grants of
Plan Based Awards Table
Cash
Compensation
Salaries for the executive
officers named above are paid pursuant to written executive employment agreements which renew annually, if not subject to a notice of expiration. The
base salaries for Messrs. Perlman, Price, Cochran and Fernandez de Castro under their employment agreements are subject to adjustment on the first day
of January each agreement renewal year, directly proportional to the percent change in the Consumer Price Index for All Urban Consumers (CPI-U) for the
U.S. City Average for All Items, 1982-84=100, comparing the CPI for October for the current year against the CPI for October of the prior year (except
November is used for Mr. Fernandez de Castro). Mr. Price’s salary for 2007 included approximately $60,000 for an automobile allowance under his
employment agreement for past periods. Under the agreements, base salaries currently in effect for the named executive officers are as
follows:
Name
|
|
|
|
Base Salary
|
Richard E.
Perlman |
|
|
|
$ |
441,024 |
|
James K.
Price |
|
|
|
$ |
439,324 |
|
J. Miguel
Fernandez de Castro |
|
|
|
$ |
200,000 |
|
James A.
Cochran |
|
|
|
$ |
274,439 |
|
Paul P. Lehr
|
|
|
|
$ |
300,000 |
|
Stephen J.
Beshara |
|
|
|
$ |
300,000 |
|
Cash bonuses for 2007 were
payable pursuant to the Company’s 2007 Incentive-Based Compensation Plan (the “2007 Compensation Plan”) adopted by the Compensation
Committee in March 2007. The named executive officers, as well as all managers and key employees of the Company, are participants in the 2007
Compensation Plan. The 2007 Compensation Plan provides for a performance-based annual cash bonus for participants. Cash bonuses may be earned if the
Company reaches certain financial results or meets certain financial targets for 2007 for the participants’ business segment or function as set
forth in the plan, or for certain participants a blend of targeted financial results for business segments and functions and the Company as a whole.
Targets for the commercial business include EBITDA and revenue numbers for the year. Targets for the residential business and the residential marketing
function are based on EBITDA.
The 2007 Compensation Plan
further provides for an additional annual bonus if financial targets or budgeted results are exceeded by fixed percentages of targeted amounts, for
commercial and corporate employees, including Messrs. Perlman, Price, Fernandez de Castro, Cochran and Lehr. An additional annual bonus for residential
business and marketing employees, including Mr. Beshara, for exceeding targets would be determined by the Compensation Committee considering a proposal
from management based upon actual results exceeding the targets and other qualitative and quantitative factors that the Committee believes reasonably
supports approval. Named executive officers received base bonuses and additional bonuses for 2007 under the 2007 Compensation Plan.
Equity
Compensation
The 2007 Compensation Plan
provides for retention grants to participants of a total of 545,000 restricted stock units (“RSUs”), payable by issuance of one share of the
Company’s common stock for each unit upon vesting. The RSUs vest one fifth each year, beginning March 10, 2008, so long as the participant is
employed by the Company on the vesting date. Vesting of the RSUs will accelerate upon a change of control or sale of the Company. The executive
officers named above participated in the RSU awards under the 2007 Compensation Plan.
The Company also entered into
agreements with three of the named executives, Messrs. Fernandez de Castro, Beshara and Lehr, to amend certain of their outstanding stock option
agreements to change the exercise prices to the fair market value of the underlying common shares on a new measurement date. Under those amendment
agreements, the executives were awarded restricted stock units under the Company’s 2003 Stock Incentive Plan denominated in dollars in the amount
of the aggregate spread between the former exercise prices of the stock options and the modified, higher, prices. The purpose of the modifications was
to help the executives avoid the adverse tax consequences under IRC Section 409A for stock options deemed to have been initially granted at a discount.
The transition rules of that tax provision permit these executives, who had received these stock options at a time
48
when they were not executive
officers, to avoid the adverse tax consequences by modifying the options in this fashion. The Company is permitted to compensate the option holders for
the difference in exercise prices, so long as the compensation is paid out in the next tax year. Accordingly, the dollar-denominated restricted stock
units awarded to the executives were structured to pay out in shares of common stock on March 7, 2008.
The Company also entered into
agreements with Messrs. Perlman, Price and Cochran to modify the stock option agreements covering certain of their stock options that could be deemed
discounted options under IRC Section 409A. These agreements modified the stock options such that the executives may only exercise the options in
connection with their death or disability, upon termination of employment, change of control or immediately prior to their expiration.
Outstanding Equity Awards at Fiscal
Year-End
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable (1)
|
|
Option
Exercise
Price ($)
|
|
Option Expiration Date
|
|
Number of
Shares
or Units of
Stock That
Have Not
Vested (#)
|
|
Market Value of
Shares or Units of
Stock That
Have
Not Vested ($)
|
Richard E.
Perlman |
|
|
|
|
416,633 |
|
|
$ |
5.25 |
|
|
October
29, 2013 |
|
|
58,000 |
(3) |
|
$ |
957,000 |
|
| |
James K. Price
|
|
|
|
|
416,666 |
|
|
$ |
5.25 |
|
|
October
29, 2013 |
|
|
58,000 |
(3) |
|
$ |
957,000 |
|
| |
J. Miguel
Fernandez de Castro |
|
|
|
|
33,333 |
|
|
$ |
14.58 |
|
|
April 19,
2014 |
|
|
30,000 |
(3) |
|
$ |
495,000 |
|
|
|
|
|
|
15,000 |
(2) |
|
$ |
11.95 |
|
|
May 3,
2015 |
|
|
|
|
|
|
|
|
| |
James A.
Cochran |
|
|
|
|
133,333 |
|
|
$ |
5.25 |
|
|
October
29, 2013 |
|
|
20,000 |
(3) |
|
$ |
330,000 |
|
|
|
|
|
|
15,000 |
(2) |
|
$ |
10.35 |
|
|
May 3,
2015 |
|
|
|
|
|
|
|
|
| |
Paul P. Lehr
|
|
|
|
|
40,000 |
|
|
$ |
10.35 |
|
|
May 3,
2015 |
|
|
66,000 |
(3) |
|
$ |
1,089,000 |
|
| |
Stephen J.
Beshara |
|
|
|
|
46,676 |
|
|
$ |
12.99 |
|
|
November
21, 2013 |
|
|
106,000 |
(4) |
|
$ |
1,749,000 |
|
|
|
|
|
|
40,000 |
(2) |
|
$ |
11.95 |
|
|
May 3,
2015 |
|
|
|
|
|
|
|
|
(1) |
|
The Company accelerated the vesting of
all outstanding stock options on December 31, 2005, so all options listed are fully vested. While the executive officer may exercise the options at any
time, each has agreed not to sell the underlying shares until the date the shares would have vested but for the Company’s acceleration of vesting
at the end of 2005. The shares underlying options that are still subject to the purchase-and-hold provision of the stock option modification agreements
are indicated by footnote. |
(2) |
|
Shares are released from the
purchase-and-hold provision described in footnote (1) in equal amounts every three months over a three-year period beginning May 3,
2005. |
(3) |
|
The restricted stock units vest
one-fifth on March 10, 2008 and thereafter each of the remaining one-fifths on each of the next four anniversaries thereof. |
(4) |
|
13,200 of the restricted stock units
vest on March 10, 2008 and thereafter 13,200 units vest on each of the next four anniversaries thereof. 40,000 of the restricted stock units vest on
May 2, 2008. |
49
Option Exercises and Stock Vested
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
|
|
Number of
Shares Acquired
on Exercise (#)
|
|
Value Realized
on Exercise ($)
|
|
Number of
Shares Acquired
on Vesting (#)
|
|
Value Realized
on Vesting ($)
|
Richard E.
Perlman |
|
|
|
|
–0– |
|
|
|
–0– |
|
|
|
–0– |
|
|
|
–0– |
|
James K. Price
|
|
|
|
|
–0– |
|
|
|
–0– |
|
|
|
–0– |
|
|
|
–0– |
|
J. Miguel
Fernandez de Castro |
|
|
|
|
–0– |
|
|
|
–0– |
|
|
|
(1 |
) |
|
$ |
187,998 |
|
James A. Cochran
|
|
|
|
|
–0– |
|
|
|
–0– |
|
|
|
–0– |
|
|
|
–0– |
|
Paul P. Lehr
|
|
|
|
|
4,666 |
|
|
$ |
8,819 |
|
|
|
(1 |
) |
|
$ |
20,437 |
|
Stephen J.
Beshara |
|
|
|
|
–0– |
|
|
|
–0– |
|
|
|
(1 |
) |
|
$ |
300,602 |
|
(1) |
|
See footnotes 3, 4 and 5 to the Summary
Compensation Table and footnote 4 to the Grants of Plan-based Awards table above. |
Potential Payments Upon Termination or
Change-in-Control
The employment agreements with
all of the named executive officers provide for a number of possible benefits upon termination of the executive’s employment. If termination is a
result of death or disability, then earned but unpaid salary, benefits and bonus are payable. In addition, however, the disabled executive or the
estate of the deceased executive will have up to a year to exercise outstanding stock options. If the executive’s employment is terminated by the
Company without cause or if the executive resigns for “good reason” (as defined to include, among other things, a material reduction in base
salary, job functions, duties or responsibilities, and a relocation of the executive’s work site), then all outstanding stock options and
restricted stock units become fully vested and the Company must pay the executive in a lump sum three times his total annual compensation (including
base salary, bonuses and benefits) for Messrs. Perlman, Price and Cochran, or one half of annual base salary for Messrs Lehr and Beshara, in effect
either immediately before the termination or on the first day of the term of the agreement, whichever is greater. Mr. Fernandez de Castro’s
agreement is the same in this regard except he receives three times his total annual compensation if termination without cause or for “good
reason” is in connection with a change of control, or one times that amount if not in connection with a change of control. The agreements provide
for payment to be made within five business days after termination. Upon a change of control, as defined in the agreements, all outstanding stock
options and the right to sell the underlying shares and all outstanding restricted stock units become fully vested. In addition, the executive may,
during a period that could reach six months following the change of control, resign and receive payment within five days of the lump-sum severance
amounts described above. The employment agreements also provide for an additional, tax gross-up payment to be made by the Company to the executive in
the event that, upon termination without cause or for “good reason” or in connection with a change in control, any payments made to the
executive are subject to an excise tax under Section 4999 of the Internal Revenue Code. Finally, the employment agreements prohibit the executive from
engaging in certain activities which compete with the Company, seeks to recruit its employees or disclose any of its trade secrets or otherwise
confidential information.
The following chart shows the
effect of termination and change of control provisions for the named executive officers if the triggering event occurred on the last business day of
2007. The resulting amount payable is the same whether termination is by the Company without cause or by the executive for good reason at any time or
termination is voluntary on the part of the executive within a period described in the agreements that may be as long as six months after a change of
control. Because the Company accelerated the vesting of all outstanding stock options at the end of 2005, a triggering event at the end of 2007 would
not cause any additional acceleration of vesting of options.
50
Name
|
|
|
|
Type of
Severance Benefit
|
|
Amount Payable
|
|
Richard E.
Perlman |
|
|
|
Base
Salary |
|
|
|
$ |
1,236,672 |
|
|
|
|
|
Bonus |
|
|
|
|
225,000 |
|
|
|
|
|
Benefits |
|
|
|
|
24,681 |
|
|
|
|
|
IRC
Sec. 4999 Gross Up |
|
|
|
|
1,104,863 |
|
|
|
|
|
|
|
Total value: |
|
$ |
2,591,216 |
|
James K. Price
|
|
|
|
Base
Salary |
|
|
|
$ |
1,236,672 |
|
|
|
|
|
Bonus |
|
|
|
|
225,000 |
|
|
|
|
|
Benefits |
|
|
|
|
33,426 |
|
|
|
|
|
IRC
Sec. 4999 Gross Up |
|
|
|
|
1,085,261 |
|
|
|
|
|
|
|
Total value: |
|
$ |
2,580,359 |
|
J. Miguel
Fernandez de Castro |
|
|
|
Base
Salary |
|
|
|
$ |
600,000 |
|
|
|
|
|
Bonus |
|
|
|
|
75,000 |
|
|
|
|
|
Benefits |
|
|
|
|
32,712 |
|
|
|
|
|
IRC
Sec. 4999 Gross Up |
|
|
|
|
571,516 |
|
|
|
|
|
|
|
Total value: |
|
$ |
1,279,228 |
|
James A.
Cochran |
|
|
|
Base
Salary |
|
|
|
$ |
823,317 |
|
|
|
|
|
Bonus |
|
|
|
|
90,000 |
|
|
|
|
|
Benefits |
|
|
|
|
14,265 |
|
|
|
|
|
IRC
Sec. 4999 Gross Up |
|
|
|
|
536,403 |
|
|
|
|
|
|
|
Total value: |
|
$ |
1,463,985 |
|
Paul P. Lehr
|
|
|
|
Base
Salary |
|
|
|
$ |
150,000 |
|
|
|
|
|
IRC
Sec. 4999 Gross Up |
|
|
|
|
0 |
|
|
|
|
|
|
|
Total value: |
|
$ |
150,000 |
|
Stephen J.
Beshara |
|
|
|
Base
Salary |
|
|
|
$ |
150,000 |
|
|
|
|
|
IRC
Sec. 4999 Gross Up |
|
|
|
|
454,254 |
|
|
|
|
|
|
|
Total value: |
|
$ |
604,254 |
|
Compensation Committee Interlocks and Insider
Participation
The Company has a Compensation
Committee, the members of which are Messrs. Shutzer, Welsh and DeYoung, all of whom are independent directors. Our Compensation Committee establishes
salaries, incentives and other forms of compensation for officers and other employees. This Committee also administers our incentive compensation and
benefit plans.
No interlocking relationships
currently exist, or have existed between our Compensation Committee and the board of directors or compensation committee of any other
company.
Compensation Committee Report
The Compensation Committee has
reviewed and discussed the Compensation Discussion and Analysis with management, and based upon its review and discussions the Compensation Committee
has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form
10-K.
William A. Shutzer
Raymond H.
Welsh
James W. DeYoung
51
Director
Compensation
In October 2006, the Board of
Directors adopted a revised Director compensation plan. Members of the Board who are not TurboChef employees, or employees of any parent, subsidiary or
affiliate of TurboChef, receive an annual retainer of $25,000 per year, payable one fourth each quarter in advance of service. Each non-employee
Director also receives an annual grant of 5,000 restricted stock units, to vest 50% each anniversary following the grant. The chairman of each of the
Audit and Compensation Committees receives 2,000 additional restricted stock units with the same vesting. Directors are reimbursed for their reasonable
and necessary expenses for attending Board and Board committee meetings.
Name
|
|
|
|
Fees Paid
in Cash
|
|
Restricted
Stock Units
Awards(1)
|
|
All
Other
Compensation
|
|
Total
|
J. Thomas
Presby(4) |
|
|
|
$ |
25,000 |
|
|
$ |
53,836 |
|
|
|
|
|
|
$ |
78,836 |
|
William A.
Shutzer(5) |
|
|
|
$ |
25,000 |
|
|
$ |
53,836 |
|
|
|
|
|
|
$ |
78,836 |
|
Raymond H.
Welsh(6) |
|
|
|
$ |
25,000 |
|
|
$ |
38,454 |
|
|
|
|
|
|
$ |
63,454 |
|
James W.
DeYoung(7) |
|
|
|
$ |
25,000 |
|
|
$ |
38,454 |
|
|
$ |
49,959 |
(2)(3) |
|
$ |
113,413 |
|
Sir Anthony
Jolliffe(8) |
|
|
|
$ |
25,000 |
|
|
$ |
38,454 |
|
|
$ |
24,961 |
(2) |
|
$ |
88,415 |
|
(1) |
|
The grant date fair value under SFAS
123R of the RSUs awarded on October 29, 2006 was $12.83 per share and $15.48 per share on October 29, 2007. |
(2) |
|
Compensation was in the form of 4,580
restricted stock units each, awarded on May 2, 2006 for consulting services, vesting monthly over one year, with a delayed payout until May 2, 2009.
The grant date fair value under SFAS 123R was $13.23 per share. |
(3) |
|
Compensation was in the form of 4,408
restricted stock units awarded on October 2, 2007 for consulting services, vesting monthly over one year. The grant date fair value under SFAS 123R was
$13.67 per share. Compensation also included $10,000 cash paid for consulting services. |
(4) |
|
At year end, Mr. Presby held stock
options on 68,332 shares, all of which were vested, and RSUs for 10,500 shares, none of which were vested. |
(5) |
|
At year end, Mr. Shutzer held stock
options on 68,332 shares, all of which were vested, and RSUs for 10,500 shares, none of which were vested. |
(6) |
|
At year end, Mr. Welsh held stock
options on 53,332 shares, all of which were vested, and RSUs for 7,500 shares, none of which were vested. |
(7) |
|
At year end, Mr. DeYoung held stock
options on 61,665 shares, all of which were vested, and RSUs for 16,488 shares, 4,580 of which were vested but not payable until May 2, 2009 and 1102
of which were vested but not payable until October 2, 2008. |
(8) |
|
At year end, Sir Anthony Jolliffe held
stock options on 89,998 shares, all of which were vested, and RSUs for 12,080 shares, 4,580 of which were vested but not payable until May 2,
2009. |
52
Item
12. |
|
Security Ownership of Certain
Beneficial Owners and Management and Related
Stockholder Matters |
Security Ownership
Five Percent
Owners
The following table sets forth
information, as of March 1, 2008, as to shares of our capital stock held by persons known to us to be the beneficial owners of more than five percent
of any class of our capital stock (other than officers and directors) based upon information publicly filed by such persons. Unless otherwise indicated
in the footnotes to this table and subject to community property laws where applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
Title of Class
|
|
|
|
Name and Address of
Beneficial Owner of
Class
|
|
Amount of Beneficial
Ownership
|
|
Percent of
Class (1)
|
| |
Common |
|
|
|
FMR
Corp.
82 Devonshire Street
Boston, MA 02109 |
|
|
4,408,144 |
(2) |
|
|
14.9 |
% |
Common |
|
|
|
Jack
Silver
SIAR Capital LLC
660 Madison Avenue
New York, NY 10021 |
|
|
3,249,401 |
(3) |
|
|
10.9 |
% |
Common |
|
|
|
Jeffrey B. Bogatin
888 Park Avenue
New York, NY 10021 |
|
|
1,479,164 |
(4) |
|
|
5.0 |
% |
(1) |
|
Based upon 29,570,854 shares outstanding
on March 1, 2008. |
(2) |
|
Based upon ownership reported in an
amended Schedule 13G filed on February 14, 2008. The amended Schedule 13G was filed by FMR Corp. as well as Edward C. Johnson 3d, Chairman of FMR
Corp. |
(3) |
|
Based upon ownership reported in an
amended Schedule 13G filed on February 13, 2008 by Jack Silver and affiliated entities. |
(4) |
|
Based upon ownership reported in an
amended Schedule 13D filed on December 21, 2006. |
Officers and
Directors
The following table sets forth
information concerning the shares of TurboChef Common Stock that are beneficially owned by the following individuals:
• |
|
each of TurboChef’s
directors; |
• |
|
each of TurboChef’s named executive
officers; and |
• |
|
all of TurboChef’s directors and
executive officers as a group. |
Unless otherwise indicated, the
listing is based on the number of TurboChef common shares held by such beneficial owners as of March 1, 2008. Unless otherwise indicated in the
footnotes to this table and subject to community property laws where applicable, the Company believes that each of the stockholders named in this table
has sole voting and investment power with respect to the shares indicated as beneficially owned.
The number of shares shown as
beneficially owned by each beneficial owner in the table below includes shares that can be acquired by that beneficial owner through stock option
exercises or will be received through the vesting of restricted stock units on or prior to April 30, 2008. In calculating the percentage owned by each
beneficial owner, the Company assumed that all stock options that are exercisable by that person on or prior to April 30, 2008 are exercised by that
person and the underlying shares issued and shares issuable under a restricted stock unit to that person on or prior to April 30, 2008 have been
issued. The total number of shares outstanding used in calculating the percentage owned assumes no exercise of options held by other beneficial owners,
no issuance of shares underlying other restricted stock units and no exchange of any preferred units of membership interest of
Enersyst
53
Development Center, L.L.C.
Likewise, beneficial ownership of certain officers and directors is shown as if shares of common stock have been distributed by OvenWorks, LLLP to its
partners.
Name of Beneficial Owner
|
|
|
|
Amount and Nature
of Beneficial
Ownership (1)
|
|
Percent
of
Class
|
Richard E.
Perlman |
|
|
|
|
2,569,698 |
(2) |
|
|
8.6 |
% |
James K.
Price |
|
|
|
|
2,208,802 |
(3) |
|
|
7.4 |
% |
J. Thomas
Presby |
|
|
|
|
192,072 |
(4) |
|
|
* |
|
William A.
Shutzer |
|
|
|
|
1,889,561 |
(5) |
|
|
6.4 |
% |
Raymond H.
Welsh |
|
|
|
|
93,763 |
(6) |
|
|
* |
|
Sir Anthony
Jolliffe |
|
|
|
|
112,528 |
(7) |
|
|
* |
|
James W.
DeYoung |
|
|
|
|
368,038 |
(8) |
|
|
1.2 |
% |
James A.
Cochran |
|
|
|
|
312,287 |
(9) |
|
|
1.1 |
% |
Paul P. Lehr
|
|
|
|
|
53,200 |
(10) |
|
|
* |
|
J. Miguel
Fernandez de Castro |
|
|
|
|
64,999 |
(11) |
|
|
* |
|
Stephen J.
Beshara |
|
|
|
|
99,866 |
(12) |
|
|
* |
|
All current
directors and executive officers as a group (13 persons) |
|
|
|
|
8,179,798 |
(2)(13) |
|
|
26.1 |
% |
(1) |
|
Unless otherwise indicated, the Company
believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by
them. Percentages herein assume a base of 29,570,854 shares of common stock outstanding as of March 1, 2008. |
(2) |
|
Includes 416,633 shares of common stock
issuable upon exercise of options, 11,600 shares issuable upon vesting of restricted stock units and 432,185 shares of common stock currently owned by
OvenWorks, LLLP, which is controlled by Mr. Perlman. Mr. Perlman has pledged 1,676,587 shares as security. Mr. Perlman’s address is 655 Madison
Avenue, Suite 1500, New York, NY 10021. |
(3) |
|
Includes 416,666 shares of common stock
issuable upon exercise of options, 11,600 shares issuable upon vesting of restricted stock units and 71,257 shares of common stock currently owned by
OvenWorks, LLLP. Mr. Price has pledged 900,000 shares as security. Mr. Price’s address is Six Concourse Parkway, Suite 1900, Atlanta, GA
30328. |
(4) |
|
Includes 68,333 shares of common stock
issuable upon exercise of options and 4,811 shares of common stock currently owned by OvenWorks, LLLP. |
(5) |
|
Includes 68,333 shares of common stock
issuable upon exercise of options and 72,746 shares of common stock currently owned by OvenWorks, LLLP. Mr. Shutzer’s address is 655 Madison
Avenue, Suite 1500, New York, NY 10021. |
(6) |
|
Includes 53,332 shares of common stock
issuable upon exercise of options. |
(7) |
|
Includes 89,998 shares of common stock
issuable upon exercise of options and 2,530 shares of common stock currently owned by OvenWorks, LLLP. |
(8) |
|
Includes 61,665 shares of common stock
issuable upon exercise of options and 8,333 shares of common stock currently owned by OvenWorks, LLLP. |
(9) |
|
Includes 148,333 shares of common stock
issuable upon exercise of options, 2,000 shares issuable upon vesting of restricted stock units and 10,802 shares of common stock currently owned by
OvenWorks, LLLP. Mr. Cochran has pledged 151,152 shares as security. |
(10) |
|
Includes 40,000 shares of common stock
issuable upon exercise of options and 13,200 shares issuable upon vesting of restricted stock units. |
(11) |
|
Includes 48,333 shares of common stock
issuable upon exercise of options and 6,000 shares issuable upon vesting of restricted stock units. |
(12) |
|
Includes 86,666 shares of common stock
issuable upon exercise of options and 13,200 shares issuable upon vesting of restricted stock units. |
(13) |
|
Includes 1,573,543 shares issuable upon
exercise of options, 40,400 shares issuable upon vesting of restricted stock units and 432,185 shares of common stock currently owned by OvenWorks,
LLLP. |
54
EQUITY COMPENSATION PLAN INFORMATION
The following
table sets forth as of December 31, 2007, information about our equity compensation plans.
Plan category
|
|
|
|
(b)
Number of securities
to be issued
upon
exercise of outstanding
options, warrants
and rights
|
|
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
(b)
Number of securities
remaining available
for
future issuance under
equity compensation plans
(excluding securities
reflected in first column)
|
Equity
compensation plans approved by security holders |
|
|
|
|
3,694,239 |
|
|
$ |
9.35 |
|
|
|
903,794 |
|
Equity
compensation plans not approved by security holders |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
|
|
|
|
|
3,694,239 |
|
|
$ |
9.35 |
|
|
|
903,794 |
|
(a) |
|
The weighted-average exercise price does
not take into account the shares issuable upon vesting of outstanding restricted stock units which have no exercise price. |
(b) |
|
Includes an estimated 223,000 shares
issuable on March 7, 2008 pursuant to the vesting of restricted stock units, which estimate is based upon the closing price of the Common Stock on
February 27, 2008. The RSUs are denominated in dollars, aggregating $1.9 million, and the actual number of shares issuable will be determined from the
closing price of the Common Stock on March 6, 2008. |
Item 13. Certain Relationships
and Related Transactions, and Director Independence
Transactions with Related
Persons
Since the beginning of the
Company’s last fiscal year, there has been no transaction or currently proposed transaction involving in excess of $120,000 with the Company in
which any director or executive officer of the Company or immediate family member or five percent shareholder has a direct or indirect material
interest. Any such transaction would be subject to review by the Board of Directors under the Company’s Guide for Business Conduct (or ethics
code, a copy of which is available on the Company’s website), and the Company expects a director or executive officer contemplating such a
transaction also would, if applicable, seek approval by a majority of disinterested directors under Section 144 of the Delaware General Corporation
Law.
Independence of Members of
the Board of Directors
Nasdaq Marketplace Rules require
that a majority of the members of our Board of Directors be independent. Our Board of Directors has determined that all of the members of the Board who
are not executive officers of the Company are independent, as that term is defined under Nasdaq’s Marketplace Rule 4200(a)(15). Therefore, Messrs.
Presby, Shutzer, DeYoung, and Welsh and Sir Anthony Jolliffe, who comprise more than a majority of the seven-member Board, are independent under such
rule. The independence standards of these rules also include independence requirements for committees of the Board of Directors. Our compensation,
nominating and audit committees include members only from among our independent directors.
Nasdaq’s Marketplace Rule
4200(a)(15) defines an “independent director” as “a person other than an executive officer or employee of the company or any other
individual having a relationship which, in the opinion of the issuer’s board of directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.” The Rule goes on to exclude certain persons, including a director who was employed
by the Company during the last three years, accepted compensation from the Company in excess of $100,000 in any twelve consecutive month period within
the last three years or who had various relationships with family members who had business relationships or various interlocking relationships with the
Company. In addition to a review of any related party transactions, as would be disclosed above, the Board looks at information it has available to it
about each individual director, such as responses to questionnaires, as well as its general knowledge of a director’s relationships with the
Company, management personnel and other directors, and it assesses this information against the categories of excluded individuals under Nasdaq
Marketplace Rule 4200(a)(15) to help it reach its determination of whether a director is independent. In reaching its determination that the directors
identified above are independent,
55
the Board considered the
ownership interest of the directors in OvenWorks LLLP and the consulting arrangement between the Company and one of the directors.
Item 14. Principal Accountant
Fees and Services
Audit Fees and All Other Fees
Audit
Fees
Fees for audit services totaled
approximately $1.1 million in 2007 and $536,000 in 2006, including fees associated with the annual audit and internal control report, the reviews of
the Company’s quarterly reports on Form 10-Q and annual reports on Form 10-K and, for 2007, fees associated with the stock option
investigation.
Audit-Related
Fees
Fees for audit related services
totaled approximately $1,500 in 2007 and $2,000 in 2006. Audit related services principally include accounting consultations and other attest
services.
Tax
Fees
Fees for tax services totaled
approximately $37,000 in 2007 and $50,000 in 2006, including tax compliance, tax advice and tax planning.
All Other
Fees
The Company did not pay its
principal accountant any other fees in 2007 or in 2006.
The Audit Committee pre-approves
all services for which the principal accountant is engaged.
We have been advised by Ernst
& Young LLP that neither the firm, nor any member of the firm, has any financial interest, direct or indirect, in any capacity in the Company or
its subsidiaries.
56
Part IV
Item 15. Exhibits, Financial
Statement Schedules
(a) The following
documents are filed as part of this Report:
1. Financial
Statements.
Description
|
|
|
|
Page
|
Reports of
Independent Registered Public Accounting Firm |
|
|
|
|
F-2 |
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006 |
|
|
|
|
F-4 |
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006 and 2005 |
|
|
|
|
F-5 |
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005 |
|
|
|
|
F-6 |
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 |
|
|
|
|
F-8 |
|
Notes to
Consolidated Financial Statements |
|
|
|
|
F-9 |
|
2. Financial Statement
Schedules.
The following Financial Statement
Schedule for the Registrant is filed as part of this Report and should be read in conjunction with the Registrant’s Financial
Statements:
Description
|
|
|
|
Page
|
Schedule
II—Valuation and Qualifying Accounts |
|
|
|
|
S-1 |
|
Schedules other than the one
listed above are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or
related notes.
3. Exhibits.
The following exhibits are
required to be filed with this Report by Item 601 of Regulation S-K:
Exhibit No.
|
|
|
|
Description
|
2.1 |
|
|
|
Stock Purchase Agreement dated as of October 28, 2003 by and between the Registrant and OvenWorks, LLLP (incorporated by reference to Exhibit
2.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on November 10, 2003) |
2.2 |
|
|
|
Contribution Agreement, dated May 21, 2004 by and among the Registrant, Enersyst Development Center LLC and its members (incorporated by
reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 28, 2004) |
2.3 |
|
|
|
Asset Purchase Agreement, dated September 12, 2005, among TurboChef Technologies, Inc., Global Appliance Technologies, Inc. and stockholders
of Global Appliance Technologies (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed with the
Commission on September 13, 2005) |
3.1 |
|
|
|
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1.2 to the Registrant’s Registration Statement on Form
SB-2, Registration No. 33-75008) |
3.2 |
|
|
|
Amendment to Certificate of Incorporation—Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference
to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed with the Commission on November
14, 2000) |
57
Exhibit No.
|
|
|
|
Description
|
3.3 |
|
|
|
Amendment to Certificate of Incorporation—Certificate of Designation of Series B Convertible Preferred Stock (incorporated by reference
to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed with the Commission on April 16,
2001) |
3.4 |
|
|
|
Amendment to Certificate of Incorporation—Certificate of Designation of Series C Convertible Preferred Stock (incorporated by reference
to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the Commission on May 15,
2002) |
3.5
|
|
|
|
Amendment to Certificate of Incorporation—Certificate of Designation of Series D Convertible Preferred Stock (incorporated by reference
to Exhibit 3(i) to the Registrant’s Current Report on Form 8-K, filed with the Commission on November 10, 2003) |
3.6
|
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation of TurboChef Technologies, Inc., as amended (incorporated by reference
to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 20, 2004) |
3.7
|
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation of TurboChef Technologies, Inc., as amended (incorporated by reference
to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on December 23, 2004) |
3.8
|
|
|
|
Restated By-Laws (incorporated by reference to Exhibit 3.2.2 to the Registrant’s Registration Statement on Form SB-2, Registration No.
33-75008) |
3.9
|
|
|
|
Amendment to Bylaws (incorporated by reference to Item 5.03 of the Registrant’s Current Report on Form 8-K, filed with the Commission on
November 27, 2007) |
4.1
|
|
|
|
Specimen Common Stock certificate (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form SB-2,
Registration No. 33-75008) |
4.2
|
|
|
|
Specimen Common Stock certificate (incorporated by reference to Exhibit 4.11 to the Registrant’s Registration Statement on Form S-3,
Registration No. 333-121818) |
4.3
|
|
|
|
See
Exhibits 3.1 through 3.9 for provisions of the Certificate of Incorporation and Bylaws of the Registrant defining the rights of holders of the
Registrant’s Common Stock |
10.1
|
|
|
|
1994
Stock Option Plan, as amended (incorporated by reference to Exhibit 10.14.2 to the Registrant’s Registration Statement on Form SB-2, Registration
No. 33-75008) |
10.2*
|
|
|
|
Equipment Supplier Approval Agreement dated as of March 5, 2004 by and among the Registrant, Doctor’s Associates, Inc. and Independent
Purchasing Cooperative, Inc. (incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2003, filed with the Commission on March 30, 2004) |
10.3
|
|
|
|
TurboChef Technologies, Inc. 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 30, 2004) |
10.4
|
|
|
|
Form
of Incentive Stock Option Agreement under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.22 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 30, 2004) |
10.5
|
|
|
|
Form
of Non-Qualified Stock Option Agreement under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 30, 2004) |
10.6 |
|
|
|
Form
of Non-Qualified Stock Option Agreement for Consultants under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.24 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 30,
2004) |
58
Exhibit No.
|
|
|
|
Description
|
10.7 |
|
|
|
Employment Agreement, dated as of February 9, 2004, by and between the Registrant and Richard E. Perlman (incorporated by reference to Exhibit
10.25 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 30,
2004) |
10.8 |
|
|
|
Employment Agreement, dated as of February 9, 2004, by and between the Registrant and James K. Price (incorporated by reference to Exhibit
10.26 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 30,
2004) |
10.9 |
|
|
|
Employment Agreement, dated as of February 9, 2004, by and between the Registrant and James A. Cochran (incorporated by reference to Exhibit
10.27 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March 30,
2004) |
10.10 |
|
|
|
Preferred Unit Exchange Agreement, dated May 21, 2004, by and among the Registrant and the members of Enersyst (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 28, 2004) |
10.11 |
|
|
|
Amended and Restated Operating Agreement of Enersyst, dated May 21, 2004 (incorporated by reference to Exhibit 10.4 to the Registrant’s
Current Report on Form 8-K, filed with the Commission on May 28, 2004) |
10.12 |
|
|
|
Amendment to TurboChef Technologies, Inc. 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed with the Commission on May 12, 2004, as amended on November 22,
2004) |
10.13 |
|
|
|
Employment Agreement, dated as of September 14, 2004, by and between the Registrant and Paul P. Lehr (incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on November 1, 2004) |
10.14 |
|
|
|
Credit Agreement dated as of February 28, 2005 among TurboChef Technologies, Inc., its subsidiaries and Bank of America, N.A. (incorporated by
reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 3, 2005) |
10.15 |
|
|
|
Employment Agreement, effective as of April 25, 2005, by and between TurboChef Technologies, Inc. and Joseph T. McGrain (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 5, 2005) |
10.16 |
|
|
|
Restrictive Covenant Agreement, dated September 12, 2005, between TurboChef Technologies, Inc. and David H. McFadden (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 13, 2005) |
10.17 |
|
|
|
Restrictive Covenant Agreement, dated September 12, 2005, between TurboChef Technologies, Inc. and David A. Bolton (incorporated by reference
to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 13, 2005) |
10.18 |
|
|
|
Second Amendment to TurboChef Technologies, Inc. 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.18 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Commission on September 24,
2007) |
10.19 |
|
|
|
Third Amendment to TurboChef Technologies, Inc. 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.19 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Commission on September 24, 2007) |
10.20 |
|
|
|
Form
of Restricted Stock Unit award agreement for employees under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.20 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Commission on September 24,
2007) |
59
Exhibit No.
|
|
|
|
Description
|
10.21 |
|
|
|
Form
of Restricted Stock Unit award agreement for directors under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.21 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Commission on September 24,
2007) |
10.22 |
|
|
|
Stock Option Modification Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with
the Commission on December 30, 2005) and Schedule |
10.23* |
|
|
|
2007
Incentive-Based Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2007, filed with the Commission on September 24, 2007) |
10.24 |
|
|
|
Form
of Stock Options Amendment Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the
Commission on December 10, 2007) and Schedule |
10.25 |
|
|
|
Form
of Executive Stock Options Amendment Agreement and Schedule |
10.26 |
|
|
|
Amended and restated employment agreement, dated January 18, 2008, by and between TurboChef Technologies, Inc. and Richard E.
Perlman |
10.27 |
|
|
|
Amended and restated employment agreement, dated January 18, 2008, by and between TurboChef Technologies, Inc. and James K.
Price |
10.28 |
|
|
|
Amended and restated employment agreement, dated January 18, 2008, by and between TurboChef Technologies, Inc. and James A.
Cochran |
10.29 |
|
|
|
Amended and restated employment agreement, dated January 18, 2008, by and between TurboChef Technologies, Inc. and J. Miguel Fernandez de
Castro |
10.30 |
|
|
|
Amended and restated employment agreement, dated January 18, 2008, by and between TurboChef Technologies, Inc. and Paul P.
Lehr |
10.31 |
|
|
|
Amended and restated employment agreement, dated January 18, 2008, by and between TurboChef Technologies, Inc. and Stephen J.
Beshara |
10.32* |
|
|
|
2008
Incentive-Based Compensation Plan |
10.33 |
|
|
|
Amended and Restated Credit Agreement dated as of February 7, 2008 among TurboChef Technologies, Inc., its subsidiaries and Bank of America,
N.A. (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 8,
2008) |
23.1 |
|
|
|
Consent of Independent Registered Public Accounting Firm |
24.1 |
|
|
|
Power of Attorney (see signature page) |
31.1 |
|
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
|
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
|
|
|
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
* |
|
Portions of these documents have been
omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment of the omitted
portions. |
60
SCHEDULE II
TURBOCHEF TECHNOLOGIES, INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
Balance at
Beginning
of Year
|
|
Charged to
Costs and
Expenses
|
|
Charged to
Other
Accounts
|
|
Deductions
|
|
Balance at
End of
Year
|
|
|
|
|
(In thousands) |
|
Allowance for
Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2007 |
|
|
|
$ |
162 |
|
|
$ |
326 |
|
|
$ |
— |
|
|
$ |
(293 |
) |
|
$ |
195 |
|
Year ended
December 31, 2006 |
|
|
|
|
177 |
|
|
|
147 |
|
|
|
— |
|
|
|
(162 |
) |
|
|
162 |
|
Year ended
December 31, 2005 |
|
|
|
|
197 |
|
|
|
98 |
|
|
|
(48 |
) |
|
|
(70 |
) |
|
|
177 |
|
Deferred
Income Tax Asset Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2007 |
|
|
|
|
40,867 |
|
|
|
7,523 |
|
|
|
— |
|
|
|
— |
|
|
|
48,390 |
|
Year ended
December 31, 2006 |
|
|
|
|
32,985 |
|
|
|
7,882 |
|
|
|
— |
|
|
|
— |
|
|
|
40,867 |
|
Year ended
December 31, 2005 |
|
|
|
|
19,645 |
|
|
|
12,344 |
|
|
|
996 |
|
|
|
— |
|
|
|
32,985 |
|
All financial statement schedules
not listed are omitted because they are inapplicable or the requested information is shown in the financial statements of the Registrant or in the
related notes to the consolidated financial statements.
S-1
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on form 10-K for the year ended December
31, 2007 to be signed on its behalf by the undersigned, thereunto duly authorized on this 6th day of March, 2008.
TURBOCHEF
TECHNOLOGIES, INC.
By: |
|
/s/ James K. Price
James K.
Price
President and Chief Executive Officer
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS,
that each person whose signature appears below constitutes and appoints James K. Price and Richard E. Perlman, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates indicated.
Signature
|
|
|
|
Title
|
|
Date
|
/s/ Richard E.
Perlman
_______________________________
Richard E. Perlman |
|
|
|
Chairman of the Board and Director |
|
March 6, 2008 |
| |
/s/ James K.
Price
_______________________________
James K. Price |
|
|
|
Chief
Executive Officer, President and
Director (Principal Executive Officer) |
|
March 6, 2008 |
| |
/s/ J. Miguel
Fernandez de Castro
_______________________________
J. Miguel Fernandez de Castro |
|
|
|
Vice
President and Chief Financial
Officer (Principal Financial and
Accounting Officer) |
|
March 6, 2008 |
| |
/s/ William A.
Shutzer
_______________________________
William A. Shutzer |
|
|
|
Director |
|
March 6, 2008 |
| |
/s/ Raymond H.
Welsh
_______________________________
Raymond H. Welsh |
|
|
|
Director |
|
March 6, 2008 |
| |
/s/ J. Thomas
Presby
_______________________________
J. Thomas Presby |
|
|
|
Director |
|
March 6, 2008 |
| |
/s/ James W.
DeYoung
_______________________________
James W. DeYoung |
|
|
|
Director |
|
March 6, 2008 |
| |
/s/ Anthony
Jolliffe
_______________________________
Sir Anthony Jolliffe |
|
|
|
Director |
|
March 6, 2008 |
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
Reports of
Independent Registered Public Accounting Firm |
|
|
|
|
F-2 |
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
Balance
Sheets as of December 31, 2007 and 2006 |
|
|
|
|
F-4 |
|
Statements of
Operations for the years ended December 31, 2007, 2006 and 2005 |
|
|
|
|
F-5 |
|
Statements of
Changes in Stockholders’ Equity for the years ended December 31, 2007, 2006
and 2005 |
|
|
|
|
F-6 |
|
Statements of
Cash Flows for the years ended December 31, 2007, 2006 and 2005 |
|
|
|
|
F-8 |
|
Notes to
Financial Statements |
|
|
|
|
F-9 |
|
F-1
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders
TurboChef Technologies, Inc.
We have audited the accompanying consolidated balance
sheets of TurboChef Technologies, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule
listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated financial position of TurboChef Technologies, Inc. at December 31, 2007
and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment in
2006.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the effectiveness of TurboChef Technologies, Inc.’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 29, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young
LLP
Atlanta, Georgia
February 29, 2008
F-2
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders of
Turbochef Technologies, Inc.
We have audited TurboChef’s internal control over
financial reporting as of December 31, 2007 based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). TurboChef Technologies Inc.’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Management’s Report on Internal Controls. Our responsibility is to express an opinion on the company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, TurboChef Technologies Inc. maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of TurboChef Technologies, Inc. as of December 31, 2007
and 2006, and the related consolidated statements of operations, stockholders’ equity and statement of cash flows for each of the three years in
the period ended December 31, 2007 of TurboChef Technologies, Inc. and our report dated February 29, 2008 expressed an unqualified opinion
thereon.
/s/ Ernst & Young
LLP
Atlanta, Georgia
February 29, 2008
F-3
TURBOCHEF TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
10,149 |
|
|
$ |
19,675 |
|
Accounts
receivable, net of allowance of $195 and $162 |
|
|
|
|
38,657 |
|
|
|
11,001 |
|
Other
receivables |
|
|
|
|
2,502 |
|
|
|
2,771 |
|
Inventory,
net |
|
|
|
|
11,883 |
|
|
|
11,737 |
|
Prepaid
expenses |
|
|
|
|
3,307 |
|
|
|
2,128 |
|
Total current
assets |
|
|
|
|
66,948 |
|
|
|
47,312 |
|
Property and
equipment, net |
|
|
|
|
6,728 |
|
|
|
7,944 |
|
Developed
technology, net of accumulated amortization of $2,914 and $2,107 |
|
|
|
|
5,156 |
|
|
|
5,963 |
|
Goodwill
|
|
|
|
|
5,934 |
|
|
|
5,934 |
|
Covenants
not-to-compete, net of accumulated amortization of $1,286 and $726 |
|
|
|
|
4,314 |
|
|
|
4,874 |
|
Other assets
|
|
|
|
|
91 |
|
|
|
174 |
|
Total assets
|
|
|
|
$ |
88,721 |
|
|
$ |
72,201 |
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
|
$ |
20,178 |
|
|
$ |
9,200 |
|
Accrued
expenses |
|
|
|
|
9,894 |
|
|
|
3,103 |
|
Future
installments due on covenants not-to-compete and additional consideration for assets acquired |
|
|
|
|
3,801 |
|
|
|
3,793 |
|
Amounts
outstanding under credit facility |
|
|
|
|
9,000 |
|
|
|
— |
|
Deferred
revenue |
|
|
|
|
9,554 |
|
|
|
3,403 |
|
Accrued
warranty |
|
|
|
|
558 |
|
|
|
1,889 |
|
Deferred rent
|
|
|
|
|
247 |
|
|
|
247 |
|
Other current
liabilities |
|
|
|
|
1,908 |
|
|
|
— |
|
Total current
liabilities |
|
|
|
|
55,140 |
|
|
|
21,635 |
|
Future
installments due on covenants not-to-compete and additional consideration for assets acquired, non-current |
|
|
|
|
— |
|
|
|
3,550 |
|
Deferred
rent, non-current |
|
|
|
|
974 |
|
|
|
1,218 |
|
Other
liabilities |
|
|
|
|
100 |
|
|
|
93 |
|
Total
liabilities |
|
|
|
|
56,214 |
|
|
|
26,496 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $1 par value, authorized 5,000,000 shares, 0 shares issued |
|
|
|
|
— |
|
|
|
— |
|
Preferred
membership units exchangeable for shares of TurboChef
common stock |
|
|
|
|
380 |
|
|
|
384 |
|
Common stock,
$.01 par value, authorized 100,000,000 shares;
issued 29,568,325 and 29,197,145 shares at December 31, 2007
and 2006, respectively
|
|
|
|
|
296 |
|
|
|
292 |
|
Additional
paid-in capital |
|
|
|
|
173,857 |
|
|
|
169,821 |
|
Accumulated
deficit |
|
|
|
|
(142,026 |
) |
|
|
(124,792 |
) |
Total
stockholders’ equity |
|
|
|
|
32,507 |
|
|
|
45,705 |
|
Total
liabilities and stockholders’ equity |
|
|
|
$ |
88,721 |
|
|
$ |
72,201 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
TURBOCHEF TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales |
|
|
|
$ |
107,003 |
|
|
$ |
47,403 |
|
|
$ |
50,239 |
|
Royalties |
|
|
|
|
1,103 |
|
|
|
1,266 |
|
|
|
2,010 |
|
Total
revenues |
|
|
|
|
108,106 |
|
|
|
48,669 |
|
|
|
52,249 |
|
Costs and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
product sales |
|
|
|
|
66,645 |
|
|
|
31,929 |
|
|
|
43,532 |
|
Research and
development |
|
|
|
|
5,177 |
|
|
|
4,357 |
|
|
|
4,307 |
|
Purchased
research and development |
|
|
|
|
— |
|
|
|
7,665 |
|
|
|
6,285 |
|
Selling,
general and administrative |
|
|
|
|
53,427 |
|
|
|
29,027 |
|
|
|
33,777 |
|
Restructuring
charges |
|
|
|
|
— |
|
|
|
(41 |
) |
|
|
621 |
|
Total costs
and expenses |
|
|
|
|
125,249 |
|
|
|
72,937 |
|
|
|
88,522 |
|
Operating
loss |
|
|
|
|
(17,143 |
) |
|
|
(24,268 |
) |
|
|
(36,273 |
) |
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
|
|
638 |
|
|
|
1,300 |
|
|
|
1,536 |
|
Interest
expense and other |
|
|
|
|
(729 |
) |
|
|
(436 |
) |
|
|
(332 |
) |
|
|
|
|
|
(91 |
) |
|
|
864 |
|
|
|
1,204 |
|
Loss before
income taxes |
|
|
|
|
(17,234 |
) |
|
|
(23,404 |
) |
|
|
(35,069 |
) |
Provision for
income taxes |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
loss |
|
|
|
$ |
(17,234 |
) |
|
$ |
(23,404 |
) |
|
$ |
(35,069 |
) |
| |
Per share
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted |
|
|
|
$ |
(0.59 |
) |
|
$ |
(0.81 |
) |
|
$ |
(1.25 |
) |
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted |
|
|
|
|
29,294,596 |
|
|
|
28,834,821 |
|
|
|
28,034,103 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
TURBOCHEF TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE
DATA)
|
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Preferred
Membership
Units
|
|
Shares
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
Balance,
January 1, 2005 |
|
|
|
|
— |
|
|
|
— |
|
|
|
6,351 |
|
|
|
24,313,158 |
|
|
$ |
243 |
|
|
$ |
93,550 |
|
|
$ |
(66,319 |
) |
Net
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(35,069 |
) |
Issuance of
common stock in public offering, net of issuance costs |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,925,000 |
|
|
|
29 |
|
|
|
54,810 |
|
|
|
— |
|
Issuance of
common stock in exchange for Enersyst preferred membership units |
|
|
|
|
— |
|
|
|
— |
|
|
|
(5,384 |
) |
|
|
518,032 |
|
|
|
5 |
|
|
|
5,379 |
|
|
|
— |
|
Exercise of
options and warrants
for common stock |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
807,278 |
|
|
|
8 |
|
|
|
3,064 |
|
|
|
— |
|
Issuance of
common stock for acquisition of intangible assets |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
60,838 |
|
|
|
1 |
|
|
|
992 |
|
|
|
— |
|
Proceeds from
notes receivable for
stock issuances |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Compensation
expense, primarily related to stock options granted for services |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,115 |
|
|
|
— |
|
Other |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(59 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
Balance,
December 31, 2005 |
|
|
|
|
— |
|
|
|
— |
|
|
|
967 |
|
|
|
28,624,247 |
|
|
|
286 |
|
|
|
164,907 |
|
|
|
(101,388 |
) |
Net
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,404 |
) |
Issuance of
common stock in exchange for Enersyst preferred membership units |
|
|
|
|
— |
|
|
|
— |
|
|
|
(583 |
) |
|
|
56,093 |
|
|
|
1 |
|
|
|
582 |
|
|
|
— |
|
Exercise of
options and warrants
for common stock |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
342,106 |
|
|
|
3 |
|
|
|
2,171 |
|
|
|
— |
|
Issuance of
common stock for acquisition of intangible assets |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
169,365 |
|
|
|
2 |
|
|
|
1,871 |
|
|
|
— |
|
Compensation
expense, primarily related to restricted stock granted for services |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,334 |
|
|
|
— |
|
|
|
290 |
|
|
|
— |
|
Balance,
December 31, 2006 |
|
|
|
|
— |
|
|
|
— |
|
|
|
384 |
|
|
|
29,197,145 |
|
|
|
292 |
|
|
|
169,821 |
|
|
|
(124,792 |
) |
Net
loss |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17,234 |
) |
Issuance of
common stock in exchange for Enersyst preferred membership units |
|
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
414 |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
Exercise of
options and warrants
for common stock |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
225,307 |
|
|
|
2 |
|
|
|
2,018 |
|
|
|
— |
|
Issuance of
common stock for acquisition of intangible assets |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
124,381 |
|
|
|
2 |
|
|
|
1,520 |
|
|
|
— |
|
Compensation
expense, primarily related to restricted stock granted for services |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,078 |
|
|
|
— |
|
|
|
1,823 |
|
|
|
— |
|
Tender offer
and option amendments |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,329 |
) |
|
|
— |
|
Balance,
December 31, 2007 |
|
|
|
|
— |
|
|
|
— |
|
|
|
380 |
|
|
|
29,568,325 |
|
|
$ |
296 |
|
|
$ |
173,857 |
|
|
$ |
(142,026 |
) |
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
TURBOCHEF TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE
DATA)
|
|
|
|
Notes Receivable
For
Stock Issuances
|
|
Treasury
Stock
|
|
Total
Stockholders’
Equity
|
Balance,
January 1, 2005 |
|
|
|
$ |
(46 |
) |
|
$ |
— |
|
|
$ |
33,779 |
|
Net loss
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(35,069 |
) |
Issuance of
common stock in public offering, net of issuance costs |
|
|
|
|
— |
|
|
|
— |
|
|
|
54,839 |
|
Issuance of
common stock in exchange for Enersyst preferred membership units |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of
options and warrants for common stock |
|
|
|
|
— |
|
|
|
— |
|
|
|
3,072 |
|
Issuance of
common stock for acquisition of intangible assets |
|
|
|
|
— |
|
|
|
— |
|
|
|
993 |
|
Proceeds from
notes receivable for stock issuances |
|
|
|
|
46 |
|
|
|
— |
|
|
|
46 |
|
Compensation
expense, primarily related to stock options granted
for services |
|
|
|
|
— |
|
|
|
— |
|
|
|
7,115 |
|
Other
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
Balance,
December 31, 2005 |
|
|
|
|
— |
|
|
|
— |
|
|
|
64,772 |
|
Net loss
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(23,404 |
) |
Issuance of
common stock in exchange for Enersyst preferred membership units |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of
options and warrants for common stock |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,174 |
|
Issuance of
common stock for acquisition of intangible assets |
|
|
|
|
— |
|
|
|
— |
|
|
|
1,873 |
|
Compensation
expense, primarily related to restricted stock granted
for services |
|
|
|
|
— |
|
|
|
— |
|
|
|
290 |
|
Balance,
December 31, 2006 |
|
|
|
|
— |
|
|
|
— |
|
|
|
45,705 |
|
Net loss
|
|
|
|
|
— |
|
|
|
— |
|
|
|
(17,234 |
) |
Issuance of
common stock in exchange for Enersyst preferred membership units |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of
options and warrants for common stock |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,020 |
|
Issuance of
common stock for acquisition of intangible assets |
|
|
|
|
— |
|
|
|
— |
|
|
|
1,522 |
|
Compensation
expense, primarily related to restricted stock granted
for services |
|
|
|
|
— |
|
|
|
— |
|
|
|
1,823 |
|
Tender offer
and option amendments |
|
|
|
|
— |
|
|
|
— |
|
|
|
(1,329 |
) |
Balance,
December 31, 2007 |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
32,507 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
TURBOCHEF TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
$ |
(17,234 |
) |
|
$ |
(23,404 |
) |
|
$ |
(35,069 |
) |
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
research and development |
|
|
|
|
— |
|
|
|
7,665 |
|
|
|
6,285 |
|
Depreciation
and amortization |
|
|
|
|
4,069 |
|
|
|
3,854 |
|
|
|
2,796 |
|
Non-cash
interest |
|
|
|
|
470 |
|
|
|
391 |
|
|
|
203 |
|
Non-cash
equity compensation expense |
|
|
|
|
2,402 |
|
|
|
290 |
|
|
|
7,115 |
|
Amortization
of deferred rent |
|
|
|
|
(236 |
) |
|
|
(244 |
) |
|
|
(122 |
) |
Non-cash
restructuring costs |
|
|
|
|
— |
|
|
|
— |
|
|
|
125 |
|
Provision for
doubtful accounts |
|
|
|
|
326 |
|
|
|
147 |
|
|
|
98 |
|
Foreign
exchange loss (gain) |
|
|
|
|
(6 |
) |
|
|
8 |
|
|
|
76 |
|
Changes in
operating assets and liabilities, net of effects of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash |
|
|
|
|
— |
|
|
|
— |
|
|
|
3,196 |
|
Accounts
receivable |
|
|
|
|
(27,976 |
) |
|
|
(3,834 |
) |
|
|
2,196 |
|
Inventories
|
|
|
|
|
(729 |
) |
|
|
(1,445 |
) |
|
|
(3,590 |
) |
Prepaid
expenses and other assets |
|
|
|
|
(954 |
) |
|
|
(2,140 |
) |
|
|
(2,342 |
) |
Accounts
payable |
|
|
|
|
10,978 |
|
|
|
1,581 |
|
|
|
(2,311 |
) |
Accrued
expenses and warranty |
|
|
|
|
5,460 |
|
|
|
(1,023 |
) |
|
|
245 |
|
Deferred
revenue |
|
|
|
|
6,151 |
|
|
|
1,042 |
|
|
|
911 |
|
Net cash used
in operating activities |
|
|
|
|
(17,279 |
) |
|
|
(17,112 |
) |
|
|
(20,188 |
) |
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of business, net of cash acquired |
|
|
|
|
— |
|
|
|
— |
|
|
|
(192 |
) |
Acquisition
of intangible assets |
|
|
|
|
(2,349 |
) |
|
|
(2,349 |
) |
|
|
(7,292 |
) |
Purchase of
property and equipment, net |
|
|
|
|
(768 |
) |
|
|
(3,111 |
) |
|
|
(3,098 |
) |
Other
|
|
|
|
|
— |
|
|
|
— |
|
|
|
128 |
|
Net cash used
in investing activities |
|
|
|
|
(3,117 |
) |
|
|
(5,460 |
) |
|
|
(10,454 |
) |
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
the sale of common stock, net |
|
|
|
|
— |
|
|
|
— |
|
|
|
54,839 |
|
Proceeds from
the exercise of stock options and warrants |
|
|
|
|
2,020 |
|
|
|
2,174 |
|
|
|
3,072 |
|
Borrowings
under credit facility |
|
|
|
|
9,000 |
|
|
|
— |
|
|
|
— |
|
Payment of
deferred loan costs |
|
|
|
|
(150 |
) |
|
|
(25 |
) |
|
|
(156 |
) |
Other
|
|
|
|
|
— |
|
|
|
— |
|
|
|
43 |
|
Net cash
provided by financing activities |
|
|
|
|
10,870 |
|
|
|
2,149 |
|
|
|
57,798 |
|
Net (decrease)
increase in cash and cash equivalents |
|
|
|
|
(9,526 |
) |
|
|
(20,423 |
) |
|
|
27,156 |
|
Cash and cash
equivalents at beginning of year |
|
|
|
|
19,675 |
|
|
|
40,098 |
|
|
|
12,942 |
|
Cash and cash
equivalents at end of year |
|
|
|
$ |
10,149 |
|
|
$ |
19,675 |
|
|
$ |
40,098 |
|
Supplemental
disclosures of noncash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing activity—landlord funded leasehold improvements |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,832 |
|
Noncash
investing and financing activity — liability recorded in connection with intangible assets |
|
|
|
$ |
— |
|
|
$ |
5,792 |
|
|
$ |
3,600 |
|
Noncash
investing activity—issuance of common stock in exchange for intangible assets |
|
|
|
$ |
1,520 |
|
|
$ |
1,873 |
|
|
$ |
993 |
|
Noncash
financing activity—tender offer and option amendments |
|
|
|
$ |
1,908 |
|
|
$ |
— |
|
|
$ |
— |
|
Noncash
financing activity—issuance of common stock in exchange for preferred membership units |
|
|
|
$ |
4 |
|
|
$ |
583 |
|
|
$ |
5,384 |
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
income taxes |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
236 |
|
Cash paid for
interest |
|
|
|
|
228 |
|
|
|
38 |
|
|
|
50 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements
NOTE 1. NATURE OF OPERATIONS AND
GENERAL
TurboChef Technologies, Inc. (the
“Company”) was incorporated in 1991 and became a Delaware corporation in 1993. The Company is a leading provider of equipment, technology and
services focused on the high speed preparation of food products. The Company’s customizable commercial speed cook ovens cook food products at high
speeds with food quality comparable, and in many cases superior, to conventional heating methods. Through 2005, the Company’s primary markets were
with commercial food service operators throughout North America, Europe and Australia and management believes that, for 2005 and prior, the Company
operated in one primary business segment. However, during 2005, the Company took several steps designed to take its technologies to residential
consumers, including market research, related industrial design research and product development and exploration of distribution channels for a
proposed residential oven product line. The launch of the residential product line created an additional business segment for the Company of which the
recently introduced 30″ Double Wall Oven is the inaugural product offering.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying financial
statements reflect the application of certain accounting policies described below and elsewhere in the notes to the financial
statements.
Basis of Consolidation and
Presentation
The consolidated financial
statements include the accounts of TurboChef Technologies Inc. and its majority-owned and controlled company. Significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year
presentation.
Use of Estimates
The preparation of the financial
statements in conformity with accounting principles generally accepted in the United States of America 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. Management bases its estimates on certain assumptions which
they believe are reasonable in the circumstances and actual results could differ from those estimates. The more significant estimates reflected in
these financial statements include warranty, accrued expenses and valuation of stock-based compensation.
Cash Equivalents
The Company considers all highly
liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable consist of
amounts owed to the Company for the sale of its products in the normal course of business. Accounts receivable consist principally of monies owed in US
Dollars and are reported net of allowance for doubtful accounts. Generally, no collateral is received from customers and additions to the allowance are
based on ongoing credit evaluations of customers with general credit experience being within the range of management’s expectations. Accounts are
reviewed regularly for collectibility and those deemed uncollectible are written off.
Inventories
Inventories are valued at the
lower of cost, determined using the average cost method, or market and primarily consist of ovens (finished goods) and parts for use in production or
as replacements. The Company establishes reserves for inventory estimated to be obsolete, unmarketable or slow moving on a case by case basis,
equal
F-9
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
to the difference between the
cost of inventory and estimated market value based upon assumptions about future demand, technology changes and market conditions. Ovens used for
demonstration and testing are generally depreciated over a one-year period. Depreciation for demonstration ovens was $584,000, $784,000 and $780,000
for the years ended December 31, 2007, 2006 and 2005 respectively. Inventory consists of the following at December 31 (in thousands):
|
|
|
|
2007
|
|
2006
|
Finished
goods — ovens |
|
|
|
$ |
3,835 |
|
|
$ |
4,154 |
|
Demonstration
inventory, net |
|
|
|
|
595 |
|
|
|
224 |
|
Parts
inventory, net |
|
|
|
|
6,734 |
|
|
|
6,933 |
|
|
|
|
|
|
11,164 |
|
|
|
11,311 |
|
Costs of
inventory subject to a deferred revenue relationship |
|
|
|
|
719 |
|
|
|
426 |
|
|
|
|
|
$ |
11,883 |
|
|
$ |
11,737 |
|
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 and accelerated
methods for income tax purposes. Leasehold improvements are depreciated over the lesser of their expected useful life or the remaining lease
term.
Goodwill and Other Intangible
Assets
Goodwill represents the excess
purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair values. Statement of Financial
Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, requires goodwill and other acquired intangible assets
that have an indefinite useful life to no longer be amortized; however, these assets must undergo an impairment test annually or more frequently if
facts and circumstances warrant a review. Goodwill is allocated and reviewed for impairment by reporting units, which consists of the operating
segments. The annual goodwill impairment test, completed in October 2007, concluded that the carrying amount of goodwill was not impaired and there
have been no developments subsequent to October 2007 that would indicate impairment exists. The goodwill impairment review will continue to be
performed annually or more frequently if facts and circumstances warrant a review.
SFAS No. 142 also requires that
intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Currently, acquired developed technology and covenants not-to-compete are both
amortized using the straight line method over estimated useful lives of 10 years and the Company recorded $1.4 million, in the aggregate, of
amortization expense for 2007 and 2006, and $973,000, in the aggregate, of amortization expense for 2005 for these long-lived intangible assets. Annual
amortization for each of the next five years will approximate $1.4 million.
Other Assets
Other assets consist primarily of
deferred financing costs for transactions completed in 2007 and capitalized patent costs, which include outside legal fees incurred in the registration
of the Company’s patents. These costs are amortized over their economic lives, ranging from one to ten years. Amortization of other assets was
$135,000, $53,000 and $42,000 for the years ended December 31, 2007, 2006 and 2005 respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of
The Company reviews long-lived
assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
F-10
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
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.
Management believes no impairment exists as of December 31, 2007.
Product Warranty
The Company’s ovens are
warranted against defects in material and workmanship for a period of one year (“OEM Warranties”). Additionally, the Company offers to
certain customers extended warranties (“ESP Warranties”). In 2007, the Company entered into an agreement with an insurance company to insure
its obligations under the OEM and ESP Warranties. The Company remits premiums to the insurance company and submits for reimbursement all eligible
claims made under the OEM and ESP Warranties. Premiums are recorded as a component of cost of product sales at the time products are sold for OEM
Warranties and over the term of the extended warranty coverage for ESP Warranties. Premiums will be reviewed and may be adjusted prospectively to
reflect actual and anticipated experience.
Fair Value of Financial Instruments
The carrying amount of cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term maturity of these
instruments. The carrying amount outstanding under the credit facility approximates fair value because the interest rate reflects the rate the Company
would be able to obtain on debt with similar terms and conditions.
Revenue Recognition
Revenue from product sales, which
includes all revenues except royalty revenues, are recognized when no significant vendor obligation remains, title to the product passes (depending on
terms, either upon shipment or delivery), and the customer has the intent and ability to pay in accordance with contract payment terms that are fixed
and determinable. Certain customers may purchase installation services. Revenue from these services are deferred and recognized when the installation
service is performed. Certain customers may purchase extended warranty coverage. Revenue from sales of extended warranties is deferred and recognized
in product sales on a straight-line basis over the term of the extended warranty contract. Royalty revenues are recognized based on the sales dates of
licensees’ products and service revenues are recorded based on attainment of scheduled performance milestones. The Company reports its revenue net
of any sales tax collected.
Our product sales sometimes
involve multiple elements (i.e., products, extended warranties and installation services). Revenue under multiple element arrangements is accounted for
in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables”. Under this method, for elements determined to be separate units of accounting, revenue is allocated based upon the relative
fair values of the individual components.
The Company provides for returns
on product sales based on historical experience and adjusts such reserves as considered necessary. Reserves for sales returns and allowances are
recorded in the same accounting period as the related revenues and are not significant for any of the periods presented.
Deferred revenue includes amounts
billed to customers for which revenue has not been recognized. Deferred revenue consists primarily of sales deposits, unearned revenue from extended
warranty contracts and other amounts billed to customers where the sale transaction is not yet complete and, accordingly, revenue cannot be
recognized.
F-11
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
Cost of Product Sales
Cost of product sales is
calculated based upon the cost of the oven, the cost of any accessories supplied with the oven, an allocation of cost for applicable delivery, duties
and taxes and a warranty provision. Cost of product sales also includes cost of replacement parts and accessories and cost of labor, parts and payments
to third parties in connection with fulfilling extended warranty contracts. For extended warranty contracts sold prior to the insurance program
discussed above, the Company compares expected expenditures on extended warranty contracts to the deferred revenue over the remaining life of the
contracts, and if the expenditures are anticipated to be greater than the remaining deferred revenue the Company records a charge to cost of product
sales for the difference. Cost of product sales does not include any cost allocation for administrative and technical support services required to
deliver or install the oven or an allocation of costs associated with the quality control of the Company’s contract manufacturers. These costs are
recorded within selling, general and administrative expenses. Cost of product sales also does not attribute any allocation of compensation or general
and administrative expenses to royalty and services revenues.
Shipping and Handling Costs
Shipping and handling charges
billed to customers are recorded as revenues; the corresponding costs are included in cost of goods sold.
Research and Development Expenses
Research and development expenses
consist of salaries and other related costs incurred for personnel and departmental operations in planning, design and testing of the speed cook ovens.
Research and development expenditures are charged to operations as incurred.
Purchase of In-Process Research and
Development
Amounts allocated to the purchase
of in-process research and development (“IPRD”) include the value of products in the development stage that are not considered to have
reached technological feasibility or to have alternative future use.
Advertising Expenses
Advertising and promotion costs,
including expenses related to trade shows, are expensed as incurred and amounted to $8.9 million, $3.5 million and $2.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Foreign Exchange
For the year ended December 31,
2007, approximately 12% of our revenues were derived from sales outside of the United States. For the years ended December 31, 2006 and 2005,
approximately 18% and 22%, respectively, of the Company’s revenues were derived from sales outside of the United States. Less than 10% of these
sales and subsequent accounts receivable and selling, general and administrative expenses for the years ended December 31, 2007, 2006 and 2005 were
denominated in foreign currencies. The Company is subject to risk of financial loss resulting from fluctuations in exchange rates of foreign currencies
against the US dollar. At this time, the Company does not engage in any hedging activities.
Restructuring Charges
The Company classified certain
expenses in 2006 related to a restructuring plan to reorganize its international operations and re-align the related resources and cost structure as
restructuring charges. The expenses related to the closing of a location that served markets where the Company continues to have a presence
and,
F-12
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
accordingly, the results of
those operations are included in continuing operations. Restructuring expenses included severance, lease termination, professional fees and write-off
of leasehold improvements.
Accounting for Leases
The Company leases office and
warehouse space under operating lease agreements with original lease periods up to 7.5 years. Certain of the lease agreements contain renewal and rent
escalation provisions. Rent escalation provisions are considered in determining straight-line rent expense to be recorded over the lease term. The
lease term begins on the date of initial possession of the lease property for purposes of recognizing lease expense on a straight-line basis over the
term of the lease. Lease renewal periods are considered on a lease-by-lease basis and are generally not included in the initial lease term. Landlord
allowances for improvements to leaseholds are included in property and equipment and offset by a corresponding deferred rent credit. The Company
amortizes the leasehold improvements over the shorter of the life of the improvements or the life of the lease. The deferred rent credit is included in
other liabilities (current and long term) in the accompanying balance sheets and will be amortized as a reduction of rent expense over the term of the
applicable lease.
Income Taxes
The Company accounts for income
taxes using the liability method. Deferred income 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 bases and operating loss carryforwards.
Deferred income 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 income tax assets and liabilities of a change in tax rates is recognized in
the statements of operations in the period that includes the enactment date. The Company recognizes and adjusts the deferred tax asset valuation
allowance based on judgments as to future realization of the deferred tax benefits supported by demonstrated trends in the Company’s operating
results.
Loss Per Common Share
Basic earnings per share is
computed by dividing net loss by the weighted-average number of common shares outstanding during each period. Diluted earnings per common share is
calculated by dividing net income, adjusted on an “as if converted” basis, by the weighted-average number of actual shares outstanding and,
when dilutive, the share equivalents that would arise from the assumed conversion of convertible instruments. The effect of potentially dilutive stock
options and warrants is calculated using the treasury stock method. For the year ended December 31, 2007, the potentially dilutive securities include
options and restricted stock units, convertible into 3.5 million shares of common stock; an indeterminate number of shares issuable in the future to
settle the dollar denominated restricted stock units issued in connection with the tender offer and amendment of options completed in December 2007;
Enersyst Development Center, LLC (“Enersyst”) preferred membership units exchangeable for 37,000 shares of common stock and an indeterminate
number of shares issuable in the future to settle the equity portion of the Company’s liability for additional consideration due under an asset
acquisition agreement. For the year ended December 31, 2006, the potentially dilutive securities include options, warrants and restricted stock units,
convertible into 3.3 million shares of common stock; Enersyst Development Center, LLC (“Enersyst”) preferred membership units exchangeable
for 37,000 shares of common stock and an indeterminate number of shares issuable in the future to settle the equity portion of the Company’s
liability for additional consideration due under an asset acquisition agreement. For the years ended December 31, 2007, 2006 and 2005, all of the
potentially dilutive securities were excluded from the calculation of shares applicable to loss per share, because their inclusion would have been
anti-dilutive.
F-13
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
Stock-Based Employee Compensation
Effective January 1, 2006, the
Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, a revision of SFAS No. 123 (SFAS No. 123R), using the modified prospective
method. SFAS No. 123R requires measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of
compensation expense over the requisite service period for awards expected to vest. The fair value of stock option grants is determined using the
Black-Scholes valuation model, which is consistent with the valuation techniques previously utilized for options in footnote disclosures required under
SFAS No. 123, Accounting for Stock Based Compensation, (“SFAS No. 123”) as amended by SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure (“SFAS No. 148”). The fair value of restricted stock awards is determined based on the
number of shares granted and the quoted price of our common stock on the grant date. Such fair values will be recognized as compensation expense over
the requisite service period, net of estimated forfeitures, using the straight-line method under SFAS No. 123R.
Prior to January 1, 2006, the
Company accounted for stock-based awards under the intrinsic value method. Under the intrinsic value method, no compensation expense was recognized for
stock options granted to employees with exercise prices equal or greater than the market value of the underlying stock on the dates of grant.
Compensation expense, net of forfeitures, has been recognized for periods prior to January 1, 2006; for certain stock options granted with an exercise
price lower than the fair market value of our common stock on the measurement date as determined by the findings of a recently completed review of the
Company’s option grants since 1994. The compensation expense is equal to the excess of fair market value of our common stock over the exercise
price on the measurement date. The compensation expense was amortized on a straight-line basis over the vesting period, all of which was recognized
when the Company accelerated the vesting terms of all outstanding options at December 31, 2005.
The table below presents a
reconciliation of the Company’s pro forma net income giving effect to the estimated compensation expense related to stock options that would have
been reported if the Company utilized the fair value method for the year ended December 31, 2005 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
Net loss
applicable to common stockholders, as reported |
|
|
|
$ |
(35,069 |
) |
Add:
Employee stock-based compensation expense |
|
|
|
|
(6,936 |
) |
Deduct:
Employee stock-based compensation expense, net of forfeitures |
|
|
|
|
(19,882 |
) |
Pro forma
net loss applicable to common stockholders |
|
|
|
$ |
(48,015 |
) |
Net loss
applicable to common stockholders per share — basic and diluted:
|
|
|
|
|
|
|
As reported
|
|
|
|
$ |
(1.25 |
) |
Pro forma
|
|
|
|
|
(1.71 |
) |
For purposes of computing pro
forma net loss, we estimate the fair value of option grants using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not
present in our employee stock options. Additionally, option valuation models require the input of highly subjective assumptions, including the expected
volatility of the stock price. Because our employee stock options have characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models may not
provide a reliable single measure of the fair value of its stock-based awards.
F-14
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
For purposes of the pro forma
disclosures, the assumptions used to value the option grants are stated as follows for the year ended December 31, 2005:
|
|
|
|
|
Expected
life (in years) |
|
|
|
|
2–3 |
|
Volatility
|
|
|
|
|
63 |
% |
Risk free
interest rate — options |
|
|
|
|
4.07–4.61% |
|
Dividend
yield |
|
|
|
|
0.0 |
% |
Weighted
average fair value of option grants — Black-Scholes model |
|
|
|
$ |
6.54 |
|
During the year ended December
31, 2007, the Company issued 570,000 restricted stock units to certain employees and non-employee members of the board of directors. These restricted
stock units had a weighted average fair value of $15.41 per unit and the aggregate fair value was $8.8 million. The fair value of these awards was
based upon the market price of the underlying common stock as of the date of grant. Of these awards, 537,000 vest over a five-year period with the
remaining vesting over one- and two-year periods, provided the individual remains in the employment or service of the Company as of the vesting date.
Additionally, these shares could vest earlier in the event of a change in control, merger or other acquisition, or upon termination for disability or
death. The shares of common stock will be issued at vesting. During the year ended December 31, 2006, the Company issued 83,000 restricted stock units
to certain employees and non-employee members of the board of directors. These restricted stock units had a weighted average fair value of $12.84 per
unit and the aggregate fair value was $1.1 million. The fair value of these awards was based upon the market price of the underlying common stock as of
the date of grant. Of these awards, 40,000 vest at the end of a two-year period, with the remaining awards vesting over one-, two- and three-year
periods from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, these
shares could vest earlier in the event of a change in control, merger or other acquisition, or upon termination for disability or death. The shares of
common stock will be issued at vesting, or, in some cases, at a deferred payout date. Stock based compensation expense related to the awards was $1.8
million for the year ended December 31, 2007. For the year ended December 31, 2007, stock-based compensation expense of $140,000 is included in
research and development expenses, $12,000 is included in cost of product sales, and the remainder is included in selling, general, and administrative
expenses. Selling, general and administrative expenses for the year ended December 31, 2006, include $290,000 recognized as stock-based compensation
expense for these awards. At December 31, 2007, the unrecognized compensation expense related to restricted stock awards is $7.7 million with a
remaining weighted average life of 2.0 years.
On December 7, 2007, the Company
completed a tender offer that allowed 30 employees to amend or cancel certain options to remedy potential adverse personal tax consequences.
Additionally, the Company entered into an agreement with four officers of the Company not eligible to participate in the tender offer to amend their
options to also remedy potential adverse personal tax consequences. As a result, the Company amended 572,000 options granted after October 29, 2003
that, for financial reporting purposes, were or may have been granted at a discount to increase the option grant price to the fair market value on the
date of grant and issued to the employee a dollar denominated RSU for the difference in option grant price between the amended option and the original
discounted price. The dollar denominated RSU will be settled in shares on March 7, 2008. The Company accounted for these modifications and settlements
in accordance with SFAS 123R and as a result recorded incremental compensation expense of $579,000 during the three months ended December 31, 2007 and
recognized a liability of $1.9 million for the dollar denominated RSU’s (presented as an other current liability) with a resulting net decrease to
additional paid-in-capital of $1.3 million.
F-15
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
The fair value of amended options
was determined using the Black-Scholes option valuation model with the following weighted average assumptions:
Expected
life (in years) |
|
|
|
|
1.64 |
|
Volatility
|
|
|
|
|
44.43 |
% |
Risk free
interest rate — options |
|
|
|
|
3.04–3.13% |
|
Dividend
yield |
|
|
|
|
0.0 |
% |
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial
Accounting Standards Board (“FASB”) issued Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109. This interpretation clarifies the application of SFAS No. 109 by defining a
criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial
statements. The interpretation would require the Company to review all tax positions accounted for in accordance with SFAS No. 109 and apply a
more-likely-than-not recognition threshold. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority
that has full knowledge of all relevant information. Subsequent recognition, de-recognition, and measurement is based on management’s best
judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company adopted the requirements of this statement as of January 1, 2007. The adoption of FIN 48 did not have a material effect on the
Company’s financial position or results of operations.
In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value
measurements; however, this statement does not require any new fair value measurements. The definition of fair value retains the exchange price notion
in earlier definitions of fair value. This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and
establishes a fair value hierarchy that distinguishes between (1) market participant assumptions based on market data and (2) the reporting
entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. This
Statement clarifies that market participant assumptions include assumptions about risk and assumptions about the effect of a restriction on the sale or
use of an asset and clarifies that a fair value measurement for a liability reflects its nonperformance risk. This Statement expands disclosures about
the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this
statement to have a material effect on the financial position or results of operations.
In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other
items at fair value. The objective of which is to improve financial reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Eligible
items for the measurement option include all recognized financial assets and liabilities except: investments in subsidiaries, interests in variable
interest entities, employers’ and plans’ obligations for pension benefits, assets and liabilities
F-16
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
recognized under leases,
deposit liabilities, financial instruments that are a component of shareholder’s equity. Also included are firm commitments that involve only
financial instruments, nonfinancial insurance contracts and warranties and host financial instruments. The statement permits all entities to choose at
specified election dates, after which the entity shall report unrealized gains and losses on items for which the fair value option has been elected in
earnings, at each subsequent reporting date. The fair value option may be applied instrument by instrument; however, the election is irrevocable and is
applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
Adoption of this statement will not have a material effect on the financial position or results of operations.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business Combinations. SFAS No. 141R changes accounting for business combinations through a requirement to
recognize 100 percent of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100
percent controlling interest when the acquisition constitutes a change in control of the acquired entity. Other requirements include capitalization of
acquired in-process research and development assets, expensing, as incurred, acquisition-related transaction costs and capitalizing restructuring
charges as part of the acquisition only if requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, are
met. SFAS No. 141R is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The implementation of this guidance will affect the Company’s results of operations and
financial position after its effective date only to the extent it completes applicable business combinations and therefore the impact can not be
determined at this time.
In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160
establishes the economic entity concept of consolidated financial statements, stating that holders of residual economic interest in an entity have an
equity interest in the entity, even if the residual interest is related to only a portion of the entity. Therefore, SFAS No. 160 requires a
noncontrolling interest to be presented as a separate component of equity. SFAS No. 160 also states that once control is obtained, a change in control
that does not result in a loss of control should be accounted for as an equity transaction. The statement requires that a change resulting in a loss of
control and deconsolidation is a significant event triggering gain or loss recognition and the establishment of a new fair value basis in any remaining
ownership interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the adoption of
SFAS No. 160 to have a material impact on its results of operations and financial position.
NOTE 3. ACQUISITION OF INTANGIBLE
ASSETS
On September 12, 2005, the
Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Global Appliance Technologies, Inc. (“Global”) and
stockholders of Global. Pursuant to the Purchase Agreement, the Company acquired the patent and technology assets of Global, further expanding
TurboChef’s ownership of proprietary commercial and residential speed cook technologies.
At the closing of the
transaction, Global received $5.0 million in cash and 60,838 shares of the Company’s common stock with a value of $993,000 at the date of
acquisition. Additionally, the Company entered into services agreements with the principals of Global which provided, among other things, for delivery
of three patent applications by the end of the first year, and two additional patent applications by the end of the eighteenth month following closing.
Upon timely delivery of these patent applications, the Company was obligated to pay Global three nearly-equal installment payments totaling $8.0
million, payable on each of the first three anniversaries of the closing date (the payments will be made 38% in cash and 62% in stock). In September
2006, all of the patent applications required under the terms of the agreement were delivered. The transaction was accounted for as an asset
acquisition. The aggregate consideration for the assets acquired is
F-17
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
comprised of $6.3 million,
including transaction costs, given at closing and $7.7 million for the estimated fair value of the contingent consideration which became payable upon
delivery of the patent applications. The Company allocated the consideration for these technology assets to IPRD and expensed $7.7 million and $6.3
million for the years ended December 31, 2006 and 2005, respectively.
Amounts allocated to IPRD include
the value of products in the development stage that are considered not to have reached technological feasibility or to have alternative future use.
Technology development and IPRD were identified and valued through extensive interviews, analysis of data provided by Global concerning development
projects, their stage of development, the time and resources needed to complete them, if applicable, and their expected income generating ability and
associated risks. No development projects had reached technological feasibility; therefore, all the intangible assets were deemed to be purchase of
IPRD. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique
utilized in valuing acquired IPRD. Key assumptions for IPRD included a discount rate of 34% and estimates of revenue growth, cost of sales, operating
expenses and taxes. This valuation performed in 2005 at the date of acquisition was updated in 2006 to reflect the resolution of the contingencies as
described above.
In connection with this
transaction, the Company also entered into Restrictive Covenant Agreements (the “Restrictive Covenant Agreements”) with each of the two
principals of Global. Under the Restrictive Covenant Agreements, the principals agreed to certain covenants regarding the disclosure of trade secrets
and confidential information, and to covenants restricting their ability to compete with the Company. As consideration for these covenants, each
principal received $1.0 million in cash at closing, and each can receive additional cash payments totaling $2.0 million, which are payable in equal
portions on the first three anniversaries of the closing date. The estimated fair value of these agreements, $5.6 million, will be amortized over the
agreements’ ten-year term. Annual amortization for each of the next five years will approximate $560,000.
NOTE 4. OTHER
RECEIVABLES
As discussed in Note 8, the
Company entered into an agreement with an insurance company to insure its warranty obligations. The Company submits for reimbursement all eligible
claims made under the warranties and includes the outstanding amounts in other receivables in the accompanying consolidated balance sheets. As of
December 31, 2007, the amount outstanding totaled $2.2 million.
The Company entered into a
favorable final settlement in the second quarter of 2005 with a contract assembler related to consigned inventory lost in a fire suffered at one of the
assembler’s plants. The amount due under the settlement is included in other receivables in the accompanying consolidated balance sheets. The
Company received payment on the settlement amount in April 2007.
NOTE 5. CONCENTRATION OF CREDIT
RISKS
The Company is generally subject
to the financial well being of the business of commercial food service operators and related equipment; however, management does not believe that there
is significant credit risk with respect to trade receivables. Additionally, the Company had been subject to customer concentration resulting from the
initial rollouts of several large customers. For the years ended December 31, 2007, 2006 and 2005, 66%, 55%, and 60% of total sales were made to three
customers. As of December 31, 2007 and 2006, 73% and 41% of outstanding accounts receivable were from three customers, respectively. No other single
customers accounted for more than 10% of the Company’s sales during the three years ended December 31, 2007.
F-18
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
NOTE 6. PROPERTY AND
EQUIPMENT
Property and equipment consisted
of the following at December 31:
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
Estimated
Useful Lives
(years)
|
|
(In thousands)
|
|
Leasehold
improvements |
|
|
|
5–7.5 |
|
$ |
3,140 |
|
|
$ |
3,044 |
|
Furniture and
fixtures |
|
|
|
5 |
|
|
1,458 |
|
|
|
1,369 |
|
Equipment
|
|
|
|
3–7 |
|
|
6,921 |
|
|
|
6,471 |
|
|
|
|
|
|
|
|
11,519 |
|
|
|
10,884 |
|
Less
accumulated depreciation |
|
|
|
|
|
|
(4,791 |
) |
|
|
(2,940 |
) |
|
|
|
|
|
|
$ |
6,728 |
|
|
$ |
7,944 |
|
Depreciation expense was $2.0
million, $1.7 million and $1.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.
NOTE 7. ACCRUED
EXPENSES
Accrued expenses consisted of the
following as of December 31 (in thousands):
|
|
|
|
2007
|
|
2006
|
Accrued
compensation and benefits |
|
|
|
$ |
3,924 |
|
|
$ |
1,378 |
|
Sales and
marketing |
|
|
|
|
3,487 |
|
|
|
907 |
|
Professional
and accounting fees |
|
|
|
|
1,169 |
|
|
|
432 |
|
Accrued taxes
and other |
|
|
|
|
1,314 |
|
|
|
386 |
|
Total accrued
expenses |
|
|
|
$ |
9,894 |
|
|
$ |
3,103 |
|
NOTE 8. ACCRUED WARRANTY AND
UPGRADE COSTS
The Company generally provides a
one-year parts and labor warranty on its ovens. Provisions for warranty claims are recorded at the time products are sold and are reviewed and adjusted
periodically by management to reflect actual and anticipated experience. Because warranty estimates are forecasts that are based on the best available
information, claims costs may differ from amounts provided, and these differences may be material. In 2007, the Company entered into an agreement with
an insurance company to insure all of its obligations under the OEM Warranties. The Company remits premiums to the insurance company and submits for
reimbursement all eligible claims made under the OEM warranties. Premiums are recorded as a component of cost of product sales at the time products are
sold. Premiums will be reviewed and may be adjusted prospectively to reflect actual and anticipated experience. The below table represents the
remaining warranty obligation for ovens sold prior to the insurance agreement.
In 2005, the Company identified a
potential longevity and reliability issue with its Tornado oven. The success of the toasted menu offerings for Subway, the Company’s largest
customer at the time, resulted in higher use of the Tornado oven and more cook cycles than had been anticipated. Increased warranty calls from the
Subway installed base occurred as certain components degraded under the high usage much earlier than expected. The Company determined that it could
improve the longevity and reliability of the ovens through a change in the oven’s software (or operating system). This software change was
incorporated in production and a voluntary and proactive software upgrade program launched for installed units. This program also included replacement
of certain components in the ovens to ensure that the installed base of Tornado ovens would benefit from the latest enhancements to the ovens.
Extensive engineering tests performed of the revised software provided evidence that led us to believe that the longevity and reliability issue with
Subway’s Tornado ovens has been satisfactorily resolved. Additions to the warranty reserve to address this issue aggregated $9.6 million for
2005.
F-19
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
An analysis of changes in the
liability for product warranty claims is as follows for the years ended December 31 (in thousands):
|
|
|
|
2007
|
|
2006
|
|
2005
|
Balance at
beginning of year |
|
|
|
$ |
1,889 |
|
|
$ |
2,482 |
|
|
$ |
2,586 |
|
Provision for
warranties |
|
|
|
|
405 |
|
|
|
3,301 |
|
|
|
3,997 |
|
Warranty
expenditures |
|
|
|
|
(1,736 |
) |
|
|
(3,894 |
) |
|
|
(13,682 |
) |
Other
adjustments to provision for warranties |
|
|
|
|
— |
|
|
|
— |
|
|
|
9,581 |
|
Balance at
end of year |
|
|
|
$ |
558 |
|
|
$ |
1,889 |
|
|
$ |
2,482 |
|
NOTE 9. RESTRUCTURING
CHARGES
During the fourth quarter of
2005, the Company initiated a restructuring plan to close its underperforming operation in the Netherlands and re-align the resources and cost
structure. The Company now directs the activities of all of its international distributors directly from its domestic operations center. Since the
Company continues to have a presence in the markets previously managed by its Netherlands operation, the results of that unit’s operations are
included in continuing operations. The closing of the Netherlands operations resulted in restructuring charges of $621,000 including $125,000 of
non-cash charges, principally related to impairment of fixed assets. In the first quarter of 2006, the Company negotiated to terminate the lease of the
closed facility and recorded a reduction in the restructuring reserve of $41,000. The lease termination payment was made in April 2006 and concluded
the restructuring plan initiated in the fourth quarter of 2005.
In accounting for restructuring
charges, the Company complied with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires that a
liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is
incurred.
NOTE 10. INCOME
TAXES
The components of the provision
for income taxes for the years ended December 31 (in thousands):
|
|
|
|
2007
|
|
2006
|
|
2005
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
State
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
provision for income taxes |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
The following is a reconciliation
of the (benefit) provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the statements of operations for the
years ended December 31 (in thousands):
|
|
|
|
2007
|
|
2006
|
|
2005
|
Expected
income tax benefit |
|
|
|
$ |
(5,859 |
) |
|
$ |
(7,957 |
) |
|
$ |
(11,923 |
) |
State income
tax benefit, net of federal benefit |
|
|
|
|
(358 |
) |
|
|
(489 |
) |
|
|
(740 |
) |
Other |
|
|
|
|
98 |
|
|
|
(207 |
) |
|
|
(89 |
) |
Changes in
deferred income tax asset valuation allowance |
|
|
|
|
6,119 |
|
|
|
8,653 |
|
|
|
12,752 |
|
Provision for
income taxes |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
F-20
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
The components of the
Company’s net deferred tax assets as of December 31, were as follows (in thousands):
|
|
|
|
2007
|
|
2006
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
|
|
Warranty
reserves |
|
|
|
$ |
201 |
|
|
$ |
682 |
|
Allowance for
doubtful accounts |
|
|
|
|
67 |
|
|
|
55 |
|
Inventory
|
|
|
|
|
913 |
|
|
|
377 |
|
Basis
difference of other current assets |
|
|
|
|
259 |
|
|
|
93 |
|
Total current
deferred income tax assets |
|
|
|
|
1,440 |
|
|
|
1,207 |
|
Net operating
loss carryforwards |
|
|
|
|
35,800 |
|
|
|
29,229 |
|
Basis
difference of intangible assets |
|
|
|
|
5,972 |
|
|
|
6,279 |
|
Basis
difference of stock- based compensation |
|
|
|
|
4,188 |
|
|
|
3,366 |
|
Research and
development credit carryforwards |
|
|
|
|
1,144 |
|
|
|
832 |
|
Federal
alternative minimum tax credit carryforwards |
|
|
|
|
121 |
|
|
|
121 |
|
Basis
difference of other long-term assets |
|
|
|
|
6 |
|
|
|
57 |
|
Total
non-current deferred income tax assets |
|
|
|
|
47,231 |
|
|
|
39,884 |
|
Total gross
deferred income tax assets |
|
|
|
|
48,671 |
|
|
|
41,091 |
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Basis
difference of other long-term assets |
|
|
|
|
(281 |
) |
|
|
(224 |
) |
Total gross
deferred income tax liabilities |
|
|
|
|
(281 |
) |
|
|
(224 |
) |
Net deferred
income tax asset |
|
|
|
|
48,390 |
|
|
|
40,867 |
|
Less deferred
income tax asset valuation allowance |
|
|
|
|
(48,390 |
) |
|
|
(40,867 |
) |
Net deferred
income tax assets |
|
|
|
$ |
— |
|
|
$ |
— |
|
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 the deferred income tax assets will be realized. Accordingly, the Company recorded a valuation allowance equal to 100% of
the net deferred income tax assets at December 31, 2007 and 2006, respectively.
There was no provision for income
taxes required for 2007, 2006 or 2005. At December 31, 2007, the Company has net operating loss carryforwards (“NOL’s”) for federal
income tax purposes of $99.1 million, which may be used against future taxable income, if any, and which begin to expire in 2011. Additionally, the
Company has $8.8 million in income tax deductions related to stock option exercises the tax effect of which will be reflected as additional paid- in
capital when realized. In October 2003, a change in ownership took place, which for income tax purposes under Internal Revenue Code Section 382, limits
the annual utilization of $21.1 million of the loss carryforwards and could cause some amount of the carryforwards to expire before they are utilized.
The Company has federal alternative minimum tax credit carryforwards of $121,000, which may be used to offset future federal tax liability, if
any.
The Company also has research and
development credit carryforwards of approximately $1.1 million, which may be used to offset future federal tax liability, if any. A portion of this
credit may be subject to limitations.
The Company adopted the
provisions of FIN 48 effective January 1, 2007. No cumulative adjustment was required or recorded as a result of the implementation of FIN 48. As of
December 31, 2007, the Company had no unrecognized tax benefits. The Company is no longer subject to U.S. federal income or state tax
return
F-21
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
examinations by tax
authorities for tax years before 2003. However, since the Company has substantial tax net operating losses originating in years before 2003, the tax
authorities may review the amount of the pre-2003 net operating losses. The Company is not currently under examination by any tax authority. The
Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense when and if incurred. The Company had
no interest or penalties related to unrecognized tax benefits accrued as of December 31, 2007. The Company does not anticipate that the amount of the
unrecognized benefit will significantly increase or decrease within the next 12 months.
NOTE 11. CREDIT
FACILITY
On February 28, 2005, the Company
entered into a Credit Agreement with Bank of America, N.A. (the 2005 Credit Agreement). The 2005 Credit Agreement, as amended, allowed the Company to
borrow up to $20.0 million at any time under the revolving credit facility, based upon a portion of the Company’s eligible accounts receivable and
inventory. The 2005 Credit Agreement also provided for a letter of credit facility within the credit limit of up to $5.0 million. Revolving credit
loans under the 2005 Credit Agreement bear interest at a rate of the British Bankers Association LIBOR Rate plus 2.5%, 7.65% as of December 31, 2007,
unless for certain reasons Eurodollar Rate Loans are unavailable, then at a rate of 2.5% over the higher of the Federal Funds Rate plus 0.5% and Bank
of America’s prime rate. The Company’s obligations under the 2005 Credit Agreement were secured by substantially all of the assets of
TurboChef and its subsidiary. The 2005 Credit Agreement contained customary affirmative and negative covenants and acceleration provisions. The credit
commitment expired on February 29, 2008, and any outstanding indebtedness under the 2005 Credit Agreement was due on that date. As of December 31,
2007, the Company has $9.0 million in borrowings outstanding, $917,000 in outstanding letters of credit and $10.1 million available under the 2005
Credit Agreement.
In February 2008, the Company
entered into an Amended and Restated Credit Agreement with Bank of America, N.A. (the 2007 Credit Agreement). The terms of this agreement are
comparable to those in the 2005 Credit Agreement. The credit commitment expires on February 28, 2009, and any outstanding indebtedness under the 2007
Credit Agreement will be due on that date. TurboChef had outstanding indebtedness of $9 million under its previous credit agreement with the lender,
which amount was rolled into this 2007 Credit Agreement. The outstanding amount of $9.0 million was repaid on February 28, 2008 and the Company now has
the $20.0 million available under the 2007 Credit Agreement.
NOTE 12. STOCKHOLDERS’
EQUITY
Stock-Based Compensation Plans
The Company has an omnibus
stock-based compensation plan, the 2003 Stock Incentive Plan (the “2003 Plan”),that provides for the grant of restricted stock, restricted
stock units and incentive and nonqualified options to purchase the Company’s stock to eligible officers, key employees, directors and consultants.
Additionally, options awarded under the Company’s 1994 Stock Option Plan (the “1994 Plan”), which has expired, remain outstanding. The
2003 Plan, as amended, reserved up to 5,333,333 shares of the Company’s common stock for issuance to eligible participants. Options awarded under
these plans (i) are generally granted at exercise prices equal to or above quoted market prices on the dates of the grant; (ii) generally become
exercisable over a period of one to four years; and (iii) generally expire seven or ten years subsequent to award. At December 31, 2007, there was an
aggregate of 1.1 million shares available for grant under the 2003 Plan.
F-22
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
A summary of stock option
activity follows:
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
Options
outstanding at January 1, 2005 |
|
|
|
|
3,121,626 |
|
|
$ |
6.97 |
|
Options
granted |
|
|
|
|
966,578 |
|
|
|
12.81 |
|
Options
exercised |
|
|
|
|
(482,058 |
) |
|
|
4.38 |
|
Options
expired or canceled |
|
|
|
|
(82,219 |
) |
|
|
12.51 |
|
Options
outstanding at December 31, 2005 |
|
|
|
|
3,523,927 |
|
|
|
8.79 |
|
Options
granted |
|
|
|
|
— |
|
|
|
— |
|
Options
exercised |
|
|
|
|
(342,106 |
) |
|
|
6.35 |
|
Options
expired or canceled |
|
|
|
|
(99,935 |
) |
|
|
19.66 |
|
Options
outstanding at December 31, 2006 |
|
|
|
|
3,081,886 |
|
|
|
8.71 |
|
Options
granted |
|
|
|
|
— |
|
|
|
— |
|
Options
exercised |
|
|
|
|
(238,082 |
) |
|
|
8.94 |
|
Options
expired or canceled |
|
|
|
|
(6,206 |
) |
|
|
14.74 |
|
Options
outstanding at December 31, 2007 |
|
|
|
|
2,837,598 |
|
|
|
9.35 |
|
Options
exercisable at December 31, 2005 |
|
|
|
|
3,523,927 |
|
|
|
8.79 |
|
Options
exercisable at December 31, 2006 |
|
|
|
|
3,081,886 |
|
|
|
8.71 |
|
Options
exercisable at December 31, 2007 |
|
|
|
|
2,837,598 |
|
|
|
9.35 |
|
The following table summarizes
information about the Company’s stock options outstanding at
December 31, 2007:
Options Outstanding and
Exercisable
|
|
Range of Exercise Prices
|
|
|
|
Outstanding as
of December 31,
2007
|
|
Weighted Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise Price
|
$2.58–$5.25 |
|
|
|
|
1,264,564 |
|
|
|
5.79 |
|
|
$ |
5.20 |
|
$5.26–$11.95 |
|
|
|
|
820,427 |
|
|
|
6.82 |
|
|
|
10.64 |
|
$11.96–$28.50 |
|
|
|
|
752,517 |
|
|
|
6.99 |
|
|
|
14.92 |
|
|
|
|
|
|
2,837,508 |
|
|
|
6.41 |
|
|
|
9.35 |
|
In 2005, the Company granted
options in payment for consulting services. The number of shares of common stock which can be purchased under these grants were 3,333 and 16,667
exercisable at $15.45 and $11.00, respectively. Compensation expense of $181,000 in connection with these awards is included in selling, general and
administrative expense.
Restricted stock units
(“RSU”) are grants that entitle the holder to shares of common stock as the award vests. The fair value of these awards was based upon the
market price of the underlying common stock as of the date of grant and these awards vest over one-, two- and five-year periods from the date of grant,
provided the individual remains in the employment or service of the Company as of the vesting date. Additionally, these shares could vest earlier in
the event of a change in control, merger or other acquisition, or upon termination for disability or death. The shares of common stock will be issued
at vesting, or, in some cases, at a deferred payout date.
F-23
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
A summary of restricted stock
unit activity follows:
|
|
|
|
Number of
RSUs
|
|
Weighted
Average
Grant-Date
Fair
Value
|
Balance at
January 1, 2006 |
|
|
|
|
— |
|
|
$ |
— |
|
RSUs granted
|
|
|
|
|
83,160 |
|
|
|
12.84 |
|
RSUs vested
|
|
|
|
|
(5,334 |
) |
|
|
13.08 |
|
RSUs
forfeited |
|
|
|
|
— |
|
|
|
— |
|
Balance at
December 31, 2006 |
|
|
|
|
77,826 |
|
|
|
12.82 |
|
RSUs granted
|
|
|
|
|
578,408 |
|
|
|
15.41 |
|
RSUs vested
|
|
|
|
|
(21,093 |
) |
|
|
12.77 |
|
RSUs
forfeited |
|
|
|
|
(8,500 |
) |
|
|
15.42 |
|
Balance at
December 31, 2007 |
|
|
|
|
626,641 |
|
|
|
15.18 |
|
There was no activity related to
restricted stock units for 2005.
Stock based compensation expense
related to the awards was $1.8 million for the year ended December 31, 2007. For the year ended December 31, 2007, stock-based compensation expense of
$140,000 is included in research and development expenses, $12,000 is included in cost of product sales, and the remainder is included in selling,
general, and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2006, include $290,000 recognized as
stock-based compensation expense for these awards. As of December 31, 2007 and 2006, there was $7.7 million and $778,000 of unrecognized compensation
cost related to these RSU awards, which is expected to be recognized over a weighted average period of 2.0 years and 1.5 years,
respectively.
Tender Offer and Option Amendments
On December 7, 2007, the Company
completed a tender offer that allowed 30 employees to amend or cancel certain options to remedy potential adverse personal tax consequences.
Additionally, the Company entered into an agreement with four officers of the Company not eligible to participate in the tender offer to amend their
options to also remedy potential adverse personal tax consequences. As a result, the Company amended 572,000 options granted after October 29, 2003
that, for financial reporting purposes, were or may have been granted at a discount to increase the option grant price to the fair market value on the
date of grant and issued to the employee a dollar denominated RSU for the difference in option grant price between the amended option and the original
discounted price. The dollar denominated RSU will be settled in shares on March 7, 2008. The Company accounted for these modifications and settlements
in accordance with SFAS 123R and as a result recorded incremental compensation expense of $579,000 during the three months ended December 31, 2007 and
recognized a liability of $1.9 million for the dollar denominated RSU’s (presented as an other current liability) with a resulting net decrease to
additional paid-in-capital of $1.3 million.
Stock Issuances
On February 8, 2005, the Company
closed a public offering of 5,000,000 shares of its common stock at $20.50 before discounts and commissions to underwriters and other offering
expenses. Of the shares sold, 2,925,000 were sold by the Company and 2,075,000 were sold by certain selling shareholders. The Company plans to use the
net proceeds to finance the development and introduction of residential ovens, to pursue possible acquisitions or strategic investments and for working
capital and other general corporate purposes.
During 2007, 2006 and 2005,
respectively, the Company exchanged Enersyst preferred membership units for 414, 56,000 and 518,000 shares of common stock. The remaining preferred
membership units are exchangeable for 37,000 shares of common stock under the terms of the exchange agreement.
F-24
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
In September 2007 and 2006,
respectively, the Company issued 124,381 and 169,365 shares of common stock, with a value of $1.5 million and $1.9 million, respectively, as the equity
portion of the first installment of contingent consideration payable under the terms of the Global Purchase Agreement. An indeterminate number of
shares are issuable in the future to settle $1.7 million of the amount payable for the contingent consideration in connection with acquisition of
technology assets.
NOTE 13. COMMITMENTS AND
CONTINGENCIES
Lease Commitments
The Company leases office
facilities and certain equipment under noncancellable operating leases having original terms ranging from one to eight years. Approximate future
minimum rent payments, by year and in the aggregate, under noncancellable operating leases are as follows (in thousands):
Year
|
|
|
|
2008
|
|
|
|
$ |
1,293 |
|
|
|
|
|
2009
|
|
|
|
|
1,170 |
|
|
|
|
|
2010
|
|
|
|
|
895 |
|
|
|
|
|
2011
|
|
|
|
|
896 |
|
|
|
|
|
2012
|
|
|
|
|
826 |
|
|
|
|
|
|
|
|
|
$ |
5,080 |
|
|
|
|
|
Rent expense was approximately
$1.2 million, $1.1 million, and $920,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Employee Benefit Plan
The Company maintains an employee
savings plan that qualifies as a cash or deferred salary arrangement under Section 401(k). The plan covers all employees who meet minimum age and
service requirements. Eligible employees may contribute to the plan, subject to certain limitations. The Company may make matching contributions to the
plan at its sole discretion. Employees become fully vested with respect to Company contributions after five years of service. The matching contribution
for 2007 totaled $228,000 and for 2006 and 2005 totaled $150,000.
NOTE
14. LITIGATION
Maytag Corporation
The Company filed for arbitration
against Maytag Corporation in Dallas, Texas, on February 2, 2001, in connection with a series of contracts for research, development and
commercialization of certain technology through a joint, strategic relationship. Hearings before the panel took place during 2005, with the final
hearing on October 4, 2005. On March 1, 2006 the panel issued its decision in which it denied all monetary damage and other claims by both parties,
except it did order Maytag to assign a fifty-percent interest to TurboChef in ten U.S. patents issued to Maytag.
In May 2002, Maytag filed a
complaint in Iowa federal court seeking, among other things, to require that two of the claims originally filed and pending in the Texas arbitration be
decided only in a separate arbitration proceeding in Boston, Massachusetts. Maytag’s complaint in the Iowa proceeding also alleged that in a
January 2002 press release (and in certain other unidentified statements) the Company publicized false and misleading statements about Maytag’s
use of the Company’s intellectual property in its residential appliances. Based upon this allegation, Maytag asserted claims that the Company
caused false advertising with respect to Maytag’s goods and services, intentionally interfered with Maytag’s prospective business, defamed
Maytag and unfairly
F-25
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
competed with Maytag.
Maytag’s complaint in the Iowa proceeding did not specify the dollar amount of damages sought. On May 15, 2006, Maytag and TurboChef filed a
stipulation for voluntary dismissal of Maytag’s complaint in Iowa federal court, and the parties subsequently agreed to a final settlement of this
matter.
Maytag had also initiated
arbitration against the Company in Boston, claiming damages in excess of $1.3 million for failure to pay for ovens. The Company had filed a
counterclaim alleging that Maytag breached its warranty and committed fraud and that it has been damaged in an amount in excess of $1.5 million. In
August 2006, the Company and Maytag mediated a settlement to resolve this matter. The Company’s financial statements as of and for the period
ended December 31, 2006 reflect the impact of this settlement, the terms of which are confidential.
Food Automation-Service Techniques,
Inc.
On August 8, 2005, Technology
Licensing Corporation and Food Automation-Service Techniques, Inc. (“FAST”) filed suit against TurboChef in Federal District Court in
Connecticut alleging infringement by the Company’s three commercial oven products of U.S. Patent No. 4,920,948. FAST sought unspecified damages,
injunction, attorneys’ fees and costs. In its press release of September 9, 2005, FAST claimed it was seeking damages that could exceed $30
million. TurboChef filed its answer on August 30, 2005, among other things, denying any infringement. Management believes that these claims are without
merit and vigorously defended itself. The parties reached agreement to settle the lawsuit effective as of February 21, 2006, the results of which were
recorded in the prior year.
Garland Commercial Industries LLC and AGA Commercial
Products
The Company filed suit August 1,
2007 in the U.S. District Court, Northern District of Texas, against the defendants, Garland Commercial Industries LLC (“Garland”) and AGA
Commercial Products (“AGA”) for infringement by their oven products of several patents owned by the Company and its subsidiary, Enersyst
Development Center L.L.C. (“Enersyst”). The speed cook ovens involved are sold by Garland under the Merrychef brand and are or were sold by
AGA under the Amana brand. The Company is seeking unspecified damages and injunctions. The defendants seek a judgment denying the claims, dismissing
the complaint, declaring all of the asserted patents invalid or unenforceable or that the defendants do not infringe. They also seek costs and legal
fees.
Lincoln Foodservice Products LLC
Lincoln Foodservice Products LLC
(“Lincoln”) filed suit against the Company and Enersyst on October 9, 2007 in the U.S. District Court, Northern District of Texas, for patent
infringement of one U.S. patent owned by Lincoln. Lincoln is a subsidiary or affiliate of Enodis PLC, parent of Garland (Merrychef), and filed this
suit at the time Garland answered the Company’s suit. Lincoln is seeking damages, including treble damages, fees, interest and costs as well as to
enjoin the Company from further infringement by its products, including the Tornado® speed cook oven.
The Company is also party to
other legal proceedings from time to time that arise in the ordinary course of our business. The Company believes an unfavorable outcome of any such
existing proceedings should not have a material adverse affect on our operating results or future operations.
F-26
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
NOTE 15. QUARTERLY FINANCIAL
INFORMATION (UNAUDITED)
Unaudited quarterly financial
information follows (in thousands except share and per share data):
2007
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Fiscal Year
|
Total
revenues |
|
|
|
$ |
18,331 |
|
|
$ |
22,968 |
|
|
$ |
32,493 |
|
|
$ |
34,314 |
|
|
$ |
108,106 |
|
Gross
profit |
|
|
|
|
6,798 |
|
|
|
9,037 |
|
|
|
12,914 |
|
|
|
12,712 |
|
|
|
41,461 |
|
Net
loss |
|
|
|
|
(4,917 |
) |
|
|
(6,518 |
) |
|
|
(1,764 |
) |
|
|
(4,035 |
) |
|
|
(17,234 |
) |
Basic and
diluted loss per share |
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.59 |
) |
Number of
shares used in the computation of basic and diluted loss per share |
|
|
|
|
29,223,104 |
|
|
|
29,247,657 |
|
|
|
29,274,530 |
|
|
|
29,427,538 |
|
|
|
29,294,596 |
|
2006
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Fiscal Year
|
Total
revenues |
|
|
|
$ |
9,536 |
|
|
$ |
10,494 |
|
|
$ |
13,401 |
|
|
$ |
15,238 |
|
|
$ |
48,669 |
|
Gross
profit |
|
|
|
|
2,899 |
|
|
|
3,224 |
|
|
|
5,052 |
|
|
|
5,565 |
|
|
|
16,740 |
|
Net
loss |
|
|
|
|
(4,932 |
) |
|
|
(4,987 |
) |
|
|
(10,668 |
) |
|
|
(2,817 |
) |
|
|
(23,404 |
) |
Basic and
diluted loss per share |
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.81 |
) |
Number of
shares used in the computation of basic and diluted loss per share |
|
|
|
|
28,665,275 |
|
|
|
28,765,080 |
|
|
|
28,835,787 |
|
|
|
29,060,089 |
|
|
|
28,834,821 |
|
The sum of the quarterly earnings
per share amounts do not add to the annual earnings per share amount due to the weighting of common and common equivalent shares outstanding during
each of the respective periods.
NOTE 16. SEGMENT INFORMATION AND
REVENUE BY GEOGRAPHIC AREA
SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information, establishes standards for the way in which public companies are to disclose certain information
about operating segments in their financial reports. It also establishes standards for related disclosures about products and services, geographic
areas, and major customers.
Through 2005, the Company’s
primary markets were with commercial food service operators throughout North America, Europe and Australia and management believes that, for 2005 and
prior, the Company historically operated in one business segment. During 2005, the Company took several steps designed to take its technologies to
residential consumers, including market research, related industrial design research and product development and exploration of distribution channels
for a proposed residential oven product line. The launch of the residential product line created an additional business segment for the Company in
2006. Consequently, the Company revised and restated the segment reporting to more closely align with how the Company is now managed by the Chief
Operating Decision Maker. The results from operations are now reported using two reportable operating segments: Commercial and Residential. The
Commercial segment includes operations of the historical business excluding corporate expenses, defined below, other income (expense) and income taxes.
The Residential segment includes costs related to the development and the anticipated launch of the residential product line.
The accounting policies of the
operating segments are the same as those described in Summary of Significant Accounting Policies. The Chief Operating Decision Maker evaluates
performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of corporate expenses, other income
(expense) and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs
that are directly attributable to the operations of the
F-27
TurboChef Technologies, Inc.
Notes to Consolidated
Financial Statements (Continued)
individual segment. The
Company does not currently account for or report to the Chief Operating Decision Maker its assets or capital expenditures by segments.
Information about the
Company’s operations by operating segment follows (in thousands):
SEGMENT
|
|
|
|
2007
|
|
2006
|
|
2005
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
$ |
107,602 |
|
|
$ |
48,669 |
|
|
$ |
52,249 |
|
Depreciation
and amortization |
|
|
|
|
2,424 |
|
|
|
2,806 |
|
|
|
2,035 |
|
Net income
(loss) |
|
|
|
|
14,938 |
|
|
|
(488 |
) |
|
|
(9,433 |
) |
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
$ |
504 |
|
|
$ |
— |
|
|
$ |
— |
|
Depreciation
and amortization |
|
|
|
|
798 |
|
|
|
240 |
|
|
|
— |
|
Net loss
|
|
|
|
|
(14,333 |
) |
|
|
(7,030 |
) |
|
|
(5,142 |
) |
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Depreciation
and amortization |
|
|
|
|
847 |
|
|
|
808 |
|
|
|
761 |
|
Net loss
|
|
|
|
|
(17,839 |
) |
|
|
(15,886 |
) |
|
|
(20,494 |
) |
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
$ |
108,106 |
|
|
$ |
48,669 |
|
|
$ |
52,249 |
|
Depreciation
and amortization |
|
|
|
|
4,069 |
|
|
|
3,854 |
|
|
|
2,796 |
|
Net loss
|
|
|
|
|
(17,234 |
) |
|
|
(23,404 |
) |
|
|
(35,069 |
) |
The Company does not have
significant assets outside the United States. Revenues by geographic region for each of the three years ended December 31 is as follows (in
thousands):
REGION
|
|
|
|
2007
|
|
2006
|
|
2005
|
North
America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
$ |
94,395 |
|
|
$ |
40,166 |
|
|
$ |
41,031 |
|
Residential:
|
|
|
|
|
504 |
|
|
|
— |
|
|
|
— |
|
Total North
America revenue: |
|
|
|
|
94,899 |
|
|
|
40,166 |
|
|
|
41,031 |
|
Europe and
Asia/Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
13,207 |
|
|
|
8,503 |
|
|
|
11,218 |
|
Residential:
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total Europe
and Asia/Pacific revenue: |
|
|
|
|
13,207 |
|
|
|
8,503 |
|
|
|
11,218 |
|
Totals
|
|
|
|
$ |
108,106 |
|
|
$ |
48,669 |
|
|
$ |
52,249 |
|
F-28