<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1996
REGISTRATION NO. 333-4370
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THERMATRIX INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3569 94-2958515
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
----------------
101 METRO DRIVE
SUITE 248
SAN JOSE, CALIFORNIA 95110
(408) 453-0490
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN T. SCHOFIELD
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
THERMATRIX INC.
101 METRO DRIVE, SUITE 248
SAN JOSE, CALIFORNIA 95110
(408) 453-0490
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL J. DANAHER, ESQ. HOWARD L. SHECTER, ESQ.
WILSON SONSINI GOODRICH & ROSATI MORGAN, LEWIS & BOCKIUS LLP
PROFESSIONAL CORPORATION 101 PARK AVENUE
650 PAGE MILL ROAD NEW YORK, NEW YORK 10178
PALO ALTO, CALIFORNIA 94304 (212) 309-6000
(415) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
THERMATRIX INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
------------------------------- ----------------------
<S> <C>
1.Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus...... Outside Front Cover Page
2.Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front Cover Page
3.Summary Information and Risk
Factors....................... Prospectus Summary; Risk Factors
4.Use of Proceeds................. Use of Proceeds
5.Determination of Offering
Price......................... Outside Front Cover Page; Underwriting
6.Dilution........................ Dilution
7.Principal Security Holders...... Principal Stockholders
8.Plan of Distribution............ Outside and Inside Front Cover Pages;
Underwriting
9.Description of Securities to be
Registered.................... Prospectus Summary; Capitalization;
Description of Capital Stock
10.Interests of Named Experts and
Counsel....................... Legal Matters
11.Information with Respect to the
Registrant.................... Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy; Dilution;
Capitalization; Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Certain Transactions; Principal
Stockholders; Description of Capital Stock;
Shares Eligible for Future Sale; Legal
Matters; Experts; Consolidated Financial
Statements
12.Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 15, 1996
2,000,000 SHARES
Thermatrix Inc.
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby are being issued and sold by
Thermatrix Inc. (the "Company"). It is currently estimated that the initial
public offering price will be between $12 and $14 per share. See "Underwriting"
for a discussion of the factors considered in determining the initial public
offering price.
Prior to this offering, there has been no public market for the Common Stock
of the Company. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "TMXI."
SEE "RISK FACTORS" ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK
OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (3)..................................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering payable by the Company estimated
at $800,000.
(3) The Underwriters have been granted an option, exercisable within 30 days
from the date hereof, to purchase up to 300,000 additional shares of Common
Stock, at the Price to Public per share, less the Underwriting Discount,
for the purpose of covering over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel
or reject orders in whole or in part and subject to certain other conditions.
It is expected that delivery of the certificates representing the shares will
be made against payment on or about , 1996, at the offices of Oppenheimer
& Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York
10281.
-----------
OPPENHEIMER & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED
HSBC JAMES CAPEL
The date of this Prospectus is , 1996
<PAGE>
FLAMELESS THERMAL OXIDATION
Thermatrix
Flameless
Thermal
Oxidation
System
The Thermatrix system destroys greater than 99.99% of
hazardous air pollutants in fume streams.
[INSERT GRAPHIC DESCRIPTIVE OF TECHNOLOGICAL PROCESS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and with quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
Thermatrix, the Thermatrix logo and PADRE are trademarks or registered
trademarks of the Company.
2
<PAGE>
[PHOTO]
THERMATRIX ASSEMBLY FACILITY (KNOXVILLE, TENNESSEE)
THREE UNITS IN FINAL ASSEMBLY FOR A DEPARTMENT OF ENERGY REMEDIATION PROJECT.
[PHOTO]
THERMATRIX SYSTEM INSTALLED AT A PULP AND PAPER MILL.
<PAGE>
[PHOTO]
THERMATRIX SYSTEM INTALLED AT A FMC CORPORATION CHEMICAL PLANT.
[PHOTO]
THERMATRIX SYSTEM IN OPERATION AT A CHEVRON REFINERY.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. As used in this Prospectus, the terms
"Thermatrix" and the "Company" refer to Thermatrix Inc., a Delaware
corporation, its predecessor Thermatrix Inc., a California corporation and its
sole subsidiary, Thermatrix Ltd., a corporation incorporated under the laws of
England and Wales. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus: (i) assumes an initial public offering price of
$13.00 per share, the mid-point of the range set forth on the cover page of
this Prospectus; (ii) assumes no exercise of outstanding options or warrants to
purchase an aggregate of 814,097 shares of Common Stock; (iii) assumes no
exercise of the Underwriters' over-allotment option; (iv) reflects the
automatic conversion of all outstanding shares of Series B, Series C, and
Series D Preferred Stock (collectively, the "Preferred Stock") into an
aggregate of 5,267,313 shares of Common Stock upon the closing of this
offering; (v) reflects the one-for-three reverse split of the Common Stock
(assuming conversion of all outstanding shares of Preferred Stock); (vi)
reflects the reincorporation of the Company in Delaware; and (vii) reflects the
filing of amendments to the Company's Certificate of Incorporation authorizing
50,000,000 shares of Common Stock and 5,000,000 shares of undesignated
preferred stock and eliminating the Company's existing Preferred Stock. See
"Principal Stockholders," "Description of Capital Stock," "Underwriting" and
Notes 5, 6 and 11 of Notes to Consolidated Financial Statements.
THE COMPANY
Thermatrix Inc. is an environmental technology company engaged in the
development, manufacture and sale of innovative, proprietary industrial process
equipment for the destruction of volatile organic compounds and hazardous air
pollutants (collectively, "VOCs"). The core component of the Company's
technology is its proprietary flameless thermal oxidizer, which is capable of
treating virtually all VOCs while achieving destruction removal efficiency
("DRE") of 99.99% or higher with de minimis formation of hazardous by-products
such as oxides of nitrogen ("NOX"), carbon monoxide ("CO"), and products of
incomplete combustion ("PICs"). The Company sells its flameless thermal
oxidizer as a stand-alone unit or as an integrated system. See "Business--
Introduction."
The Company seeks to expand the use and application of its proprietary
flameless thermal oxidation ("FTO") technology globally and to become a leading
supplier of VOC treatment systems. The Company has initially focused on the
industrial VOC market where it believes the Company's FTO system offers the
greatest economic and environmental advantages over competing VOC treatment
methods. These advantages include: (i) high DRE; (ii) de minimis formation of
hazardous by-products; (iii) low operating and maintenance costs; (iv) product
safety; (v) broad application to a wide range of VOCs, including difficult-to-
treat chlorinated, sulfonated and fluorinated compounds; (vi) the ability to
economically treat fume streams with variable flows and concentrations; and
(vii) high operating reliability. See "Business--Strategy."
VOCs are an unavoidable by-product of numerous manufacturing and process
industries worldwide and must be controlled due to serious health, safety and
environmental risks. The current global market for VOC control equipment
exceeds $2.0 billion and is estimated to grow at 10% per annum according to
McIlvaine & Co., a market analyst firm serving the air pollution control
industry. Conventional technologies for the treatment of industrial VOCs are
primarily flame-based destruction systems (such as incinerators), carbon
adsorption systems and scrubbing systems, most of which have been in use for
over thirty years. See "Business--Existing Treatment Methods For Control of
VOCs."
3
<PAGE>
The Company has achieved a number of significant milestones in
commercializing its technology, including: (i) establishing the application of
its proprietary FTO technology in the petroleum, chemical/petrochemical, pulp
and paper and pharmaceutical industries with "market leader" customers, and for
soil and groundwater remediation; (ii) selling more than 40 commercial-scale
systems; (iii) establishing a global sales and marketing organization; and (iv)
the receipt of regulatory approvals by the Company's customers for the use of
the Company's systems in the United States, Canada, England and France. The
Company's customers include: Chevron U.S.A., Inc., Dow Chemical Company,
Chesebrough-Pond's USA Co., Monsanto Company, FMC Corporation and Zeneca, Ltd.
as well as the United States Departments of Defense and Energy (the "DOD" and
the "DOE", respectively).
The Company's strategy in the industrial VOC market is to: (i) increase
market penetration for established applications; (ii) broaden application of
the Company's proprietary FTO technology for new industrial VOC applications;
and (iii) expand its international operations. In addition to its core
industrial VOC emissions control business, the Company has embarked on a
strategy of working with strategic partners to evaluate the feasibility of
applying the Company's FTO technology for other uses. The Company is presently
exploring the application of its FTO technology to the destruction of chemical
weapons, treatment of radioactive mixed wastes and control of diesel emissions.
The Company is also pursuing a strategy to selectively acquire complementary
technologies in order to expand its presence in the VOC treatment market. In
October 1995, the Company acquired an exclusive license to the PADRE VOC
adsorption technology from Purus, Inc. and acquired all rights to the
technology in April 1996. The PADRE technology is a recovery technology using a
regenerative synthetic adsorption resin to capture and recover very low
concentration VOCs from low to medium flow vapor streams. The Company plans to
sell PADRE units on a stand-alone basis as well as in conjunction with
Thermatrix systems. See "Business--Strategy."
As of April 12, 1996, the Company owned four United States and six
international patents, had received notice of allowance for one additional
United States patent application, and had an additional seven United States and
32 international patent applications pending that cover the fundamental aspects
of the Company's flameless thermal oxidation technology. See "Risk Factors--
Proprietary Technology and Unpredictability of Patent Protection" and
"Business--Intellectual Property."
The Company was founded in 1985 as In-Process Technology Inc. ("IPT"). In
July 1992, the Company restructured its operations, installed new senior
management, changed its name to Thermatrix Inc. and focused exclusively on
applications for its technology as a flameless thermal destruction process for
the treatment of VOCs. Accordingly, the Company has a limited operating history
in the VOC emissions market. See "Risk Factors--Limited Operating History" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The principal office of the Company is located at 101 Metro Drive,
Suite 248, San Jose, California 95110. Its telephone number is (408) 453-0490.
4
<PAGE>
THE OFFERING
Common Stock Offered.............. 2,000,000 shares
Common Stock Outstanding After
the Offering..................... 7,400,838 shares(1)
Use of Proceeds...................
For working capital, repayment of short-
term borrowings, the purchase of capital
equipment and other general corporate
purposes, including development of
strategic alliances and strategic joint
ventures to pursue new applications of the
FTO technology.
Proposed Nasdaq National Market TMXI
Symbol...........................
- -------
(1) Excludes as of March 31, 1996: (i) 746,997 shares of Common Stock issuable
upon the exercise of outstanding stock options under the Company's 1987
Incentive Stock Plan at a weighted average exercise price of $1.61 per
share; no additional stock options will be granted under the 1987 Incentive
Stock Plan (see "Management--Employee Benefit Plans--1987 Incentive Stock
Plan"), (ii) 67,100 shares of Common Stock reserved for issuance upon the
exercise of warrants to purchase Common Stock at a weighted average
exercise price of $4.65 per share (see "Description of Capital Stock--
Warrants"), and (iii) 333,334 shares of Common Stock reserved for future
issuance pursuant to the Company's 1996 Stock Plan, 116,667 shares of
Common Stock reserved for future issuance pursuant to the Company's
Employee Stock Purchase Plan and 83,334 shares of Common Stock reserved for
future issuance pursuant to the Company's 1996 Director Option Plan. See
"Management--Director Compensation" and "--Employee Benefit Plans."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................. $ 881 $ 3,135 $ 6,494 $ 549 $ 2,735
Cost of revenues.......... 966 3,099 6,064 574 2,506
-------- -------- -------- --------- ---------
Gross margin.............. (85) 36 430 (25) 229
Operating expenses:
Research and development.. 483 1,326 1,084 327 138
Selling, general and
administrative........... 2,100 4,503 4,740 1,090 1,328
Interest income (expense),
net...................... 47 (28) 231 97 (1)
Income taxes.............. -- -- 31 8 5
-------- -------- -------- --------- ---------
Net loss.................. $ (2,621) $ (5,821) $ (5,194) $ (1,353) $ (1,243)
======== ======== ======== ========= =========
Pro forma net loss per
share(1)................. $ (0.91) $ (0.24) $ (0.22)
======== ========= =========
Pro forma weighted average
shares outstanding(1).... 5,723 5,701 5,766
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED (3)
-------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments.................. $ 1,477 $ 1,477 $ 24,857
Working capital.................... 1,882 1,882 25,262
Total assets....................... 5,798 5,798 29,178
Long-term debt..................... -- -- --
Redeemable convertible preferred
stock............................. 13,405 -- --
Accumulated deficit................ (23,430) (23,430) (23,430)
Total stockholders' equity
(deficit)......................... (10,588) 2,817 26,197
</TABLE>
- -------
(1) See Note 2 of Notes to Consolidated Financial Statements--Summary of
Significant Accounting Policies--Pro Forma Net Loss Per Share.
(2) Presented on a pro forma basis to give effect to the conversion of all
outstanding shares of Preferred Stock into an aggregate of 5,267,313 shares
of Common Stock upon completion of this offering.
(3) Presented on a pro forma basis as adjusted to give effect to the issuance
of the 2,000,000 shares of Common Stock offered hereby and the receipt of
the estimated net proceeds therefrom.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In evaluating the Company's business, prospective
investors should carefully consider the following factors in addition to the
other information presented in this Prospectus.
Limited Operating History. The Company was formed in 1985 as In-Process
Technology, Inc. and from 1985 to 1991 concentrated on developing its FTO
systems and ascertaining the most commercially appropriate applications for
its technology. In 1992, the Company focused its market strategy on
applications involving the destruction of VOCs. To date, the Company has
manufactured and sold only a limited number of its FTO systems for commercial
use. Thus, the Company has a limited operating history in the VOC emissions
market. There can be no assurance that the Company will be successful in
implementing this strategy. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Operating Losses and Accumulated Deficit; Uncertainty of Future
Profitability. The Company had a net loss of approximately $5.2 million in
1995 and $1.2 million for the three months ended March 31, 1996, and had an
accumulated deficit of approximately $23.4 million at March 31, 1996. Since
1992 when the Company restructured its operations, the Company has financed
its operations primarily through private placements of equity securities
totalling approximately $20.3 million and a credit facility with Cupertino
National Bank of $3.0 million. The Company does not expect to be profitable
unless and until sales of its FTO systems generate sufficient revenues to fund
its operations. There can be no assurance that the Company will achieve such
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Uncertainty of Market Acceptance. There can be no assurance that the
Company's FTO technology will receive broad market acceptance as an
economically and environmentally acceptable means of destroying VOCs. Broad
market acceptance of the Company's products will depend upon the Company's
ability to persuade potential customers to adopt its FTO technology in place
of certain, more established, competing technologies, including flame-based
destruction and carbon adsorption systems. The failure of the Company to
persuade potential customers to adopt its FTO technology would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Sensitivity to Major Projects. In 1995, two projects accounted for 59% of
the Company's revenues. Although the Company is expanding the number of its
customers and installations, the average size and dollar volume of each
installation is increasing. As a result, the Company's results of operations
are likely to continue to be dependent on major projects. Such a reliance on
major orders is likely to lead to fluctuations in, and to reduce the
predictability of, quarterly results. Larger projects also pose other
challenges. The sales cycle for larger projects tends to be longer than for
smaller projects, and, when orders are received, projects may be delayed by
factors outside the Company's control, including customer budget decisions,
design changes and delays in obtaining permits. Also, because the dollar
volumes are larger, the costs of providing warranty services could increase.
The Company's business, results of operations and financial condition could be
materially adversely affected if the Company were to fail to obtain major
project orders, if such orders were delayed, if installations of such systems
were delayed, or if such installations encountered operating, warranty or
other problems. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Fluctuations in Quarterly Operating Results. The Company's quarterly
revenues and operating results have varied significantly in the past and may
fluctuate significantly in the future as a result of a variety of factors,
many of which are outside the Company's control. Such factors include general
economic and industry conditions, the size and timing of individual orders,
the introduction of new products or services by the Company or its competitors
or the introduction of the Company's products to new markets, changes in the
levels of operating expenses, including development costs, and the amount and
timing of other costs relating to the expansion of the Company's operations.
6
<PAGE>
Furthermore, the purchase of the Company's products, particularly for major
projects, may involve a significant commitment of capital, with the attendant
delays frequently associated with large capital expenditures and authorization
procedures within its customers' organization. For these and other reasons,
the sales cycle for the Company's products can be lengthy (up to two years)
and subject to a number of significant risks over which the Company has little
or no control, including customer budgetary constraints. The Company
historically has operated with little backlog because most customer orders are
placed with relatively short lead times, usually from four to twenty-four
weeks. Variations in the timing of recognition of specific revenues due to
changes in project scope and timing may adversely and disproportionately
affect the Company's operating results for a quarter because the Company
establishes its expenditure levels on the basis of expected future revenues,
and a significant portion of the Company's expenses do not vary with current
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Management of Growth. The Company's revenues increased from $549,000 in the
three months ended March 31, 1995 to $2.7 million in the three months ended
March 31, 1996. The Company's recent growth has placed, and is expected to
continue to place, a significant strain on its managerial, operational and
financial resources. Although it relies on subcontractors to fabricate
subassemblies and to assemble and install completed systems, the Company uses
its own employees to design, test and commission systems. The Company seeks to
maintain engineering and design staffing levels adequate for current and near-
term demand. During periods of rapid growth, such as that experienced by the
Company during the last year, the Company's engineering and design personnel
generally operate at full capacity. As a result, future growth, if any, is
limited by the Company's ability to recruit and train additional engineering,
design and project management personnel and by the ability of individual
employees to manage more and larger projects. Furthermore, any failure to
maintain quality or to meet customer installation schedules could damage
relationships with important customers, damage the Company's reputation
generally and result in contractual liabilities. The pressures of meeting
increased demand may lead, and on occasions have led, to errors in
manufacturing or assembly, which in turn increase manufacturing costs and
decrease gross margins due to the cost of rework. The Company seeks to enforce
rigorous adherence to internal operating procedures and controls, including
testing of components. However, the failure of the Company to prevent such
errors could have an adverse effect on the Company's ability to increase its
operating margins which could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be able to effectively manage an expansion of
its operations or that the Company's systems or controls will be adequate to
support the Company's operations if expansion occurs. In such event, any
failure to manage growth effectively could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business--Engineering and Manufacturing."
Risks Associated with Commercialization of Technology. The Company's first
commercial unit was installed in 1992, and therefore, there is limited
operating history available on installed units. Furthermore, as the Company's
technology has become more accepted, the Company has been selling increasingly
larger systems. Larger systems are generally distinguished by the size and
weight of the system and the characteristics of the waste stream flow. The
operating history of the larger units is shorter, and the larger systems are
generally more complex than the initial systems installed by the Company.
Consequently, there can be no assurance that the performance of the Company's
units will not deteriorate as the units age or that unanticipated problems
will not be encountered with the larger, more complex systems. Any
deterioration of the Company's units or unanticipated problems with its
systems could have a material adverse effect on the Company's business,
results of operations and financial condition.
Proprietary Technology and Unpredictability of Patent Protection. The
Company relies on patents, trade secrets and proprietary know-how, which it
seeks to protect, in part, through appropriate confidentiality and proprietary
information agreements with its strategic partners, employees and consultants.
There can be no assurance that the proprietary information or confidentiality
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known to or be independently developed by others.
7
<PAGE>
There can be no assurance that any patents from pending patent applications
or from any future patent applications will be issued, that the scope of any
patent protection will exclude competitors or provide competitive advantages
to the Company, that any of the Company's patents will be held valid if
subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Since patent
applications are secret until patents are issued in the United States or
corresponding applications are published in international countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or
that it was the first to file patent applications for such inventions. In
addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Furthermore,
the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. Litigation or regulatory proceedings, which could result in
substantial cost and uncertainty to the Company, may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There
can be no assurance that the Company will have the financial resources to
defend its patents from infringement or claims of invalidity. It is also
possible that the Company may need to acquire licenses to, or contest the
validity of, issued or pending patents of third parties relating to the
Company's technology. There can be no assurance that any of such licenses
would be made available to the Company on acceptable terms, if at all, or that
if the Company were to contest the validity of any issued or pending patents,
it would prevail. In addition, the Company could incur substantial costs in
defending itself in suits brought against the Company on its patents or in
bringing suits against third parties. See "Business--Intellectual Property."
Uncertainty of Regulatory Acceptance. The Company's customers are required
to comply with environmental laws and regulations in the United States and
elsewhere which limit the emission of VOCs and other chemicals. Such
environmental laws and regulations also restrict the methods which companies
may use to reduce or eliminate toxic emissions and often require the
permitting of emission control equipment. The Company believes that its FTO
technology does not come under the United States Environmental Protection
Agency's ("EPA") current definitions of incineration. Classification as an
incineration technology could significantly increase the length of time and
cost of the permitting process for customers because of the requirement for a
public hearing, especially where community sentiment is opposed to
incineration technology. There can be no assurance that the EPA will not
classify the Company's FTO technology as an incineration technology in the
future or that there will not be other federal, state or foreign regulatory
developments that increase the regulatory burden on the Company's customers,
including requirements for more extensive permitting, in order to utilize the
Company's systems. A lengthier permitting process could reduce the competitive
advantages of the Company's technology and materially adversely affect the
Company's business, results of operations and financial condition. In
addition, the level of enforcement activities by environmental protection
agencies and changes in laws and regulations will also affect demand for the
Company's systems. To the extent that certain VOCs are banned or lower cost
substitutes that are not subject to regulation are developed for some or all
of the VOCs currently generated in the Company's markets, such bans or
developments could materially adversely affect the demand for the Company's
systems. To the extent that the burdens of complying with such environmental
laws and regulations may be eased, the demand for the Company's systems could
be materially adversely affected. In addition, the existence of environmental
regulations and the level of enforcement vary by country and may affect the
Company's ability to sell its systems outside the United States. See
"Business--The Thermatrix System" and "--Environmental Matters."
Competition. The Company currently competes primarily with suppliers of
flame-based thermal oxidation systems, carbon adsorption systems and scrubbing
systems. Within each of these categories, the systems are generally
undifferentiated and characterized by commodity pricing. The Company believes
the major considerations in selecting industrial VOC control systems are:
safety; capital, operating and maintenance costs; ease of permitting; process
stream characteristics; unit location and on-line reliability. Although the
Company
8
<PAGE>
believes its FTO technology competes favorably with respect to these factors,
many of the competing technologies have certain advantages because they have
been in use for over thirty years. These competing technologies are familiar
and predictable to companies requiring VOC controls and to regulators, and
they are available from and promoted by a large number of suppliers. Many of
the Company's competitors have substantially greater financial resources,
operating experience and market presence than the Company. As a result, they
may be able to respond more quickly to changes in customer requirements or
devote greater resources to the development, promotion and sale of their
products than the Company. Competitors could potentially reduce prices or
adopt other strategies to compete with the Company. There is no assurance that
the Company's existing competitors or new market entrants will not develop new
technologies or modifications to existing technologies that are superior to or
more cost-effective than the Company's FTO technology. Increased competition
could result in price reductions and reduced gross margins and could limit the
Company's market share. There can be no assurance that the Company will
compete successfully with existing or new competitors or that competitive
pressures faced by the Company would not materially adversely affect its
business, results of operations and financial condition. See "Business--
Competition."
Dependence on Key Personnel. The Company's success depends to a significant
extent upon its executive officers, particularly its Chairman, President and
Chief Executive Officer, John T. Schofield, and key engineering, sales,
marketing, financial and technical personnel. Employees may voluntarily
terminate their employment with the Company at any time, and none of the
Company's employees is subject to any term employment contract with the
Company. Because the Company is still at an early stage of growth, the Company
has limited personnel resources available to address the different activities
in its business. The loss of the services of one or more of the Company's key
employees could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company maintains key
employee life insurance on the life of John T. Schofield in the amount of
$2,000,000. There can be no assurance that such amount will be sufficient to
compensate the Company for the loss of the services of such individual.
The Company also believes that its future success will depend in large part
upon its ability to attract and retain additional highly skilled personnel,
particularly design and process engineers. Because of the technical
sophistication of the Company's systems and the sophisticated engineering
software utilized by the Company, design and process engineers who join the
Company generally are required to have advanced technical knowledge and
significant training to perform efficiently and productively. The availability
of such personnel is limited, and the Company has at times experienced
difficulty in locating new employees with the requisite level of expertise and
experience. There can be no assurance that the Company will be successful in
retaining its existing key personnel or in attracting and retaining the
personnel it requires in the future. See "Business--Employees" and
"Management."
Risks Associated With Development Programs. In addition to its core
industrial VOC emissions control business, the Company has embarked on a
strategy of working with strategic partners to evaluate the feasibility of
applying the Company's FTO technology for other uses. In collaboration with
strategic partners, the Company will begin tests in 1996 involving chemical
weapons destruction, radioactive mixed waste treatment and diesel emission
control. The engineering challenges involved in treating chemical warfare
agents, radioactive mixed wastes and diesel emissions are different in a
number of respects from the conditions in which the Thermatrix system has been
used in the past, and there can be no assurance that the Thermatrix technology
will prove successful in any of these new applications. Moreover, the
Company's extensive database of test results which it uses to design systems
for individual installations may not be relevant to these new applications. If
early tests of any of these new applications are positive, the Company may
need to engage in extensive and costly applications development and
engineering in order to commercialize its system for such use, and there can
be no assurance as to the success of any such effort. See "Business--Potential
Applications Under Development."
Dependence on the Reliability and Performance of Subcontractors. The Company
relies on subcontractors to build system components and to assemble and
install systems. The Company's ability to deliver high quality systems on time
will depend upon the reliability and performance of its subcontractors. The
failure of a subcontractor to meet delivery schedules could cause the Company
to default on its obligations to its customers,
9
<PAGE>
which could materially adversely affect the Company's reputation, business,
results of operations and financial condition. In addition, the Company's
reliance on subcontractors for manufacturing, assembly and installation places
a significant part of the Company's quality control responsibilities on these
subcontractors. There can be no assurance that the Company will be able to
continue to contract for the level of quality control required by the
Company's customers. The failure to provide such quality control could result
in manufacturing and installation delays which could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Engineering and Manufacturing."
Control by Management and Affiliates. Upon the closing of this offering, the
Company's executive officers and directors, together with entities affiliated
with them, will beneficially own approximately 39.2% (37.7% if the
Underwriters' over-allotment option is exercised in full) of the outstanding
Common Stock, including warrants and options held by them that are exercisable
within 60 days of March 31, 1996. As a result, these stockholders will be able
to exercise significant influence over matters requiring stockholder approval,
including the election of directors and the approval of material corporate
matters such as change of control transactions. The effects of such control
could be to delay or prevent a change of control of the Company unless the
terms are approved by such stockholders. See "Principal Stockholders."
Possible Product Liability. The Company's FTO systems are designed to
destroy VOCs, which are highly toxic and flammable. If the Company's systems
are improperly designed or operated outside of design parameters and operating
instructions provided by the Company, there is a risk of system failure or
release of VOCs, which could require the Company to defend itself against a
product liability or personal injury claim. Although the Company has product
liability and commercial general liability insurance in scope and amount which
it believes to be sufficient for the conduct of its business, there can be no
assurance that such insurance will cover or be adequate to cover such claims.
In addition, the Company's general liability insurance is subject to coverage
limits and excludes coverage for losses or liabilities relating to
environmental damage or pollution. Accordingly, the Company's efforts to
defend itself against such claims could have a material adverse effect on the
Company's business, results of operations and financial condition.
Dependence on Customer Information. The Company is highly dependent upon
information provided by its customers concerning the type, volume and flow
rate of VOC emissions to be treated by the Company's systems. If the
customer's information is inaccurate, a malfunction in the Company's FTO
system could occur, resulting in damage to the customer's facilities or
personal injury. In addition, incorrect information could cause delays in the
design, manufacture and installation of the customer's system. Through no
fault of its own, the Company could then be held liable for damages resulting
from such malfunction or delay. Any of these factors could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Potential Environmental Liability. Although the Company does not believe
that its activities would directly expose it to liabilities under local, state
or federal environmental laws and regulations, if the Company were to
improperly design, manufacture or test its systems or fail to properly train
its customer's employees in the operation of the systems, it could be exposed
to possible liability for investigation and clean-up costs under such
environmental laws. Although the Company does not currently lease its systems
to customers or operate the systems on behalf of its customers, if it were to
do so in the future, the Company could be liable under environmental laws for
any releases of hazardous substances.
The Company generally conducts performance tests on its systems at its
customers' facilities. However, in the future the Company may perform
prototype testing in its own facilities. If such testing were to involve
hazardous substances, it could subject the Company to liability under
environmental laws and regulations.
The Company could also be exposed to possible liability under environmental
laws for violations of those requirements applicable to the generation,
storage, treatment and disposal of hazardous waste. Under some environmental
laws and various theories of tort and contract law, it is also possible that
the Company could be liable for damages to its customers and third parties
resulting from the actions of its customers or arising from the failure or
malfunction, or the design, construction or operation of, the Company's FTO
systems or products,
10
<PAGE>
even if the Company were not at fault. The Company's general liability
insurance is subject to coverage limits and generally excludes coverage for
losses or liabilities relating to or arising out of environmental damage or
pollution. The Company's business, results of operations and financial
condition could be materially adversely affected by an uninsured or partially
insured claim. See "Business--Environmental Matters."
Money-back Guarantee. The Company currently offers certain of its customers
a money-back guarantee should the Company's FTO system fail to meet its
performance criteria on start-up. Although to date the Company's FTO systems
have met or exceeded performance specifications, and no money-back guarantees
have been sought, there can be no assurance that the Company will meet
performance specifications in the future or that customers will not seek the
money-back guarantee. If a customer were to seek the money-back guarantee, the
Company could be required to refund such customer's deposits, may not be able
to recover all of its manufacturing costs and would not realize the revenue
and profits recorded on such orders. Based upon the Company's prior
experience, the Company does not maintain any reserves for potential claims
under these money-back guarantees. Any claims under money-back guarantees
could materially adversely affect the Company's cash flow and reputation and
thereby have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Sales and Marketing."
Risks Associated with Fixed Price Contracts. A majority of the Company's
contracts are performed using "fixed-price" rather than "cost-plus" terms.
Under fixed-price terms, the Company quotes firm prices to its customers and
bears the full risk of cost overruns caused by estimates that differ from
actual costs incurred or manufacturing delays during the course of the
contract. Some costs, including component costs, are beyond the Company's
control and may be difficult to predict. If manufacturing or installation
costs for a particular project exceed anticipated levels, gross margins would
be materially adversely affected, and the Company could experience losses. In
addition, the manufacturing process may be subject to significant change
orders. However, the cost of these change orders may not be negotiated until
after the system is installed. The failure of the Company to recover the full
cost of these change orders could materially adversely affect gross margins
and also cause the Company to experience losses. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Risks Associated with International Operations and Sales. The Company plans
to increase its revenues, in part, through an expansion of its overseas
operations. International sales and operations may be limited or disrupted by
the imposition of government controls, export license requirements, trade
restrictions, changes in tariffs, difficulties in staffing, the transport of
machinery, managing international operations and other factors. Regulatory
compliance requirements differ among foreign countries and are also different
from those established in the United States. If the Company's customers are
unable to obtain the necessary foreign regulatory approvals on a timely basis,
the Company's international sales, and thereby its business, results of
operations and financial condition, could be materially adversely affected.
Additionally, the Company's business, results of operations and financial
condition may be materially adversely affected by fluctuations in currency
exchange rates as well as increases in duty rates, difficulties in obtaining
export licenses, ability to maintain or increase prices and competition. The
Company denominates international sales in either United States dollars or
local currencies. Sales in Europe have been primarily denominated in pounds
sterling. Since the bulk of expenses in connection with international
contracts are often incurred in United States dollars, there can be a short-
term exchange risk created. If the Company has significant international sales
in the future denominated in foreign currencies, the Company may purchase
hedging instruments to mitigate the exchange risk on these contracts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Marketing."
Effect of Anti-Takeover Provisions. Upon the closing of this offering, the
Company's Board of Directors will have the authority to issue up to 5,000,000
shares of undesignated preferred stock and to determine the price, rights,
conversion ratios, preferences and privileges of those shares without any
further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be materially adversely
affected by, the rights, including economic rights, of the holders of any
shares of preferred stock, including a material adverse effect on the market
value of the Common Stock. Any such issuance could have the
11
<PAGE>
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. Furthermore, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law that prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person first becomes an
"interested stockholder," unless the business combination is approved in a
prescribed manner. The application of Section 203 and certain provisions of
the Restated Certificate of Incorporation to be filed upon the closing of this
offering could also have the effect of delaying or preventing a change of
control of the Company, which could materially adversely affect the market
price of the Company's Common Stock. See "Description of Capital Stock--
Certain Provisions of the Restated Certificate of Incorporation and the
Restated ByLaws" and "--Certain Provisions of Delaware Law."
Shares Eligible for Future Sales; Registration Rights. Sales of a
substantial number of shares of Common Stock in the public market following
this offering could materially adversely affect the market price for the
Common Stock. The number of shares of Common Stock available for sale in the
public market is limited by restrictions under the Securities Act of 1933, as
amended (the "Securities Act") and lock-up agreements entered into by the
Company, certain of its employees, directors and other principal stockholders,
under which the holders of such shares and options to purchase such shares
have agreed not to sell or otherwise dispose of any of their shares or options
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representatives. However, the Representatives may, in
their sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. The Representatives
do not presently intend to release any of the shares subject to lock-up
agreements and generally grant requests for waivers only in limited
circumstances. As a result of these restrictions, based on shares outstanding
and options granted as of March 31, 1996, the following shares of Common Stock
will be eligible for future sale: on the date of this Prospectus, 65,917
shares in addition to the shares offered hereby; an additional 4,667 shares
will be eligible for sale 90 days after the date of this Prospectus; an
additional 4,918,456 shares will be eligible for sale 180 days after the date
of this Prospectus. In addition, the Company intends to register on a
registration statement on Form S-8, after the effective date of this offering,
a total of 1,280,332 shares of Common Stock subject to outstanding options or
reserved for issuance under the Company's 1987 Incentive Stock Plan, as
amended, 1996 Stock Plan, 1996 Director Option Plan and Employee Stock
Purchase Plan. Upon expiration of the lock-up agreements referred to above,
holders of approximately 5,267,828 shares of Common Stock will be entitled to
certain registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Company's Common Stock. See
"Description of Capital Stock--Registration Rights" and "Shares Eligible for
Future Sale."
Absence of Public Market; Possible Volatility of Share Price. Prior to this
offering, there has been no public market for the Company's Common Stock.
Although the shares have been approved for trading on the Nasdaq National
Market and each of the Representatives has advised the Company that it intends
to make a market in the Company's Common Stock following completion of this
offering, there can be no assurance that the Representatives will continue to
be market makers, that an active trading market will develop or be sustained
or that shares of the Common Stock may be resold at or above the initial
public offering price. The initial public offering price of the Common Stock
has been determined based on negotiations between the Company and the
Representatives of the Underwriters. See "Underwriting." There has been a
history of volatility in the market prices for securities of emerging growth
companies and environmental technology companies such as the Company. Factors
such as announcements of technological developments, sales of competing VOC
treatment systems, government regulatory action, public concern as to the
safety of systems developed by the Company, patent or proprietary rights
developments and market conditions in general could have a material adverse
effect on the future market price of the Common Stock.
Immediate and Substantial Dilution. Purchasers of shares of Common Stock in
this offering will experience immediate and substantial dilution in pro forma
net tangible book value of $9.50 per share. Additional dilution will occur
upon exercise of outstanding stock options and warrants and may occur if the
Company issues additional equity securities in the future. See "Dilution."
12
<PAGE>
No Dividends. Prior to this offering, the Company has not paid any
dividends. The Company intends to retain future earnings for use in its
business, and therefore does not anticipate paying dividends in the future.
Furthermore, there can be no assurance that the Company will ever pay
dividends. See "Dividend Policy."
Limitation on Utilization of Net Operating Loss Carryforwards. The Company
has incurred net operating losses since its inception and, as of March 31,
1996, had a cumulative net operating loss of approximately $22.4 million for
federal income tax purposes and $13.1 million for state income tax purposes.
The sale of stock pursuant to this offering, together with sales of equity
securities within the past three years, will effect a change in control for
taxation purposes. As a result, the utilization of the net operating losses
will be subject to annual limitations. The Company's future utilization of net
operating loss carryforwards for federal and state income tax purposes will
depend upon the Company's ability to generate profitable results of operations
during the relevant tax periods. There can be no assurance that the Company
will be able to utilize its net operating loss carryforwards. See Note 9 of
Notes to Consolidated Financial Statements.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
being offered hereby, after deducting the underwriting discount and other
offering expenses payable by the Company in connection with this offering, are
estimated to be approximately $23,380,000 (approximately $27,007,000 if the
Underwriters' over-allotment option is exercised in full).
The Company intends to use the net proceeds of this offering for working
capital, the repayment of short-term borrowings under its line of credit, the
purchase of capital equipment and for general corporate purposes, including
development of strategic alliances and strategic joint ventures to pursue new
applications of the technology.
Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term investment-grade securities primarily with maturities
of one year or less. The Company believes that the net proceeds of this
offering will be sufficient to finance its working capital and other capital
requirements through 1997.
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock or
Preferred Stock. The Company currently intends to retain earnings to finance
the growth and development of its business and does not anticipate paying
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
March 31, 1996 was $2,480,000, or $0.46 per share. The "pro forma net tangible
book value" per share represents the amount of total tangible assets of the
Company less total liabilities, divided by 5,396,671, the number of shares of
Common Stock outstanding after giving effect to the conversion of all
outstanding shares of Preferred Stock into 5,267,313 shares of Common Stock.
After giving effect to the sale of 2,000,000 shares of Common Stock offered
hereby at an assumed public offering price of $13.00 per share and receipt of
the estimated net proceeds therefrom, the pro forma net tangible book value of
the Company as of March 31, 1996 would have been $25,860,000 or $3.50 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.04 per share to existing stockholders and an immediate dilution of
$9.50 per share to new investors purchasing shares in this offering.
The following table illustrates the dilution per share as described above:
<TABLE>
<S> <C> <C>
Assumed public offering price.................................. $13.00
Pro forma net tangible book value before offering............ $0.46
Increase attributable to new investors....................... 3.04
-----
Pro forma net tangible book value after offering............... 3.50
------
Dilution to new investors...................................... $ 9.50
======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value will be $3.83 per share, resulting in dilution
to investors in this offering of $9.17 per share.
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares purchased from the Company, the total cash consideration
paid and the average cash price per share for the existing stockholders and
the new investors, before deductions of the underwriting discount and
estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 5,396,671 73.0% $12,301,000 32.1% $ 2.28
New investors................... 2,000,000 27.0% 26,000,000 67.9% 13.00
--------- ----- ----------- -----
Total......................... 7,396,671 100.0% $38,301,000 100.0%
========= ===== =========== =====
</TABLE>
At March 31, 1996, there were options and warrants outstanding to purchase
814,097 shares of Common Stock at a weighted average exercise price of $1.86
per share. To the extent outstanding options and warrants are exercised, there
will be further dilution to new investors.
15
<PAGE>
CAPITALIZATION
The following table sets forth the actual and pro forma capitalization of
the Company as of March 31, 1996, and the pro forma capitalization as adjusted
to give effect to the sale of the 2,000,000 shares of Common Stock offered
hereby and receipt of the net proceeds therefrom. The pro forma capitalization
gives effect to the conversion of all outstanding shares of Preferred Stock
into an aggregate of 5,267,313 shares of Common Stock upon completion of this
offering.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt................................. $ -- $ -- $ --
-------- -------- -------
Redeemable convertible Series D preferred
stock(1)...................................... $ 13,405 $ -- $ --
-------- -------- -------
Stockholders' equity (deficit):
Convertible preferred stock; $0.001 par
value, 7,744,766 shares authorized;
5,000,000 shares authorized pro forma;
2,554,631 shares issued and outstanding; no
shares outstanding pro forma and as
adjusted.................................... 9,304 -- --
Common stock, $0.001 par value, 40,000,000
shares authorized; 50,000,000 shares
authorized pro forma; 129,358 shares issued
and outstanding; 5,396,671 shares issued and
outstanding pro forma; and 7,396,671 shares
issued and outstanding as adjusted(2)....... -- 5 7
Additional paid-in capital................... 3,538 26,242 49,620
Accumulated deficit.......................... (23,430) (23,430) (23,430)
-------- -------- -------
Total stockholders' equity (deficit)......... (10,588) 2,817 26,197
-------- -------- -------
Total capitalization......................... $ 2,817 $ 2,817 $26,197
======== ======== =======
</TABLE>
- --------
(1) See Note 6 of Notes to Consolidated Financial Statements.
(2) Excludes 814,097 shares of Common Stock issuable upon the exercise of
outstanding options and warrants at a weighted average exercise price of
$1.86 per share.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's statements of operations for each of the three years in the period
ended December 31, 1995 and with respect to the Company's balance sheets as of
December 31, 1994 and 1995 are derived from the financial statements of the
Company that have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere in this
Prospectus. The statement of operations data for the years ended December 31,
1991 and 1992 and the balance sheet data as of December 31, 1991, 1992 and
1993 are derived from audited financial statements not included in this
Prospectus. The unaudited balance sheet data as of March 31, 1996 and the
unaudited statement of operations data for the three months ended March 31,
1995 and 1996 have been prepared on a basis substantially consistent with the
audited consolidated financial statements and, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. Results for the
three months ended March 31, 1996 are not necessarily indicative of the
results expected for 1996. These data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ --------------------
1991(1) 1992(1) 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues............... $ 264 $ 1,041 $ 881 $ 3,135 $ 6,494 $ 549 $ 2,735
Cost of revenues....... 637 937 966 3,099 6,064 574 2,506
-------- -------- -------- -------- -------- --------- ---------
Gross margin........... (373) 104 (85) 36 430 (25) 229
-------- -------- -------- -------- -------- --------- ---------
Operating expenses:
Research and
development........... 545 414 483 1,326 1,084 327 138
Selling, general and
administrative........ 1,504 1,290 2,100 4,503 4,740 1,090 1,328
-------- -------- -------- -------- -------- --------- ---------
Total operating
expenses.............. 2,049 1,704 2,583 5,829 5,824 1,417 1,466
-------- -------- -------- -------- -------- --------- ---------
Loss from operations... (2,422) (1,600) (2,668) (5,793) (5,394) (1,442) (1,237)
Interest income
(expense), net........ (27) (151) 47 (28) 231 97 (1)
Income taxes........... -- -- -- -- 31 8 5
-------- -------- -------- -------- -------- --------- ---------
Net loss............... $ (2,449) $ (1,751) $ (2,621) $ (5,821) $ (5,194) $ (1,353) $ (1,243)
======== ======== ======== ======== ======== ========= =========
Pro forma net loss per
share(2).............. $ (0.91) $ (0.24) $ (0.22)
======== ========= =========
Pro forma weighted
average shares
outstanding(2)........ 5,723 5,701 5,766
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
------------------------------------------- -----------------
PRO
1991(1) 1992(1) 1993 1994 1995 ACTUAL FORMA(3)
------- ------- ------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term
investments........... $ 58 $ 494 $ 1,730 $ 6,930 $ 981 $ 1,477 $ 1,477
Working capital........ (904) 339 1,398 6,637 1,135 1,882 1,882
Total assets........... 549 999 2,072 9,223 4,228 5,798 5,798
Long-term debt......... 25 -- -- -- -- -- --
Redeemable convertible
preferred stock....... -- -- -- 11,321 11,321 13,405 --
Accumulated deficit.... (6,801) (8,551) (11,172) (16,993) (22,187) (23,430) (23,430)
Total stockholders'
equity (deficit)...... (929) 419 1,611 (4,209) (9,345) (10,588) 2,817
</TABLE>
- --------
(1)Financial information for 1991 and through July 7, 1992 reflects the
Company's operations as In-Process Technology, Inc. before the Company
changed its name to Thermatrix Inc. and focused its market strategy on
applications involving the destruction of VOCs.
(2)See Note 2 of Notes to Consolidated Financial Statements--Summary of
Significant Accounting Policies--Pro Forma Net Loss Per Share.
(3)Presented on a pro forma basis to give effect to the conversion of all
outstanding shares of Preferred Stock into an aggregate of 5,267,313 shares
of Common Stock upon completion of this offering.
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Thermatrix Inc. is an environmental technology company engaged in the
development, manufacture and sale of innovative, proprietary industrial
process equipment for the destruction of volatile organic compounds and
hazardous air pollutants (collectively, "VOCs"). The core component of the
Company's technology is its proprietary flameless thermal oxidizer. The
Company sells its flameless thermal oxidizer as a stand-alone unit or as an
integrated system.
The Company was founded in 1985 as In-Process Technology, Inc. ("IPT") to
advance the research, development and commercialization of an innovative
flameless thermal oxidation ("FTO") technology which had been invented at the
DOE's Lawrence Livermore National Laboratory in the early 1980s as part of a
research program to find ways to extract energy from oil shale. In 1985, IPT
acquired all intellectual property rights to this technology and, until 1992,
concentrated on developing the technology and explored various commercial
applications, including the manufacture of energy-efficient burners, process
heaters, boilers and VOC control equipment. However, the Company's efforts did
not result in successful commercialization of products and by 1992 the Company
had substantially exhausted its capital resources. In July 1992, the Company
restructured its operations, installed new senior management, changed its name
to Thermatrix Inc. and focused exclusively on applications for its technology
as a flameless thermal destruction process for the treatment of VOCs. Pursuant
to this restructuring, the Company closed certain facilities, wrote off fixed
assets and relocated its operations to San Jose, California.
Between July 1992 and the end of 1993, the Company devoted its activities
primarily to developing prototype systems for the industrial VOC market and to
expanding the FTO system capabilities to treat higher air flow rates and
concentrations. In 1994, the Company began full commercialization of its
technology, with sales of VOC treatment systems to the petroleum and
chemical/petrochemical industries and for soil and groundwater remediation. In
conjunction with the full commercialization of its technology, the Company
increased its sales, engineering and management personnel and, in April 1994,
opened an office in London to pursue international market opportunities. In
1994, the Company also began developing systems for the treatment of
chlorinated and sulfonated VOC streams. In 1995, the Company continued to
expand its customer base and to sell systems for proven applications. In
addition, the Company began to develop new applications to treat fluorinated
compounds and soils contaminated with polychlorinated biphenyls ("PCBs").
Since 1992, revenues have been derived primarily from contracts to develop
and manufacture FTO systems for the treatment of VOCs. In general, the Company
pursues new market applications to control industrial VOC emissions by
collaborating with a strategic customer in the particular market area. Under
these collaborative arrangements, the customer's engineers and other technical
personnel work closely with the Company to design and develop an industry- and
application-specific system. The Company prices these initial installations at
or near the Company's estimated cost. As a consequence, such applications
development projects generate little or no gross margins. This allows the
Company to recover the costs of its application development efforts while
establishing the acceptance of the Company's technology with market leader
customers. The Company believes these collaborative efforts will continue to
be important to its success, and the Company intends to continue to develop
applications for its technology utilizing these collaborative relationships in
the future. Systems for established applications are priced higher, can
generally be produced at lower cost and have higher gross margins. The Company
principally uses the percentage-of-completion method of accounting to
recognize contract revenues. Losses on contracts are charged to cost of
revenues as soon as such losses become known. The cost of performing
applications development work in conjunction with a project is included in the
cost of revenues in the Company's financial statements.
The Company's core technology has been successfully commercialized in the
industrial VOC control market for applications in the petroleum,
chemical/petrochemical, pharmaceutical and pulp and paper industries, and for
soil and groundwater remediation. The Company will seek to expand into
additional segments of the industrial VOC control market. Because the
Company's technology has been commercialized, the Company does not expect that
costs associated with further research and development of its core FTO
technology for the industrial VOC control market will be material to the
Company's results of operations.
18
<PAGE>
In addition to its current market for industrial VOC emission controls, the
Company is currently working with strategic partners to evaluate the
feasibility of applying the Company's technology to other markets. The Company
has agreed to supply a demonstration system to the United Kingdom's Chemical
and Biological Defence Establishment to test the Company's system for the
destruction of chemical warfare agents. The Company has also entered into an
agreement with ThermoChem, Inc. to explore the commercialization of a system
to treat mixed wastes and is collaborating with a leading supplier of
automotive and aerospace components to test the feasibility of the Company's
system to treat emissions from diesel engines. The strategic partners
generally share some, but not all, of the evaluation costs. Expenses incurred
by the Company, primarily labor costs, are generally recorded as research and
development expenses. To the extent such research and development expenses are
reimbursed by the strategic partner, these amounts are reflected as a
reduction of research and development expenses. If evaluation costs are
reimbursed under the terms of a purchase contract, these amounts are reflected
as cost of revenues. In addition, the Company, in some cases, may provide an
evaluation system to the strategic partner. Such costs are capitalized and
amortized over the estimated useful life of the evaluation system. Currently,
expenses incurred by the Company for these recent development programs have
not been material. However, if the early tests in any of these new
applications are positive, the Company may need to engage in extensive and
costly applications development and engineering in order to commercialize its
technology for such use. There can be no assurance as to the outcome of such
evaluation programs or, if initiated, the outcome of any such applications
development and engineering effort. See "Business--Potential Applications
Under Development."
As of March 31, 1996, the Company had a number of projects underway in the
industrial VOC control market, including five projects ranging in value from
$1.0 million to $3.1 million. The largest project is substantially complete
and the rest of these projects are scheduled to be completed in 1996. Although
the Company is expanding the number of its customers and installations, the
average size and dollar value of each installation is increasing. As a result,
the Company's results of operations are likely to be dependent on major
projects. Such a reliance on major orders is likely to lead to fluctuations
in, and to reduce the predictability of, quarterly results.
The Company denominates international sales in either United States dollars
or local currencies. Sales in Europe have been primarily denominated in pounds
sterling. Since the bulk of expenses in connection with international
contracts are often incurred in United States dollars, there is a short-term
exchange risk created. If the Company has significant international sales in
the future denominated in foreign currencies, the Company may purchase hedging
instruments to mitigate the exchange risk on these contracts.
In April 1996, the Company acquired from Purus, Inc. its PADRE technology,
which is a process used to capture and recover very low concentration VOCs
from low to medium flow vapor streams. The PADRE technology was acquired from
Purus, Inc. as a fully developed technology and commercial units of the PADRE
system have been sold. Therefore, the Company does not expect to incur
material research and development costs in connection with the manufacture and
sale of stand-alone PADRE units. Sales of PADRE units are subject to a 7%
royalty payable to Purus, Inc. See Note 4 of Notes to Consolidated Financial
Statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-
Based Compensation." The disclosure requirements of SFAS No. 123 are effective
as of the beginning of the Company's 1996 fiscal year. The Company does not
expect the new pronouncement to have an impact on its results of operations
since the intrinsic value-based method prescribed by APB Opinion No. 25 and
also allowed by SFAS No. 123 will continue to be used for the valuation of
stock-based compensation plans.
RESULTS OF OPERATIONS
Fiscal years Ended December 31, 1993, 1994 and 1995
Revenues in 1993 were $881,000. One customer accounted for 81% of 1993
revenues, which related to a prototype installation that demonstrated the
scalability of the Company's system from 100 standard cubic feet per minute
("scfm") to 6,500 scfm. Revenues grew from $881,000 in 1993 to $3.1 million in
1994, with four customers accounting for 29%, 21%, 20% and 11% of revenues.
This increase in revenues resulted from installations in the
19
<PAGE>
petroleum and chemical/petrochemical industries, and for soil and groundwater
remediation. Revenues grew from $3.1 million in 1994 to $6.5 million in 1995,
with two customers accounting for 41% and 18% of revenues. The increase in
revenues from 1994 to 1995 represented follow-on sales in the petroleum and
chemical/petrochemical industries and for soil and groundwater remediation as
well as systems installed in new industrial applications involving the
treatment of sulfonated and fluorinated compounds and PCB contaminated soil.
Cost of revenues in 1993 was $966,000, which primarily consisted of
applications engineering and development costs of the Company's prototype
installation to scale up the Company's system. Cost of revenues increased from
$966,000 in 1993 to $3.1 million in 1994. This increase is attributable
primarily to increases in the number and size of systems installed and in part
to applications engineering and development costs associated with building and
installing systems for new market applications. Cost of revenues increased
from $3.1 million in 1994 to $6.1 million in 1995. This increase is
attributable primarily to further increases in the number and size of systems
installed and in part to initial applications development and first-time
engineering for new applications dealing with sulfonated and fluorinated
compounds. In addition, the Company hired additional mechanical design,
process design and instrumentation and control engineers in anticipation of
increases in future business. As a result of training costs associated with
familiarizing these new hires with the Company's FTO technology, these
individuals were not fully engaged in revenue-producing projects during 1995,
which also contributed to the increase in cost of revenues.
Research and development expenses include applications engineering expenses
not chargeable to specific customer projects, as well as the cost of patent
activities. Research and development expenses increased from $483,000 in 1993
to $1.3 million in 1994, which primarily reflects prototype engineering and
development costs for dealing with sulfonated compounds and the Company's
efforts to increase the size of its systems to accommodate air flows of up to
15,000 scfm from 6,500 scfm. Research and development spending declined to
$1.1 million in 1995. This reduction reflects the Company's success in
developing collaborative efforts with its industrial customers, thereby
reducing its own independent expenditures for applications development.
Selling, general and administrative expenses increased from $2.1 million in
1993 to $4.5 million in 1994, primarily as a result of increases in the number
of sales and management personnel and costs associated with financing
activities, the opening of a London sales office in April 1994 and the
installation of a new accounting system to handle both commercial and
government contract accounting. Selling, general and administrative expenses
grew from $4.5 million in 1994 to $4.7 million in 1995.
Interest income and expense was not significant in 1993 and 1994. Interest
income was $231,000 in 1995 resulting from the investment of the net proceeds
of an equity private placement in November 1994.
Three Months Ended March 31, 1995 and 1996
Revenues increased from $549,000 in the three months ended March 31, 1995 to
$2.7 million in the three months ended March 31, 1996, with three customers
accounting for 29%, 13% and 13% of revenues. Revenues in the three months
ended March 31, 1996 resulted primarily from contracts with customers in the
chemical/petrochemical industry, continuation of a contract for application of
the Company's technology to fluorinated compounds, the first conversion of the
Company's system to metric standards for a European customer, completion of a
system for handling air streams containing hydrogen, the completion of a
transportable system for remediation applications and the Company's first
PADRE system sale. Initial work was also started on an application for the
treatment of VOCs from medical sterilization.
The contracts for fluorinated and hydrogen-bearing fume streams and the
first conversion to metric standards all represented initial development
efforts. Gross margins on these contracts were small due to first-time
engineering costs and the nature of the collaborative arrangements on these
initial applications. The improvement in gross margin from the three months
ended March 31, 1995 to the three months ended March 31, 1996 reflects repeat
sales of systems for established applications.
Research and development expenses decreased from $327,000 in the three
months ended March 31, 1995 to $138,000 in the three months ended March 31,
1996. The Company's research and development expenses in 1995 were primarily
attributable to significant independent investment by the Company in the
prototype design
20
<PAGE>
of a system to handle sulfonated compounds. The decrease in research and
development expenses from the three months ended March 31, 1995 to the three
months ended March 31, 1996 resulted primarily from the Company's ability to
develop more collaborative efforts with its industrial customers and a reduced
need for its own independent development expenditures.
Selling, general and administrative expenses increased from $1.1 million in
the three months ended March 31, 1995 to $1.3 million in the three months
ended March 31, 1996 primarily as a result of increased sales commissions
resulting from increased system sales. A majority of selling expenses relates
to bid and proposal activities relating to potential orders for future
periods.
Interest income of $97,000 in the three months ended March 31, 1995 was
earned on the net proceeds of an equity private placement in November 1994.
Net interest expense of $1,000 in the three months ended March 31, 1996
reflects interest income from much lower average cash balances than in the
same period in 1995 net of interest expense associated with commitment fees
for the Company's credit facility.
The Company's quarterly revenues and operating results have varied
significantly in the past and may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside the Company's
control. Such factors include general economic and industry conditions, the
size and timing of individual orders, the introduction of new products or
services by the Company or its competitors or the introduction of the
Company's products to new markets, changes in the levels of operating
expenses, including development costs, and the amount and timing of other
costs relating to the expansion of the Company's operations.
Furthermore, the purchase of the Company's products, particularly for major
projects, may involve a significant commitment of capital, with the attendant
delays frequently associated with large capital expenditures and authorization
procedures within its customers' organization. For these and other reasons,
the sales cycles for the Company's products are typically lengthy and subject
to a number of significant risks over which the Company has little or no
control, including customer budgetary constraints. The Company historically
has operated with little backlog because most customer orders are placed with
relatively short lead times, usually from four to twenty-four weeks.
Variations in the timing of recognition of specific revenues may adversely and
disproportionately affect the Company's operating results for a quarter
because the Company establishes its expenditure levels on the basis of
expected future revenues, and a significant portion of the Company's expenses
do not vary with current revenues. Accordingly, the Company believes that
period-to-period comparisons of results of operations are not necessarily
meaningful and should not be relied upon as indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Company's restructuring of its operations in 1992,
the Company raised $273,000 of cash and converted $2.8 million of outstanding
debt into a total of 1,035,129 shares of Series B Preferred Stock at $3.00 per
share. The cash raised in this financing was used to hire key individuals in
operations and build the first of the new systems directed towards VOC
treatment.
In April 1993, the Company sold 507,541 shares of Series C Preferred Stock
at $7.50 per share. The $3.8 million raised was used to undertake new
prototype development projects, hire key operations and management personnel
to build its infrastructure, fund the effort necessary to scale up the size of
its systems, and add the sales, bid and proposal and independent
representative network needed to move the Company toward full
commercialization of its systems.
In November 1994, the Company sold 1,614,284 shares of Series D Preferred
Stock at $7.50 per share to new and existing investors in exchange for cash
and conversion of debt for aggregate net proceeds of $11.3 million. The cash
raised was used for working capital, additional personnel in engineering and
project management, capital equipment and expenses to provide demonstrations
of the Company's systems for many new applications and continued expansion of
the Company's presence domestically and overseas.
In February 1996, the Company sold 284,594 additional shares of its Series D
Preferred Stock at $7.50 per share to existing investors for net cash of $2.1
million. At the same time, the Company entered into a loan and
21
<PAGE>
security agreement with Cupertino National Bank, which provides for either a
bridge financing of up to $3.0 million or a revolving line of credit in the
amount of $3.0 million. As of May 31, 1996, the Company had borrowed $1.0
million under the bridge facility at an interest rate of prime plus 2.5%
(approximately 10.75%). Borrowings under the bridge facility in excess of $1.5
million are subject to satisfactory evidence of a prospective equity
financing. Borrowings are secured by all of the Company's assets. Borrowings
under the line of credit in excess of $750,000 are limited to 80% of qualified
accounts receivable, primarily domestic receivables from commercial customers
which are less than 90 days old. See Note 10 of Notes to Consolidated
Financial Statements.
During 1993, 1994 and 1995, the Company used $2.4 million, $5.8 million and
$5.5 million, respectively, in operating activities and $178,000, $319,000 and
$528,000, respectively, for capital equipment and patent expenditures. The
Company anticipates it will continue to incur losses and will require
increased levels of working capital to finance any future growth. The Company
believes that the net proceeds of this offering, together with the
availability of its line of credit, will be sufficient to finance its working
capital and other capital requirements through 1997.
22
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
INTRODUCTION
Thermatrix Inc. is an environmental technology company engaged in the
development, manufacture and sale of innovative, proprietary industrial
process equipment for the destruction of volatile organic compounds and
hazardous air pollutants (collectively, "VOCs"). The core component of the
Company's technology is its proprietary flameless thermal oxidizer, which is
capable of treating virtually all VOCs while achieving destruction removal
efficiency ("DRE") of 99.99% or higher with de minimis formation of hazardous
by-products such as oxides of nitrogen ("NOX"), carbon monoxide ("CO") and
products of incomplete combustion ("PICs"). The Company sells its flameless
thermal oxidizer as a stand-alone unit or as an integrated system.
The Company seeks to expand the use and application of its proprietary
flameless thermal oxidation ("FTO") technology globally and to become a
leading supplier of VOC treatment systems. The Company has initially focused
on the industrial VOC market where it believes the Company's FTO system offers
the greatest economic and environmental advantages over competing VOC
treatment methods. These advantages include: (i) high DRE; (ii) de minimis
formation of hazardous by-products; (iii) low operating and maintenance costs;
(iv) product safety; (v) broad application to a wide range of VOCs, including
difficult-to-treat chlorinated, sulfonated and fluorinated compounds; (vi) the
ability to economically treat fume streams with variable flows and
concentrations; and (vii) high operating reliability.
VOCs are an unavoidable by-product of numerous manufacturing and process
industries worldwide and must be controlled due to serious health, safety and
environmental risks. The current global market for VOC control equipment
exceeds $2.0 billion and is estimated to grow at 10% per annum according to
McIlvaine & Co., a market analyst firm serving the air pollution control
industry. Conventional technologies for the treatment of industrial VOCs are
primarily flame-based destruction systems (such as incinerators), carbon
adsorption systems and scrubbing systems, most of which have been in use for
over thirty years.
The Company has achieved a number of significant milestones in
commercializing its technology, including: (i) establishing the application of
its proprietary FTO technology in the petroleum, chemical/petrochemical, pulp
and paper and pharmaceutical industries with "market leader" customers, and
for soil and groundwater remediation; (ii) selling more than 40 commercial-
scale systems; (iii) establishing a global sales and marketing organization;
and (iv) the receipt of regulatory approvals by the Company's customers for
the use of the Company's systems in the United States, Canada, England and
France. The Company's customers include: Chevron U.S.A. Inc., Dow Chemical
Company, Chesebrough-Pond's USA Co., Monsanto Company, FMC Corporation and
Zeneca, Ltd. as well as the United States Departments of Defense and Energy
(the "DOD" and the "DOE", respectively).
The Company's strategy in the industrial VOC market is to: (i) increase
market penetration for established applications; (ii) broaden application of
the Company's proprietary FTO technology for new industrial VOC applications;
and (iii) expand its international operations. In addition to its core
industrial VOC emissions control business, the Company has embarked on a
strategy of working with strategic partners to evaluate the feasibility of
applying the Company's FTO technology for other uses. The Company is presently
exploring the application of its FTO technology to the destruction of chemical
weapons, treatment of mixed radioactive wastes and control of diesel
emissions.
The Company is also pursuing a strategy to selectively acquire complementary
technologies in order to expand its presence in the VOC treatment market. In
October 1995, the Company acquired an exclusive license to the PADRE VOC
adsorption technology from Purus, Inc. and acquired all rights to the
technology in April 1996. The Company plans to sell PADRE units on a stand-
alone basis as well as in conjunction with Thermatrix systems.
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<PAGE>
MARKET OVERVIEW
VOCs are an unavoidable by-product of many manufacturing and process
industries worldwide and must be controlled due to significant health, safety
and environmental risks. The current global market for VOC control equipment
exceeds $2.0 billion and is estimated to grow at 10% per annum according to
McIlvaine & Co., a market analyst firm serving the air pollution control
industry. The primary conventional VOC treatment methods are flame-based
thermal oxidation, activated carbon adsorption and scrubbing systems, which
are installed in many industries, including petroleum, chemical/petrochemical,
pulp and paper and pharmaceuticals.
The health, safety and environmental risks presented by VOCs have led to
significant federal regulations, which are enforced by the Occupational Safety
and Health Administration ("OSHA"), the United States Environmental Protection
Agency ("EPA") and various state and local agencies. Noncompliance with these
regulations carries substantial civil and criminal penalties. The United
States Clean Air Act Amendments of 1990 (the "CAAA") significantly expanded
the scope of air pollution regulations established in the 1970s, and required
the reduction and control of a wide range of air pollutants, including 189
hazardous air pollutants ("HAPs"), most of which are VOCs. The CAAA also
addressed for the first time the reduction of NOX that, in combination with
VOCs, produce smog. The CAAA introduced new regulatory requirements and
timetables for the abatement of VOCs and NOX for most geographic areas that
become progressively more stringent through the year 2010.
The CAAA originally envisaged standards for regulatory compliance that would
be technology-specific. Current regulatory trends in the United States,
however, allow for performance-based mechanisms that provide economic
incentives to surpass compliance standards. One such mechanism currently in
effect involves the accumulation and banking of VOC emission credits obtained
by achieving performance beyond compliance standards. In addition, several
states are currently developing VOC emission credit trading programs. Since
the Company's FTO technology often exceeds regulatory requirements, the
Company believes that these programs create additional economic incentives to
select the Company's FTO technology over conventional treatment methods.
International demand for VOC control equipment is also rapidly growing.
While many European nations have comprehensive health, safety and
environmental regulations in force, certain Asian and Latin American nations
have only recently begun to recognize the need to more stringently control VOC
emissions. In addition, many multinational companies have recognized the
benefits of global health, safety and environmental standards and are
collaborating in the development of comprehensive future environmental
performance standards such as ISO 14000.
EXISTING TREATMENT METHODS FOR CONTROL OF VOCS
Established methods to control VOC emissions, most of which have been in use
for 30 years or more, can be broadly classified as destruction processes or
removal processes. These are generally mature technologies with multiple
suppliers and commodity pricing. These technologies generally achieve DRE
ranging from 90 to 99%. The major considerations in selecting industrial VOC
control systems are: safety; capital, operating and maintenance costs; ease of
permitting; process stream characteristics; unit location; and on-line
reliability.
Destruction Processes
Destruction processes typically employ various flame-based technologies
which are designed to convert VOCs into carbon dioxide, water vapor and, in
some cases, acid gases that can be neutralized. Flame-based technologies
include flares, fume incinerators, catalytic oxidation systems and
regenerative thermal oxidizers. The choice of the destruction process is based
upon the composition and concentration of VOCs in the fume stream, the
required DRE and other factors. Although most VOCs can be oxidized, the
process must be highly controlled to achieve high DRE and minimize the
formation of PICs and CO. The inherent higher temperatures of flame-based
devices also result in the formation of thermal NOX.
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For VOCs of intermittent flow streams and lower concentrations, supplemental
fuel frequently must be added to the flow stream to ensure combustion and
maintain the flame. This higher energy consumption increases the operating
cost of flame-based systems. In addition, many VOC emissions originate in
flammable areas where the risks of explosion or fire require that ignition
sources such as flames be prohibited. In these cases, flame-based systems must
be installed in areas that are remote from the source of the VOC emissions,
substantially increasing the cost of constructing and operating the system.
Moreover, state and local permits for the use of flame-based systems may be
difficult to obtain in areas where federal clean air standards have not been
met or where community sentiment is opposed to incineration.
Removal Processes
Removal processes concentrate rather than destroy VOC emissions. As a
result, the concentrated VOCs must be either reprocessed or disposed of in
some final form. The principal removal processes are adsorption and scrubbing.
Adsorption. In an adsorption process, the fume stream is passed through an
adsorbent bed where the VOCs are removed and retained by the adsorbent.
Eventually, the bed nears its collection capacity and must be regenerated or
replaced. If the adsorbent cannot be regenerated it must be disposed of, often
as a hazardous waste, which may result in potential environmental liability
for the owner-operator. Carbon adsorption is the most common non-flame method
of emission control. Safety concerns often dictate the use of adsorption in
place of flame-based destruction processes. Carbon can remove most VOCs, but
it is best suited for the heaviest organic compounds in low concentrations.
Carbon adsorption is least suited for chlorinated and sulfonated compounds and
where water vapor is present. While adsorption systems are often less costly
to install than competing technologies, the costs of regeneration and disposal
of the spent adsorbent can make the overall cost of the technology higher than
that of other alternatives.
Scrubbing. Scrubbing systems typically utilize water spray to remove VOCs
from a fume stream for collection in liquid form. The liquid effluent from the
scrubbing process is subsequently treated in another process. Scrubbing
systems will only remove VOCs that are soluble in the scrubbing medium and are
therefore, not suitable for all VOC streams.
THE THERMATRIX SYSTEM
The Thermatrix system is an innovative, proprietary FTO technology for the
destruction of VOCs. The Thermatrix oxidizer, shown below, is a highly
engineered, insulated vessel packed with ceramic material according to the
Company's proprietary matrix configuration.
At start-up, the FTO's ceramic matrix is preheated to between 1600 and
1800(degrees)F. Once the preheating has been completed, a VOC-laden fume
stream along with supplemental air or fuel (as and if needed) is introduced
into the oxidizer. The fume stream first passes through a mixing zone, which
ensures complete mixing of the VOCs and air or fuel, then through the reaction
zone of pre-heated ceramic material where complete flameless oxidation occurs
in a fraction of a second. The oxidation process releases heat that is
absorbed and conserved by the ceramic matrix, which helps maintain the
temperature of the system without the need for significant supplemental fuel.
Sophisticated process controls monitor the temperature level within the
oxidizer and adjust the supplemental fuel levels in the fume stream to
maintain consistent oxidation temperatures between 1600 and 1800(degrees)F.
Due to its flameless design and consistent temperature profile, the Company's
FTO system achieves high DRE with de minimis formation of NOX and CO.
Depending upon the customer application and operating requirements, the
Company's FTO system can be designed to use natural gas or electricity to pre-
heat the system. In addition, the Company's FTO system can be configured as a
straight-through system, or in cases where the energy content of the fume
stream is low, it can be configured to include an internal heat recovery
process.
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[GRAPHIC]
The Thermatrix technology has the following attributes, which individually
or in combination provide direct and indirect cost advantages over competing
VOC treatment methods:
High DRE. The Thermatrix system consistently achieves DRE of 99.99% or
higher, which exceeds the DRE achieved by competing technologies. The high DRE
of the Thermatrix system makes it particularly useful in applications
involving the most toxic and complex VOCs.
De minimis By-products. The absence of a flame minimizes the formation of
by-products generated by flame-based systems, including NOX, CO and PICs. The
Company's FTO technology typically achieves thermal NOX levels not exceeding
two parts per million volume ("ppmv") with de minimis PIC and CO formation.
Energy Efficiency. The Company's FTO system is energy efficient because its
ceramic matrix absorbs and utilizes the energy generated by the oxidation
process enabling the system to maintain the required temperature level for the
destruction of VOCs without significant supplemental fuel. As a result, the
Company's FTO system can operate effectively on VOC fume streams of moderate
to high concentrations with less than 1% of the energy typically required for
flame-based systems, and on VOC fume streams of low concentrations with less
than 30% of the energy typically required for flame-based systems.
Safety. The Thermatrix system is certified for use in highly flammable
environments where conventional flame-based systems are prohibited. Since the
Company's system can be located at the source of VOC emissions, it eliminates
the cost of piping the emissions to remote treatment sites. Destruction at the
VOC emission source also provides a safer and healthier working environment.
Flexibility. The Thermatrix system can process a broad range of VOCs,
including difficult-to-treat compounds and those with variable flows and
concentrations. This attribute is particularly desirable in industries
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such as pharmaceutical manufacturing that utilize batch processing. The
Company's FTO system can typically operate effectively down to 5% of the
design fume flow, whereas flame-based systems generally do not tolerate such
wide process fluctuations and would likely flame out under similar conditions.
Reliability. The Thermatrix oxidizer is highly reliable because it operates
within wide tolerance limits, is fully automatic, has no moving parts, no
catalysts and requires little off-line maintenance. Since it is also fully
automated, operating costs are minimal. On-line reliability is critical
because regulatory permits generally require a production line to be shut down
if the emission control device fails.
Regulatory Advantages. The Company's systems surpass regulatory performance
requirements because of the high DRE and the de minimis formation of by-
products. The Company's customers have received permits for use of the
Company's FTO system in more than a dozen states, including California, New
Jersey and Texas as well as in Canada, England and France. In addition,
current regulations allow companies to accrue and bank emission credits, which
can be used to offset future mandatory emission reductions. Since the
Company's FTO technology often exceeds regulatory requirements, its customers
are able to earn emission credits and capitalize on these regulations.
Scalability. The Thermatrix technology can be applied cost-effectively to
waste stream flows ranging from one scfm to 15,000 scfm in a single unit.
Larger flows can be treated by installing multiple units with no loss of
efficiency. This scalability allows the same technology and product design to
be standardized over a broad range of flows.
STRATEGY
The Company seeks to expand the use and application of its proprietary FTO
technology globally and to become a leading supplier of VOC treatment systems.
The Company's strategy in the industrial VOC market is to: (i) increase market
penetration for established applications; (ii) broaden application of the
Company's technology in the industrial VOC market; and (iii) expand its
international operations. In addition, the Company seeks to establish new
market applications for its FTO technology and to selectively acquire
complementary technologies in order to expand its presence in the VOC
treatment market. Key elements of the Company's strategy are as follows:
Increase Market Penetration for Established Applications. Since 1992, the
Company has worked with "market leaders" in targeted industrial segments to
demonstrate that the Thermatrix system can effectively and economically
control VOCs in various industrial applications. Thermatrix systems have now
been successfully installed in the petroleum, chemical/petrochemical, and pulp
and paper industries, and for soil and groundwater remediation at facilities
operated by customers such as Chevron U.S.A. Inc., Dow Chemical Company, FMC
Corporation and Monsanto Company, as well as facilities operated by the DOD
and DOE. Many of these customers have already purchased multiple units. The
Company is using these reference accounts to promote follow-on sales to the
same customers and to expand sales within these industries.
Broaden Application of the Company's Technology in the Industrial VOC
Market. The Company is continuing to identify new strategic customers within
industrial VOC applications not currently served by the Company. For example,
the Company is supplying a system designed to control VOC emissions in a
medical sterilization facility operated by Sorex Medical.
Expand International Operations. The Company believes that its installed
base and proven applications provide a solid foundation for sales and
marketing in both the United States and overseas. In 1994, the Company opened
an office in London and recently has established distribution relationships in
Germany, Japan and Taiwan.
Establish New Market Applications. In addition to the market for industrial
VOC controls, the Company believes that its innovative FTO technology may have
a competitive advantage in a number of markets. The Company has embarked upon
joint development programs with leading organizations to explore the
application of the Company's FTO technology to the destruction of chemical
weapons, treatment of radioactive mixed
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wastes and control of diesel emissions. See "--Potential Applications Under
Development." There can be no assurance as to the timely completion or the
results of these joint development programs. The Company is also currently
considering opportunities to provide "own-and-operate services" in addition to
the outright sale of equipment in these new market applications.
Selectively Acquire Complementary Technologies. The Company seeks to expand
its technology portfolio through joint ventures and selective acquisitions. In
October 1995, the Company licensed from Purus, Inc. a VOC adsorption
technology known as PADRE, and in April 1996, the Company acquired all rights
to the PADRE technology. The PADRE technology is a recovery technology using a
regenerative synthetic adsorption resin to capture and recover very low
concentration VOCs from low to medium flow vapor streams. In addition to
stand-alone sales of PADRE units, the Company believes the PADRE technology
can be combined with the Company's technology in an integrated system where
the customer requires destruction rather than recovery of the captured VOCs.
CURRENT THERMATRIX INDUSTRIAL VOC APPLICATIONS
The Company has identified industries which are large generators of VOCs and
where it believes its FTO technology provides significant competitive
advantages over existing treatment methods. The Company has sought acceptance
of its systems in each of its initial target markets through the utilization
of "market leader" customers. To date, the Company has sold over 40 systems
across a range of industries including petroleum, chemical/petrochemical,
pharmaceutical, pulp and paper manufacturing, medical sterilization and for
soil and groundwater remediation. The following table sets forth the Company's
target markets, representative customers and the types of VOCs treated by its
systems:
<TABLE>
<CAPTION>
Target Markets Representative Customer VOCs Treated
- ----------------------------- ------------------------------ ----------------------------
<S> <C> <C>
Petroleum/Refining Chevron, Tosco Hydrocarbons
Chemical/Petrochemical Dow Chemical, Monsanto, Chlorinated and
Manufacturing FMC, Mobil Chemical Fluorinated Compounds
Pharmaceuticals Manufacturing Zeneca, Chesebrough-Pond's USA Chlorinated Compounds
Pulp and Paper Manufacturing Georgia Pacific Sulfonated Compounds
Medical Sterilization Sorex Medical Ethylene Oxide
Soil and Groundwater DOD, DOE, Thermo Remediation, Chlorinated Compounds and
Remediation Envirogreen Hydrocarbons
</TABLE>
Petroleum. The petroleum industry is a large generator of VOCs. These VOCs
are released into the environment from a multitude of sources, including
marine terminals, unit process operations and fugitive emissions from hundreds
of small sources (for example, pumps and valves). Petroleum refineries also
generate significant volumes of oily waste water across their various
processes. Recent regulations regarding benzene in waste water have resulted
in mandates to achieve acceptable emission levels for control devices used to
process any vapor phase emissions from oil/water separation. These processing
units are often located in flammable areas and require all adjacent process
equipment to be certified for operation in flammable areas.
The primary advantages of the Company's technology as applied to the
petroleum industry include its high DRE, which minimizes the need for
secondary hazardous waste disposal and may enable customers to receive
regulatory emission credits, and the ability to treat VOC emissions at their
source in flammable environments. The Company has sold 15 units to refining
customers, including those owned by Chevron U.S.A., Inc. and Tosco Refining
Company.
Chemical/Petrochemical. The chemical/petrochemical industries are two of the
largest generators of complex VOCs, including those containing chlorinated,
fluorinated and sulfonated compounds. Thousands of industrial facilities
within these industries manufacture a wide range of organic chemicals,
including plastics,
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paints, solvents, pesticides and fertilizers. Most conventional VOC treatment
methods have limited ability to treat these complex organic compounds.
The Company believes that its technology is particularly well-suited for the
treatment of certain hydrocarbons and other hard-to-treat VOCs given its
ability to deliver high DRE with de minimis formation of by-products such as
NOX, CO and PICs. Further, the Company's FTO systems are designed to withstand
corrosive by-products, which may contaminate catalytic destruction systems and
shorten the lives of other treatment systems. The Company has sold 14 units to
chemical and petrochemical customers, including Dow Chemical Company, FMC
Corporation and Monsanto Company.
Pharmaceuticals. The pharmaceutical industry uses large volumes of
chlorinated hydrocarbons in the manufacture of pharmaceuticals, including drug
intermediates, and personal care products. The industry typically utilizes
batch processes employing a broad range of compounds within the same
manufacturing facility. Due to the highly toxic properties of many of the
elements used in the pharmaceutical manufacturing process, these firms demand
reliable systems with the ability to handle a wide variety of toxic waste
streams in varying flows and concentrations.
The primary advantages of the Company's technology as applied to the
pharmaceutical industry are its high DRE, on-line reliability and ability to
deal safely with a variety of compounds. In addition, the Company believes
that its presence in the international market through its United Kingdom
operations will enable the Company to increase its penetration into the
increasingly global pharmaceutical industry. The Company is currently
fabricating a system for Chesebrough-Pond's USA Co. in the United States and
has completed testing and engineering for several systems for Zeneca, Ltd. in
Europe.
Pulp and Paper. Paper production uses the kraft process, which generates
VOCs from the cooking liquor used to dissolve the organic binder material in
wood chips. The economics of the kraft process require recovery and reuse of
the spent cooking chemicals and recovery of the heat content of the
concentrated spent liquor. This chemical and energy recovery is typically
accomplished through combustion, which generates large volumes of flue gases
containing significant concentrations of malodorous sulfonated compounds.
Working with a pulp and paper mill, the Company has developed an application
for its technology which has been demonstrated to be more effective than
conventional methods in removing these sulfonated compounds and reducing the
unpleasant odor often associated with the kraft process.
Medical Sterilization. Ethylene oxide is a highly potent fumigant used by
commercial sterilization facilities and hospitals to sterilize medical
devices. Since the off-gas from these sterilization facilities is extremely
toxic and flammable, it demands a treatment system with a high DRE. There are
currently over 100 such sterilization facilities across the United States that
will be required to install abatement systems within the next few years.
The primary advantages of the Thermatrix technology as applied to the
medical sterilization industry include its flameless nature and high DRE.
Sorex Medical, a large contract sterilizer, selected the Thermatrix system
because of its inherent safety, low capital and maintenance costs, high DRE
and on-line reliability when compared with the traditional treatment methods,
catalytic oxidation and wet scrubbers. The Company is scheduled to install its
first system in the medical sterilization industry for Sorex Medical in 1996.
Soil and Groundwater Remediation. The soil and groundwater remediation
market continues to seek proven, low cost, expedient solutions. The Company
has sold eight units for soil and groundwater remediation, including units in
facilities owned by DOD, DOE, Thermo Remediation Inc., Envirogreen
Technologies, Ltd., and a unit in association with an in-situ thermal
desorption technology for a PCB contaminated site. The DOE conducted an
independent demonstration to compare the performance of flame-based
destruction systems, catalytic oxidizers and the Company's FTO technology. The
results of the demonstration showed that, for the fume streams demonstrated,
the life cycle cost of the Company's technology was less than one-third that
of the
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other technologies and that the Company's system achieved significantly higher
DRE. The DOD has also conducted a similar demonstration at McClellan Air Force
Base in Sacramento, California with similar results.
POTENTIAL APPLICATIONS UNDER DEVELOPMENT
In addition to its core industrial VOC emissions control business, the
Company has embarked on a strategy of working with strategic partners to
evaluate the feasibility of applying the Company's FTO technology for other
uses. In collaboration with strategic partners, the Company will begin tests
in 1996 involving chemical weapons destruction, radioactive mixed waste
treatment and diesel emission control.
Chemical Demilitarization. Chemical demilitarization refers to the safe
disassembly and destruction of stockpiled chemical warfare agents. Government
programs are currently underway in both the United States and overseas to
develop techniques to safely destroy chemical warfare agents such as mustard
gas and nerve agents. The chemical makeup of many of these agents,
particularly mustard gas, is similar to compounds that the Company is
currently destroying in the commercial industrial market. The Company has
recently entered into a demonstration agreement with the United Kingdom's
Chemical and Biological Defence Establishment ("CBDE") at Porton Down in
England. The Company will supply a demonstration system to be installed in a
specially modified structure to allow for the safe processing of actual
agents. The testing will initially involve mustard gas and will be followed by
the testing of nerve agents. The operation, testing and validation will be
conducted by the CBDE.
Radioactive Mixed Wastes. Mixed wastes are comprised of radioactive wastes
and organic chemical wastes. The treatment objective is to remove and destroy
the organic materials in order to reduce the waste volume and then to
encapsulate, vitrify or stabilize the radioactive components for final
disposal or storage.
In January 1996, the Company entered into an agreement with ThermoChem Inc.
to demonstrate jointly and commercialize their combined technologies for the
treatment of mixed wastes. ThermoChem Inc. has developed and commercialized a
proprietary thermal processing technique, referred to as fluidized bed steam
reforming. The combined Thermatrix-ThermoChem system is designed to remove
organics from the radioactive components, destroy the then volatilized
organics through the Company's FTO system and produce a radioactive char which
can then be encapsulated, vitrified, stabilized or placed in a high integrity
container for final storage or disposal. The Company believes the combined
system may significantly reduce the volume of waste requiring final treatment
or disposal. A prototype Thermatrix-ThermoChem system is currently being
constructed under a contract with the DOE to process a number of non-
radioactive surrogate mixed wastes.
Additionally, the Company has installed a test unit at a DOE facility in
Butte, Montana, operated by Mountain States Energy. The unit is being tested
on non-radioactive mixed waste surrogates for possible use in treating off-
gases generated by a centrifugal plasma arc furnace.
Diesel Emission Control. The fume and soot emissions from static and mobile
diesel engines create a serious environmental problem for which there is no
cost-effective solution. The Company is collaborating with a leading supplier
of automotive and aerospace components to test the feasibility of the
Company's FTO system to treat diesel emissions and is installing a prototype
at the collaborator's research facility.
The engineering challenges involved in treating chemical warfare agents,
mixed wastes and diesel emissions are different in a number of respects from
the conditions in which the Thermatrix system has been used in the past, and
there can be no assurance that the Thermatrix technology will prove successful
in any of these new applications. If early tests of any of these new
applications are positive, the Company may need to engage in extensive and
costly applications development and engineering in order to commercialize its
system for such use, and there can be no assurance as to the success of any
such effort.
SALES AND MARKETING
The Company has established a network of independent commissioned sales
representatives. The Company currently has agreements with 16 representative
organizations with over 50 sales agents selling the Company's
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FTO system throughout the United States and Canada. The representative
organization network was established to introduce the technology by utilizing
the long-standing relationship and selling experience of the independent
representatives with the Company's target customer base.
All independent representatives are paid solely on commission, which is
calculated on a sliding scale as a percentage of sales revenues. The
representative organization is established geographically and is managed by
four in-house Regional Sales Directors. These regional sales directors hold
science or engineering degrees and have an average of 15 years of industrial
selling experience. Responsibility for pricing and terms and conditions is
retained by the Company. Regional sales offices are located in: Naperville,
Illinois; Mt. Laurel, New Jersey; Houston, Texas; and Lakewood, Colorado.
Sales to government agencies are handled directly by the Company.
In order to manage the growing global interest in the technology, the
Company established a London office in 1994, which employs four people and
handles sales and technical support directly for the European market. In 1995,
the Company entered into a representative/manufacturing agreement with
Rotamill GmbH for Germany, and with ICI Taiwan and ICI Japan for sales
representation in Taiwan and Japan, respectively.
The Company currently offers a money-back guarantee to certain of its
customers if the Company's FTO system fails to meet its performance criteria
on start-up. The Company also provides a standard one-year equipment warranty.
The Company believes its money-back guarantee is unique in the industry. To
date, all installations have met or exceeded performance specifications, and
no money-back guarantees have been sought.
RESEARCH AND DEVELOPMENT
Fundamental research and development of the Company's FTO technology began
as part of a research program conducted by the DOE to find ways to extract
energy from oil shale. Research in the technology has been conducted by the
DOE at the Lawrence Livermore National Laboratory and subsequently by the
Company over a twelve-year period. Since 1992, the Company's research and
development has focused exclusively on the development of applications for its
FTO technology as a thermal destruction process for the treatment of VOCs.
The research and development group consists of three technical program
managers led by Dr. Richard J. Martin, Director of Technology and one of the
key developers of the technology. The group has two primary missions: (i) to
optimize the Company's technology for new applications in the industrial VOC
control market, and (ii) to support the technology development for new market
applications such as chemical demilitarization, mixed waste treatment and
diesel emission control. When areas of specialized expertise are required,
such as advanced metallurgy, the Company relies on consulting and
collaboration relationships with S.R.I. International and the M.W. Kellogg
Company Technology Development Center.
The Company maintains six transportable demonstration units that are
deployed around the world to demonstrate and optimize the technology on actual
VOC fume conditions.
INTELLECTUAL PROPERTY
As of April 12, 1996, the Company owned four United States and six
international patents, had received notice of allowance for one additional
United States patent application, and had an additional seven United States
and 32 international patent applications pending relating to its thermal
treatment technology. All issued patents expire during the period between July
31, 2005 and July 5, 2011. The Company has granted no licenses of its patents.
The Company's four issued and allowed United States patents include several
hundred claims of varying scope relating to many of the Company's inventive
methods and apparatuses. These patents cover fundamental aspects of flameless
thermal oxidation that are the bases of the Company's technology and their
application. Aspects of the technology, including the use and maintenance of a
"flameless reaction wave" of gases or vapors in a matrix of heat resistant
materials, are covered under a variety of claiming formats.
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The patent claims address applications of various fundamental physical
phenomena, such as the use of inner-body surface radiation to establish and
stabilize a flameless reaction wave and the use of radiatively-coupled fins to
augment recuperative heat transfer, as well as various subsidiary aspects and
resulting benefits of the technology. These include, among other things,
achieving high DRE and low by-product emissions, achieving uniformity of
flows, temperatures, and velocities within the apparatus, and treatment of
widely variable feed mixtures. The patents also claim in various manners key
configuration details, including preferred matrix materials and their
placement, a range of equipment geometries, flow orientations, and preheating
methods, as well as provisions for internal heat recovery tubes, embedded
tubes for process fluid heating, and catalytically active matrix materials.
The scope of coverage, if any, allowed to claims in any given patent
application can significantly change during prosecution of the patent
application. Even after a patent has been issued, the scope of the issued
claims can be limited or changed in subsequent proceedings. Consequently,
there can be no assurance that any patents from pending patent applications or
from any future patent application will be issued, that the scope of any
patent protection will exclude competitors or provide competitive advantages
to the Company, that any of the Company's patents will be held valid if
subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Since patent
applications are secret until patents are issued in the United States or
corresponding applications are published in international countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or
that it was the first to file patent applications for such inventions. In
addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Further, the
laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.
Litigation or regulatory proceedings, which could result in substantial cost
and uncertainty to the Company, may also be necessary to enforce patent or
other intellectual property rights of the Company or to determine the scope
and validity of other parties' proprietary rights. There can be no assurance
that the Company will have the financial resources to defend its patents from
infringement or claims of invalidity. It is possible the Company may need to
acquire licenses to, or contest the validity of, issued or pending patents of
third parties relating to the Company's technology. There can be no assurance
that any of such licenses would be made available to the Company on acceptable
terms, if at all, or that if the Company were to contest the validity of any
issued or pending patents, it would prevail.
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. The confidentiality
and proprietary information agreements generally provide that all confidential
information developed or made known to individuals by the Company during the
course of the relationship with the Company is to be kept confidential and not
disclosed to third parties, except in specific circumstances. The agreements
also generally provide that all inventions conceived by the individual in the
course of rendering services to the Company shall be the exclusive property of
the Company. There can be no assurance that proprietary information or
confidentiality agreements with employees, consultants and others will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or
independently developed by competitors.
In addition to the foregoing patents and patent applications, the Company
has one issued United States trademark, has received notice of allowance for
one additional United States trademark and has an additional four United
States and international trademark applications pending for certain of the
Company's tradenames and other intellectual property.
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ENGINEERING AND MANUFACTURING
The Company's engineering and manufacturing operations are based in
Knoxville, Tennessee and are organized under a comprehensive project
management system, including project costing, process design and engineering,
procurement, system assembly, pre-testing, installation and commissioning. The
engineering and manufacturing group is staffed by experienced engineers and
project managers and is managed by Alexander G. Baldwin, Vice President of
Engineering and Operations.
The Company has focused on modularizing and standardizing components of its
technology and utilizes sophisticated software to integrate these components
into comprehensive air pollution control systems. This systems integration
expertise allows the Company to provide comprehensive systems centered around
the Company's FTO technology. The engineers utilize state-of-the-art, PC-
based, computer-aided engineering and database management tools, including
three-dimensional design tools. The Company believes this approach to
automating the design process drives down costs by: (i) optimizing the
engineering work effort and allowing ready access to the growing inventory of
standardized design data; (ii) contributing significantly to accuracy,
completeness and efficiency in the manufacturing continuum (design--
procurement--fabrication--assembly); (iii) shortening the Company's product
delivery cycle; and (iv) facilitating the handling of design data between the
Company, its subcontractors and its clients.
The systems are typically assembled, wired and tested prior to delivery and
installation. The Company manufactures its systems to customer order.
Component fabrication is carried out using qualified subcontractors
specializing in the manufacture of the particular component. These specialized
subcontractors adhere to and carry formal certification with national and
international codes and standards such as those of the American Society of
Mechanical Engineers (ASME). The Company's subcontractors have been selected
to allow the Company to expand its capacity to manufacture additional systems
while minimizing the Company's investment in fixed costs. The Company uses
qualified subcontractors throughout the United States and overseas and is not
dependent on any one or subset of these subcontractors.
In the fabrication process, no one subcontractor is exposed to the entire
technology package and final assembly of the systems is completed directly by
the Company or a separate subcontractor. Throughout the delivery cycle, the
manufacturing process is managed to conform with ISO 9000.
During the period that the technology was developed, an extensive empirical
database of performance characteristics for waste flows of different volumes
and compositions was compiled. The Company has used this database to develop a
proprietary, software-based design tool. In the design process, the software
tools analyze the characteristics of the customer's fume flow and determine
the optimal system configuration and size. Not only does this process specify
the correct system characteristics, but it automates the task of generating
budget proposals. The Company is continuing to expand this database as new
systems are installed.
COMPETITION
The industrial VOC control equipment market is mature and highly fragmented
among a large number of competitors, none of whom have a significant industry-
wide market share. The Company currently competes primarily with suppliers of
flame-based thermal oxidation systems, carbon adsorption systems and scrubbing
systems. Within each of these categories, the technologies are generally
undifferentiated and characterized by commodity pricing. Most competitors
supply either flame-based thermal destruction devices or adsorbtion/removal
systems, but not both. Since many of these technologies have been in use for
over thirty years, they have certain advantages. These technologies are
familiar and predictable to companies requiring VOC controls and to
regulators, and are available from and promoted by a large number of
suppliers. Many of the Company's competitors have substantially greater
financial resources, operating experience and market presence
than the Company. There can be no assurance that the Company's existing
competitors or new market entrants will not develop new technologies or
modifications to existing technologies that are superior to or more cost-
effective than the Company's FTO technology. In addition, increased
competition could result in price reductions and reduced gross margins and
could limit the Company's market share.
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The Company believes that the major considerations in selecting industrial
VOC control systems are: safety; capital, operating and maintenance costs;
ease of permitting; process stream characteristics; unit location; and on-line
reliability. The Company believes it competes favorably with respect to these
factors.
ENVIRONMENTAL MATTERS
The United States Clean Air Act Amendments of 1990 (the "CAAA")
significantly expanded the scope of air pollution regulations established in
the 1970s, and required the reduction and control of a wide range of air
pollutants, including 189 hazardous air pollutants, most of which are VOCs.
The CAAA also addressed for the first time the reduction of NOX that, in
combination with VOCs, produce smog. The CAAA introduced new regulatory
requirements and timetables for the abatement of VOCs and NOX for most
geographic areas that become progressively more stringent through the year
2010. Specifically, Title I and Title III of the CAAA address emissions of
VOCs. Principal provisions of these titles are discussed below.
Title I establishes requirements for attaining and maintaining national
ambient air quality standards ("NAAQS"). Key provisions of Title I are aimed
at bringing cities and other areas which are not in attainment in line with
NAAQS in most areas by the year 2000 and all cities by 2010. In addition,
measures for all regions require the application of technological controls to
reduce emissions of ozone precursors, such as VOCs, from a broad range of
industrial activities, including consumer solvents and coatings, hazardous
waste treatment storage and disposal facilities, solid waste landfills and
marine terminal loading and unloading.
Title III establishes a new program for the regulation of toxic air
pollutants. The combined federal and state program provided for in the
legislation creates a comprehensive and coordinated nationwide effort to deal
with these pollutants. Title III specifically lists 189 substances as
hazardous air pollutants, of which most are VOCs. Title III defines three
significant programs that will require substantial pollution control
expenditures by industry across the nation: (i) control of routine releases
of air toxins from major industrial and commercial sources; (ii) control of
air toxic releases from area sources, primarily in urban areas; and (iii)
control of accidental releases of air toxins from industrial and commercial
sources. To reduce emissions of the 189 listed toxic hazardous air pollutants,
the application of the maximum achievable control technology at major air
emitting sources may be required.
The Pollution Prevention Act of 1990 establishes pollution prevention as a
national objective, naming it a primary goal wherever feasible. According to
this Act, where pollution cannot be prevented, materials should be recycled,
reduced or minimized in an environmentally sound manner.
CERCLA and SARA (the "Superfund" laws) provide for the investigation and
remediation of hazardous waste sites. Under the Superfund laws, parties who
own or operate sites or facilities contaminated by hazardous substances, who
have generated hazardous materials or who have arranged for the transportation
or disposal of hazardous substances may be subject to strict, joint and
several liability for the investigation and remediation of contamination
associated with those hazardous substances. Currently, the EPA is developing
guidelines that will describe a set of presumptive remedies to remediate a
variety of these sites. Soil vapor extraction is considered to be a remedy of
choice for a number of contaminants. Both the Thermatrix FTO technology and
the PADRE technology are well-suited for this application.
Although the Company does not believe that its activities would directly
expose it to liabilities under local, state or federal environmental laws and
regulations, if the Company were to improperly design, manufacture or test its
systems or fail to properly train its customer's employees in the operation of
the systems, it could be exposed to possible liability for investigation and
clean-up costs under such environmental laws. The Company generally conducts
performance tests on its systems at its customers' facilities. However, in the
future the Company may perform prototype testing in its own facilities. If
such testing were to involve hazardous substances, it could subject the
Company to liability under environmental laws and regulations.
In addition, the Company is potentially liable for damages suffered by its
customers or others under environmental laws and regulations, indemnification
provisions of certain contracts with customers, or various
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tort or contract law theories in the event that there are liabilities arising
from failure or malfunction or the design, construction or operation of any of
the Thermatrix systems and products. The Company's general liability insurance
is subject to coverage limits and generally excludes coverage for losses or
liabilities relating to or arising out of environmental damage or pollution.
The Company's business, results of operations and financial condition could be
materially adversely affected by an uninsured or partially insured claim.
The Company works with regulatory agencies both domestically and overseas to
inform these agencies about the Company's FTO technology in order to
facilitate the permitting process for its customers. In England, Her Majesty's
Inspectorate of Pollution has issued Technical Note ITN/IPCX/02 identifying
the flameless oxidation process benefits of high destruction (greater than
99.99%) and low formation of NOX and CO. The Company's FTO system was selected
for inclusion in the Texas Natural Resource Conservation Commission list of
innovative environmental technologies. Thermatrix is currently under review
for certification by the California Environmental Protection Agency ("CalEPA")
as a flameless thermal destruction technology. The CalEPA program is closed to
incineration technologies.
EMPLOYEES
As of December 31, 1995, the Company had 45 full-time employees, ten of whom
hold advanced degrees. The Company believes that it has been successful in
attracting experienced and capable engineering, operations and management
personnel. None of the Company's employees is covered by collective bargaining
agreements.
FACILITIES
The Company leases approximately 5,000 square feet of office space in San
Jose, California under a three-year lease with a two-year renewal option,
which the Company uses as its research and development, bid and proposal and
corporate administrative offices. The Company has a remaining three-year lease
for approximately 6,000 square feet of office space in Knoxville, Tennessee
which it primarily uses for project engineering, project management and
accounting offices and a 12-month lease for an approximately 10,000 square
foot assembly facility.
In addition to the two primary facilities above, the Company leases sales
offices in: Houston, Texas; Naperville, Illinois; and Mt. Laurel, New Jersey
under one-year leases which are generally renewable, and an office in
Rockville, Maryland under a month-to-month lease. The Company also leases
approximately 1,000 square feet of office space in London, England under a
five-year lease, which it uses for sales and project engineering. The Company
anticipates leasing additional office space in Knoxville, Tennessee in 1996.
35
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages and
positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John T. Schofield....... 58 Chairman, President and Chief Executive Officer
A. Judson Hill.......... 41 Executive Vice President, Corporate Development
David R. Wright......... 57 Executive Vice President, Europe
Alexander G. Baldwin.... 43 Vice President, Engineering and Operations
Steven J. Guerrettaz.... 50 Vice President, Finance and Accounting and Chief Financial Officer
Howard M. Hohl.......... 41 Vice President, North American Sales
Barbara E. Krimsky...... 35 Vice President, Administration and Secretary
Robi Blumenstein(1)..... 39 Director
Harry J. Healer......... 55 Director
Rebecca P. Mark......... 41 Director
Robert W. Page(1)....... 69 Director
Frank R. Pope(2)........ 46 Director
John M. Toups(2)........ 70 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
John T. Schofield. Mr. Schofield has been President and Chief Executive
Officer of the Company since April 1992, and Chairman of the Board since
December 1993. From March 1995 to April 1996, Mr. Schofield served as the
Company's Chief Financial Officer. From April 1981 to September 1991, Mr.
Schofield served in various executive positions at International Technology
Corporation, an environmental management company, where he directed technical
services, business activities, strategic planning and development. Mr.
Schofield holds a BSc Honours in Chemistry from the University of Manchester,
England.
A. Judson Hill. Mr. Hill has been Executive Vice President, Corporate
Development of the Company since February 1996. From March 1994 to February
1996, Mr. Hill served as the Company's Executive Vice President, Corporate.
From August 1990 to March 1994, Mr. Hill was President of Florida First
Processing Inc., an environmental services company and a subsidiary of
Westinghouse Electric Corporation. Mr. Hill holds B.S. degrees in Biology,
Chemistry and Engineering and an M.S. in Environmental Engineering from the
University of Pittsburgh.
David R. Wright. Mr. Wright has been Executive Vice President, Europe of the
Company since March 1994. From February 1993 to November 1993, Mr. Wright was
a consultant to Waste Management International, plc, a waste management
company. From January 1989 to February 1993, Mr. Wright served in various
executive positions at International Technology Corporation Europe, plc, a
subsidiary of International Technology Corporation. Mr. Wright trained as an
electrical controls engineer at High Wycombe College of Technology, England.
Alexander G. Baldwin. Mr. Baldwin joined the Company in July 1992 as
Director of Operations and in November 1993 was appointed Vice President,
Engineering and Operations. From July 1990 through June 1992, Mr. Baldwin was
Director of Projects in the Pollution Control Systems Division of
International Technology Corporation. Mr. Baldwin holds a B.S. and an M.S. in
Civil Engineering from the University of California at Berkeley.
Steven J. Guerrettaz. Mr. Guerrettaz joined the Company in May 1994 as
Corporate Controller. In April 1995, Mr. Guerrettaz was appointed Vice
President, Finance and Accounting and in April 1996 was appointed Chief
Financial Officer. From October 1988 to August 1993, Mr. Guerrettaz was a Vice
President of Chemical
36
<PAGE>
Waste Management, Inc. a hazardous waste management company. Mr. Guerrettaz
holds a B.S. in Accounting from San Jose State University.
Howard M. Hohl. Mr. Hohl joined the Company in June 1994 as Regional Sales
Director and in April 1996 was appointed Vice President, North American Sales.
From October 1991 to May 1994, Mr. Hohl was Director of Sales and Market
Development for Celgene Corporation, a biotechnology company. Mr. Hohl holds a
B.S. in Civil and Environmental Engineering from the University of Wisconsin-
Madison and an M.B.A. from the University of Akron.
Barbara E. Krimsky. Ms. Krimsky has been Vice President, Administration of
the Company since November 1993. In April 1996, Ms. Krimsky was appointed
Secretary of the Corporation. From February 1990 through October 1993, Ms.
Krimsky was the Director, Contracts Management for Quotron Systems, Inc., a
financial information services company. Ms. Krimsky holds a B.A. in Economics
and Computer Science from Duke University and an M.M. from Northwestern
University's Kellogg Graduate School of Management.
Robi Blumenstein. Mr. Blumenstein has been a Director of the Company since
November 1994. Mr. Blumenstein has been with CIBC Wood Gundy Capital, the
merchant banking division of the Canadian Imperial Bank of Commerce, since
January 1994, most recently as a Managing Director. From May 1992 to December
1993, Mr. Blumenstein was a principal of Hadley & Baxendale, Limited, an
investment and advisory firm. Mr. Blumenstein holds a B.A. and an LL.B. from
the University of Toronto and an M.B.A. from Harvard Business School.
Harry J. Healer. Mr. Healer has been a Director of the Company since
September 1989. Mr. Healer has been a general partner of the Venture Capital
Fund of New England, a venture capital investment firm, since its inception in
January 1981. Mr. Healer holds a B.S. in Business Administration from Babson
College.
Rebecca P. Mark. Ms. Mark has been a Director of the Company since March
1996. Since January 1992, Ms. Mark has been with Enron Development Corp., the
international project development arm of Enron Corp., most recently as
Chairman and Chief Executive Officer. From July 1991 to July 1993 Ms. Mark was
Vice Chairman and Chief Development Officer of Enron Power Corp. Ms. Mark is a
director of ICF Kaiser International, Inc. Ms. Mark is also a member of the
Bretton Woods Committee. Ms. Mark holds a B.A. in Psychology and an M.S. in
International Management from Baylor University and an M.B.A. from Harvard
Business School.
Robert W. Page. Mr. Page has been a Director of the Company since March
1994. Mr. Page is the former Executive Vice President of McDermott
International, Inc., an energy services company, a position he held from
February 1991 until his retirement in February 1994. From 1981 to 1987, Mr.
Page was the Chairman and Chief Executive Officer of Kellogg Rust, Inc., an
engineering and construction firm, and was Assistant Secretary of the U.S.
Army (Civil Works) from 1987 until 1990. Mr. Page is a director of ICF Kaiser
International, Inc. Mr. Page holds a B.S. in Civil Engineering from Texas A&M
University.
Frank R. Pope. Mr. Pope has been a Director of the Company since 1994. Since
April 1981, Mr. Pope has been with Technology Funding, Inc., a venture capital
investment firm, most recently as the Executive Vice President, Chief
Financial Officer and a director. Mr. Pope is a director of Medstone
International, Inc. Mr. Pope holds a B.A. in History from Stanford University,
an M.B.A. from the University of Santa Clara Graduate School of Business and a
J.D. from the University of Santa Clara School of Law.
John M. Toups. Mr. Toups has been a Director of the Company since November
1994. From January 1978 until his retirement in February 1987, Mr. Toups was
the Chief Executive Officer of Planning Research Corporation (PRC). Mr. Toups
is also a director of Caci International Inc., Nvr, Inc., Halifax Corporation,
and Telepad Corporation. Mr. Toups holds a B.S. in Civil Engineering from the
University of California at Berkeley.
Prior to the closing of this offering, the Board will be divided into three
classes, as nearly equal in number as possible, with each director serving a
three-year term and one class being elected at each year's annual
37
<PAGE>
meeting of stockholders. Ms. Mark and Messrs. Blumenstein and Schofield will
be in the class of directors whose term expires at the 1997 annual meeting of
the Company's stockholders. Messrs. Healer and Toups will be in the class of
directors whose term expires at the 1998 annual meeting of the Company's
stockholders. Messrs. Page and Pope will be in the class of directors whose
term expires at the 1999 annual meeting of the Company's stockholders. At each
annual meeting of the Company's stockholders, successors to the class of
directors whose term expires at such meeting will be elected to serve for
three-year terms or until their successors are elected and qualified. Officers
of the Company serve at the discretion of the Board of Directors.
EMPLOYMENT AGREEMENT
The Company entered into an agreement with A. Judson Hill in January 1996,
which sets a base salary of $150,000 per year and provides that in the event
he is terminated without cause, the Company shall pay Mr. Hill a severance
payment equal to three months' salary and any stock options held by Mr. Hill
on the date of the agreement will be deemed fully vested as of the date of
termination.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors do not receive cash compensation
for their service on the Board of Directors, but directors may be reimbursed
for certain expenses in connection with attendance at Board of Directors and
committee meetings.
Prior to the effective date of this offering, Robert W. Page, John M. Toups
and Rebecca P. Mark, members of the Company's Board of Directors, were granted
options, pursuant to the Company's 1987 Incentive Stock Plan, to purchase
6,667 shares of the Company's Common Stock in connection with their election
to the Board. In addition, these directors were granted a subsequent option,
pursuant to the Company's 1987 Incentive Stock Plan, to purchase 1,667 shares
of the Company's Common Stock in consideration for his or her services as a
director. The initial options become exercisable ratably over 48 months, and
the subsequent options become exercisable ratably over 12 months following the
date of grant.
1996 Director Option Plan
Non-employee directors of the Company participate in the Company's 1996
Director Option Plan (the "Directors' Plan"), which was adopted by the Board
of Directors in March 1996 and approved by the Company's stockholders in April
1996. A total of 83,334 shares of Common Stock have been reserved for issuance
under the Directors' Plan. Pursuant to the terms of the Directors' Plan, each
non-employee director will automatically be granted an option to purchase
6,667 shares (the "First Option") of Common Stock (subject to adjustment as
provided in the Directors' Plan) upon the later of the effective date of this
offering or the date on which such person first becomes a non-employee
director. Directors Blumenstein, Healer, Page, Pope, Toups and Mark will be
eligible to receive the First Option on the effective date of this offering.
In addition, each non-employee director will automatically be granted an
option to purchase 1,667 shares (a "Subsequent Option") of the Company's
Common Stock on January 1 of each year, if on such date such director has
served on the Board of Directors for at least the preceding six months.
The Directors' Plan is administered by the Board. The exercise price of each
option granted under the Directors' Plan shall be equal to 100% of the fair
market value of the Common Stock on the date of grant. First Options become
exercisable as to 12 1/2% of the shares subject to the option six months after
the date of grant and as to an additional 12 1/2% of the shares at the end of
each six-month period thereafter, provided the optionee continues to serve as
a director on such date. Subsequent Options shall become exercisable as to 50%
of the shares subject to the Subsequent Option six months after the date of
grant and as to the remaining 50% one year after the date of grant, provided
the optionee continues to serve as a director on such date. In the event of a
merger of the Company with or into another corporation, all outstanding
options shall become exercisable as to all of the shares subject to the
options, including shares as to which they would not otherwise be exercisable.
38
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee of the Board of Directors consists
of Messrs. Blumenstein and Page. No member of the Compensation Committee or
executive officer of the Company has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company reincorporated in the State of Delaware in May 1996. The
Company's Restated Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except for
liability attributed to: (i) any breach of their duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii)
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law, or (iv) any
transaction from which the director derived an improper personal benefit.
The Company's Amended and Restated Bylaws ("Restated Bylaws") provide that
the Company shall indemnify its directors and executive officers and may
indemnify its other officers and employees and other agents to the fullest
extent permitted by law including in circumstances in which indemnification is
otherwise discretionary under Delaware law. The Company's Restated Bylaws also
permit the Company to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the Restated Bylaws would permit
indemnification.
The Company will enter into agreements to indemnify its directors and
officers, in addition to indemnification provided for in the Company's
Restated Bylaws. These agreements, among other things, indemnify the Company's
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company (other than liabilities
arising from willful misconduct of a culpable nature). The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company in which indemnification
would be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation awarded to, earned by or paid for services rendered to the
Company in all capacities during the year ended December 31, 1995 by the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers whose salary and bonus for such year
exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- -------------
SECURITIES ALL OTHER
UNDERLYING COMPENSA-
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS(#)(2) TION(3)
--------------------------- --------- ----------- ------------- --------- ---
<S> <C> <C> <C> <C> <C>
John T. Schofield, Chairman,
President and Chief
Executive Officer........... $179,375 $3,000 166,667 $9,374
A. Judson Hill, Executive
Vice President, Corporate
Development................. 143,750 -- -- 1,017
David R. Wright, Executive
Vice President, Europe(4)... 144,000 -- 3,334 1,054
Ann C. Heywood, former Vice
President, Corporate
Development(5).............. 124,375 3,000 -- 972
Alexander G. Baldwin, Vice
President, Engineering and
Operations.................. 106,458 1,000 6,667 792
</TABLE>
- --------
(1) Represents shares of Common Stock with a fair market value at the date of
award of $1.50 per share.
(2) These shares are subject to exercise under stock options granted under the
Company's stock option plans.
(3) Represents premiums for life insurance policies.
(4) Mr. Wright is paid in pounds sterling. The amount set forth above assumes
an exchange rate of $1.50 per pound sterling.
(5) Ms. Heywood left the Company in February 1996 to join CalEPA.
STOCK OPTION GRANTS
The following table sets forth information concerning stock options awarded
to each of the Named Executive Officers during the year ended December 31,
1995. All such options were awarded under the Company's 1987 Incentive Stock
Plan.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM($)(1)
---------------------------------------------- ----------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED 1995 SHARE(2)(3) DATE(4) 5% 10%
---- ---------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John T. Schofield....... 166,667 67.5% $1.50 06/13/2000 $ 69,071 $ 152,628
David R. Wright......... 3,334 1.3% 1.50 06/13/2000 1,382 3,053
Alexander G. Baldwin.... 6,667 2.7% 1.50 06/13/2000 2,763 6,105
</TABLE>
- --------
(1) Potential realizable value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the five-year
option term. These numbers are calculated based on the requirements
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth.
(2) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board of Directors on
the date of grant.
(3) The exercise price may be paid in cash, check, promissory note, by
delivery of already-owned shares of the Company's Common Stock or any
combination of such methods.
(4) Options may terminate before their expiration date if the optionee's
status as an employee is terminated.
40
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth certain information regarding the exercise of
stock options by the Named Executive Officers during 1995. No stock
appreciation rights were granted during such year.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT DECEMBER 31, 1995
AT DECEMBER 31, 1995(#) ($)(1)
----------------------- --------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(2) UNEXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
John T. Schofield(3).... -- -- 153,260/147,995 $1,888,901/1,722,036
A. Judson Hill(3)....... 36,111 $81,250 -- --
David R. Wright(3)...... -- -- 3,334/6,667 40,529/79,483
Ann C. Heywood.......... -- -- 10,000/16,667 122,500/204,171
Alexander G. Bald-
win(3)................. -- -- 13,334/13,334 165,280/159,403
</TABLE>
- --------
(1) Based upon an assumed initial offering price of $13.00 per share minus the
exercise price.
(2) Based on the fair market value of the Company's Common Stock at December
31, 1995, $3.00 per share (as determined by the Company's Board of
Directors), less the exercise price paid for such shares.
(3) In January 1996, Messrs. Schofield, Hill, Wright and Baldwin were granted
stock options for 33,334, 53,334, 3,334 and 10,000 shares of the Company's
Common Stock, respectively, at an exercise price of $3.00 per share.
EMPLOYEE BENEFIT PLANS
1987 Incentive Stock Plan
The Company's 1987 Incentive Stock Plan, as amended (the "1987 Stock Plan")
was adopted by the Board of Directors in August 1987 and approved by the
stockholders in February 1988. The 1987 Stock Plan provides for grants of
incentive stock options to employees (including officers and employee
directors) and nonstatutory stock options to non-employees (including non-
employee directors) and consultants of the Company. A total of 907,650 shares
of Common Stock has been reserved for issuance under the 1987 Stock Plan. As
of March 31, 1996, 118,788 shares of Common Stock had been issued upon the
exercise of options granted under the 1987 Stock Plan, options to purchase
746,997 shares of Common Stock at a weighted average exercise price of $1.61
per share were outstanding and 41,865 shares were available for future
issuance. Options under the 1987 Stock Plan become exercisable at varying
rates over a vesting period which is determined by the Board of Directors
(generally one to five years), and as of March 31, 1996, 299,314 options were
exercisable. Options under the 1987 Stock Plan are issuable to employees,
directors and consultants of the Company. The exercise price of incentive
stock options granted under the 1987 Stock Plan must be at least equal to the
fair market value of the Common Stock on the date of grant. Following the
offering, no further options will be granted under the 1987 Stock Plan.
1996 Stock Plan
The Company's 1996 Stock Plan (the "1996 Plan") was adopted by the Board of
Directors in March 1996 and approved by the stockholders in April 1996. A
total of 333,334 shares of Common Stock has been reserved for issuance under
the 1996 Plan. The 1996 Plan provides for grants of incentive stock options to
employees (including officers and employee directors) and nonstatutory stock
options and stock purchase rights to non-employees (including non-employee
directors) and consultants of the Company. The purpose of the 1996 Plan is to
attract and retain the best available personnel for positions of substantial
responsibility and to provide additional incentive to employees and
consultants to promote the success of the Company's business. The 1996 Plan is
presently being administered by the Board of Directors, which determines the
optionees and the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The terms of options granted under the 1996 Plan are stated in the option
agreements. Terms of an incentive stock option may not exceed 10 years, and
the term of all incentive stock options and nonstatutory stock options
41
<PAGE>
granted to an optionee who, at the time of grant, owns stock representing more
than 10% of the Company's outstanding capital stock, may not exceed five
years. Options granted under the 1996 Plan vest and become exercisable as set
forth in each option agreement. No option may be transferred by the optionee
other than by will or the laws of descent or distribution, and each option may
be exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with the Company or any related corporation ceases
for any reason (other than by death or total and permanent disability) may
exercise options in the three-month period following such cessation, unless
such options terminate or expire sooner (or for nonstatutory stock options,
later), by their terms. The three-month period is extended to twelve months
for terminations due to death or permanent total disability. In the event of a
merger of the Company with or into another corporation, all outstanding
options may either be assumed or an equivalent option may be substituted by
the surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the
options, including shares as to which they would not otherwise be exercisable.
In the event that options become exercisable in lieu of assumption or
substitution, the Board of Directors shall notify optionees that all options
shall be fully exercisable for a period of 15 days, after which such options
shall terminate. The Board of Directors determines the exercise price of
options granted under the 1996 Plan at the time of grant, provided that the
exercise price of all incentive stock options must be at least equal to the
fair market value of the shares on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting rights of
the Company's outstanding capital stock, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date. The consideration for exercising any incentive stock option or any
nonstatutory stock option may consist of cash, check, promissory note,
delivery of already-owned shares of the Company's Common Stock subject to
certain conditions, delivery of a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the Company
the amount of sale or loan proceeds required to pay the exercise price, a
reduction in the amount of any Company liability to an optionee, or any
combination of the foregoing methods of payment or such other consideration or
method of payment to the extent permitted under applicable law. No incentive
stock options may be granted to a participant, which, when aggregated with all
other incentive stock options granted to such participant, would have an
aggregate fair market value in excess of $100,000 becoming exercisable in any
calendar year. No employee may be granted, in any fiscal year of the Company,
options to purchase more than 150,000 shares (or 250,000 shares in the case of
a new employee's initial employment with the Company). The 1996 Plan will
terminate in April 2006, unless sooner terminated by the Board of Directors.
The Board of Directors may also grant stock purchase rights to employees and
consultants under the 1996 Plan. Such grants are made pursuant to restricted
stock purchase agreements. The Company is generally granted a repurchase
option exercisable on the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The repurchase price shall be the original purchase price paid by
the purchaser. The repurchase option shall lapse at a rate determined by the
Board of Directors. Once the stock purchase right has been exercised, the
purchaser shall have the rights equivalent to those of a stockholder.
As of March 31, 1996, no options or stock purchase rights were granted under
the 1996 Plan.
Employee Stock Purchase Plan
The Company has reserved an aggregate of 116,667 shares of Common Stock for
issuance under its Employee Stock Purchase Plan (the "ESPP"). The ESPP was
adopted by the Board of Directors in March 1996 and approved by the
stockholders in April 1996. The ESPP is intended to qualify under Section 423
of the Internal Revenue Code of 1986, as amended (the "Code") and permits
eligible employees of the Company to purchase Common Stock through payroll
deductions of up to 15% of their eligible compensation provided that no
employee may purchase more than $25,000 worth of stock under all employee
stock purchase plans of the Company in any calendar year. The ESPP will be
implemented with six-month offering periods, except for the first offering
period which will commence upon the closing date of the offering and will end
on the last market trading day on or before April 30, 1997. The price of
Common Stock purchased under the ESPP will be 85% of the lower of the fair
market value of the Common Stock on the first or last day of each offering
period. The ESPP will expire in the year 2006.
42
<PAGE>
401(k) Savings Plan
The Company maintains the Thermatrix Inc. 401(k) Savings and Retirement
Plan, a defined contribution retirement plan with a cash or deferred
arrangement as described in Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). The 401(k) Plan is intended to be qualified under Section
401(a) of the Code. All employees of the Company are eligible to participate
in the 401(k) Plan. The 401(k) Plan provides that each participant make
elective contributions of a percentage of his or her compensation, subject to
statutory limits.
CERTAIN TRANSACTIONS
Between April 1993 and February 1996, the Company sold the following shares
of its Preferred Stock in private placement transactions: 507,541 shares of
Series C Preferred Stock at a price of $7.50 per share and 1,898,878 shares of
Series D Preferred Stock at a price of $7.50 per share. The Company issued
Subordinated Convertible Promissory Notes (the "Notes") in an aggregate
principal amount of $1,525,716 as bridge loan financing in connection with the
Company's sale of Series D Preferred Stock. The Notes were converted into
shares of the Company's Series D Preferred Stock at the rate of $7.50 per
share in November 1994. In addition, certain purchasers of Notes were issued
warrants to purchase an aggregate of 5,471 shares of the Company's Series D
Preferred Stock at an exercise price of $7.50 per share. The purchasers of the
Preferred Stock included, among others, the following entities affiliated with
certain members of the Company's Board of Directors and holders of more than
five percent of the Company's voting securities:
<TABLE>
<CAPTION>
SHARES OF
PREFERRED STOCK(1)
--------------------
SERIES C SERIES D
--------- ---------
<S> <C> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Technology Funding Partners Entities (Frank R. Pope)(2).. -- 174,374
The Venture Capital Fund of New England Entities (Harry
J. Healer)(3)........................................... 100,000 81,909
OTHER 5% STOCKHOLDERS
Charles River Entities(4)................................ 262,000 109,158
Prentis Cobb Hale, Trustee of the Prentis Cobb Hale
Family Trust(5)......................................... 74,207 82,854
</TABLE>
- --------
(1) The purchasers of these securities are entitled to registration rights.
See "Description of Capital Stock--Registration Rights."
(2) Includes Technology Funding Partners III, L.P. and Technology Funding
Venture Partners IV, an Aggressive Growth Fund, L.P. Includes 53,662
shares of Series D Preferred Stock issued on conversion of the Notes.
(3) Includes The Venture Capital Fund of New England II, L.P. and The Venture
Capital Fund of New England III, L.P. Includes 53,334 shares of Series D
Preferred Stock issued on conversion of the Notes and 1,908 shares of
Series D Preferred Stock issuable upon exercise of warrants held by such
entities issued in connection with the Series D Preferred Stock financing.
(4) Includes Charles River Partnership VI, L.P. and Charles River Partnership
VI-A, L.P. Includes 40,000 shares of Series D Preferred Stock issued on
conversion of the Notes and 2,491 shares of Series D Preferred Stock
issuable upon exercise of a warrant held by such entities issued in
connection with the Series D Preferred Stock financing.
(5) Includes 24,000 shares of Series D Preferred Stock issued on conversion of
the Notes.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 31, 1996 and as adjusted
to reflect the sale of Common Stock offered hereby for: (i) each of the Named
Executive Officers, (ii) each of the Company's directors, (iii) all directors
and executive officers as a group, and (iv) each person who is known by the
Company to beneficially own more than 5% of the Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
--------------------
NAMED EXECUTIVE OFFICERS, DIRECTORS, ALL NUMBER OF
DIRECTORS, SHARES
EXECUTIVE OFFICERS AS A GROUP AND FIVE BENEFICIALLY BEFORE AFTER
PERCENT STOCKHOLDERS OWNED(1) OFFERING OFFERING(2)
---------------------------------------- ------------ -------- -----------
<S> <C> <C> <C>
OFFICERS AND DIRECTORS:
John T. Schofield(3)......................... 245,726 4.41% 3.24%
Alexander G. Baldwin(4)...................... 17,612 * *
Ann C. Heywood(5)............................ 16,366 * *
A. Judson Hill(6)............................ 42,037 * *
David R. Wright(7)........................... 4,653 * *
Robi Blumenstein(8).......................... 761,905 14.12 10.30
Harry J. Healer, Jr.(9)...................... 626,135 11.60 8.46
Rebecca P. Mark(10).......................... 556 * *
Robert W. Page(11)........................... 7,640 * *
Frank R. Pope(12)............................ 1,259,003 23.33 17.02
John M. Toups(13)............................ 4,723 * *
All executive officers and directors as a
group (13 persons)(14)...................... 2,991,198 53.08 39.18
5% STOCKHOLDERS:
Charles River Partnerships VI, L.P. and 417,941 7.74 5.65
Charles River Partnership VI-A, L.P. .......
10 Post Office Square, Suite 1330
Boston, MA 02109
CIBC Wood Gundy Ventures, Inc.(8)............ 761,905 14.12 10.30
425 Lexington Ave., 2nd Floor
New York, NY 10017-3903
Prentis Cobb Hale, as Trustee of the Prentis
Cobb Hale Family 422,529 7.83 5.71
Trust Dated July 13, 1993...................
870 Market Street, Room 700
San Francisco, CA 94102
Technology Funding Partners III, L.P. and
Technology Funding Venture Partners IV, an 1,259,003 23.33 17.02
Aggressive Growth Fund, L.P.(12)............
2000 Alameda de las Pulgas, Suite 250
San Mateo, CA 94403
Vencap Equities Alberta Ltd.................. 571,429 10.59 7.73
1980 Manulife Place
10180-101 St.
Edmonton, Alberta 25J 3S4
North America Environmental Fund, L.P. ...... 571,429 10.59 7.73
c/o Ventana Environmental Organizational
Partnership, L.P.
18881 Van Karman Ave.
Tower 17, Suite 350
Irvine, CA 92715
The Venture Capital Fund of New England II,
L.P. and The Venture Capital Fund of New 626,135 11.60 8.46
England III, L.P.(9) .......................
160 Federal Street, 23rd Floor
Boston, MA 02110
</TABLE>
44
<PAGE>
- --------
(*) Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are currently exercisable or exercisable within 60 days
of March 31, 1996 are deemed outstanding. Except as indicated in the
footnotes to this table and as provided pursuant to applicable community
property laws, the stockholders named in the table have sole voting and
investment power with respect to the shares set forth opposite each
stockholder's name.
(2) After giving effect to the issuance of 2,000,000 shares of Common Stock
offered hereby.
(3) Includes 176,949 shares subject to stock options that are exercisable
within 60 days of March 31, 1996.
(4) Includes 16,945 shares subject to stock options that are exercisable
within 60 days of March 31, 1996.
(5) Includes 10,556 shares subject to stock options that are exercisable
within 60 days of March 31, 1996.
(6) Includes 5,926 shares subject to stock options that are exercisable
within 60 days of March 31, 1996.
(7) All 4,653 shares are subject to stock options that are exercisable within
60 days of March 31, 1996.
(8) Mr. Blumenstein is a director and officer of CIBC Wood Gundy Ventures,
Inc. and, therefore, may be deemed to beneficially own the shares held by
CIBC Wood Gundy Ventures, Inc. (761,905). Mr. Blumenstein disclaims
beneficial ownership of the 761,905 shares held by CIBC Wood Gundy
Ventures, Inc.
(9) Mr. Healer is a General Partner of The Venture Capital Fund of New
England and, therefore, may be deemed to beneficially own the shares held
by The Venture Capital Fund of New England (626,135, including warrants
to purchase 2,725 shares). Mr. Healer disclaims beneficial ownership of
the 626,135 shares held by The Venture Capital Fund of New England except
to the extent of his pecuniary interest therein arising from his general
partnership interest therein.
(10) All 556 shares are subject to stock options that are exercisable within
60 days of March 31, 1996.
(11) All 7,640 shares are subject to stock options that are exercisable within
60 days of March 31, 1996.
(12) Mr. Pope is a General Partner of Technology Funding Partners III, L.P.
and Technology Funding Venture Partners IV, an Aggressive Growth Fund,
L.P., and therefore, may be deemed to beneficially own the shares held by
Technology Funding Partners III and IV (1,259,003). Mr. Pope disclaims
beneficial ownership of the 1,259,003 shares held by Technology Funding
Partners III and IV except to the extent of his pecuniary interest
therein arising from his general partnership interest therein.
(13) All 4,723 shares are subject to stock options that are exercisable within
60 days of March 31, 1996.
(14) Includes 238,591 shares subject to stock options and warrants that are
exercisable within 60 days of March 31, 1996.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
On June 3, 1996, the Company's Certificate of Incorporation was restated to
authorize the Company to issue 50,000,000 shares of Common Stock, $0.001 par
value and to effect a one-for-three reverse stock split of all the outstanding
shares of Common Stock and Preferred Stock. Upon the closing of this offering,
the Company's Restated Certificate of Incorporation will be further restated
(the "Restated Certificate of Incorporation") to reflect the conversion of the
Preferred Stock into Common Stock and to authorize the Company to issue
5,000,000 shares of undesignated preferred stock, $0.001 par value. Upon the
closing of this offering, 7,400,838 shares of Common Stock will be issued and
outstanding and no shares of preferred stock will be issued and outstanding.
The discussion herein describes the Company's capital stock, the Restated
Certificate of Incorporation and the Restated Bylaws as anticipated to be in
effect upon closing of this offering. The following summary of certain
provisions of the Company's capital stock describes all material provisions
of, but does not purport to be complete and is subject to, and qualified in
its entirety by, the Restated Certificate of Incorporation and the Restated
Bylaws of the Company that are included as exhibits to the Registration
Statement of which this Prospectus forms a part and by the provisions of
applicable law.
The Restated Certificate of Incorporation will and the Restated Bylaws do
contain certain provisions that are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and
which may have the effect of delaying, deferring, or preventing a future
takeover or change in control of the Company unless such takeover or change in
control is approved by the Board of Directors.
COMMON STOCK
Subject to the prior rights of the holders of any preferred stock, the
holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may from time to time determine. The shares
of Common Stock are neither redeemable nor convertible and the holders thereof
have no preemptive or subscription rights to purchase any securities of the
Company. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the assets of the
Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the prior rights of any holders of
preferred stock then outstanding. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of stockholders and
has cumulative voting rights with respect to the election of directors.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 5,000,000 shares of undesignated preferred stock. The Board of
Directors has the authority to issue the preferred stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's stockholders. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price
of, and the voting and other rights of, the holders of Common Stock. The
Company has no current plans to issue any shares of preferred stock.
WARRANTS
Upon the closing of this offering, outstanding warrants to purchase an
aggregate of 17,857 shares of Series B Preferred Stock at an exercise price of
$3.00 per share and an aggregate of 34,471 shares of Series D Preferred Stock
at an exercise price of $7.50 per share will be converted into the right to
purchase 17,857 shares of Common Stock at $3.00 per share and 49,243 shares of
Common Stock at $5.25 per share. Such warrants expire on the date five years
from the date of grant.
46
<PAGE>
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND RESTATED
BYLAWS
The Restated Certificate of Incorporation provides for the Board of
Directors to be divided into three classes, as nearly equal in number as
possible, serving staggered terms. Approximately one-third of the Board of
Directors will be elected each year. See "Management." Under the Delaware
General Corporation Law, directors serving on a classified board can only be
removed for cause. The provision for a classified board could prevent a party
who acquires control of a majority of the outstanding voting stock from
obtaining control of the Board of Directors until the second annual
stockholders meeting following the date the acquiror obtains the controlling
stock interest. The classified board provision could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company and could increase the likelihood
that incumbent directors will retain their positions.
The Restated Certificate of Incorporation provides that stockholder action
can be taken at an annual or special meeting of stockholders or by written
consent. The Restated Certificate of Incorporation and Restated Bylaws provide
that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board of Directors, by the chief executive officers of the Company, or
by stockholders holding shares in the aggregate entitled to cast not less than
10% of the votes at that meeting.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the closing of this offering, the Company will be subject to the
"Business Combination" provisions of the Delaware General Corporation Law. In
general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction
which the person became an "interested stockholder," unless: (i) the
transaction is approved by the Board of Directors prior to the date the
interested stockholder obtained such status, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and
(b) employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or subsequent to such date
the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." A "business combination" is defined to include
mergers, asset sales and other transactions resulting in a financial benefit
to a stockholder. In general, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
REGISTRATION RIGHTS
The holders of approximately 5,267,828 shares of Common Stock and rights to
acquire 67,100 shares of Common Stock and their permitted transferees (the
"Holders") are entitled to certain rights with respect to the registration of
such shares ("Registrable Securities") under the Amended and Restated Investor
Rights Agreement (the "Investor Rights Agreement"). Under the terms of the
Investor Rights Agreement between the Company and the Holders, the holders of
at least 51% of the Registrable Securities derived directly or indirectly from
the Company's Series D Preferred Stock may require, on four occasions after
six months from the effective date of this offering, that the Company use its
best efforts to register the Registrable Securities for public resale. In
addition, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other
security holders exercising registration rights, the Holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. The holders of Registrable Securities may also require the
Company on no more than five occasions to register all or a portion
47
<PAGE>
of their Registrable Securities on Form S-3 under the Securities Act when use
of such form becomes available to the Company. All such registration rights
are subject to certain conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares to be included in
such registration. In addition, the Company need not effect a registration for
the account of the Holders or a registration on Form S-3 within 120 days
following a previous registration, or within six months following any offering
of securities for the account of the Company made subsequent to this offering.
These registration rights terminate on the later of five years following the
closing of this offering or after such time as all Holders may sell under
Rule 144 during any 90-day period all shares of Common Stock to which such
registration rights apply.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is First
National Bank of Boston.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Therefore, future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 7,400,838 shares of Common Stock, assuming a closing date for
this offering of June 15, 1996. Of these outstanding shares of Common Stock,
the 2,000,000 shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 5,400,838 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which are summarized below. Sales of the Restricted Shares in the public
market, or the availability of such shares for sale, could adversely affect
the market price of the Common Stock.
Certain officers, directors and holders of Common Stock have entered into
contractual "lock-up" agreements providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of the
shares of Common Stock owned by them or that could be purchased by them
through the exercise of options to purchase Common Stock of the Company for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Company or Representative of the Underwriters. As a result of
these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, 5,330,754 shares
subject to lock-up agreements will not be saleable until 180 days after the
date of this Prospectus (or earlier with the consent of the Representative of
the Underwriters). The Representatives do not presently intend to release any
of the shares subject to lock-up agreements and generally grant requests for
waivers only in limited circumstances.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years (including
the holding period of any prior owner except an affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 74,008 shares immediately after
this offering), or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain
48
<PAGE>
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. Under Rule 144(k), a person who
is not deemed to have been an affiliate of the Company at any time during the
90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least three years (including the holding period of any prior
owner except an affiliate), is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may therefore be sold immediately upon the completion of this
offering. In general, under Rule 701 of the Securities Act as currently in
effect, any employee, consultant or advisor of the Company who purchases
shares from the Company in connection with a compensatory stock or option plan
or other written similar agreement is eligible to resell such shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period, contained
in Rule 144.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before
selling such shares.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
1987 Incentive Stock Plan, 1996 Stock Plan, 1996 Director Option Plan and the
Employee Stock Purchase Plan. Based on the number of options outstanding and
options and shares reserved for issuance at March 31, 1996 under the 1987
Incentive Stock Plan, the 1996 Stock Option Plan, 1996 Director Option Plan
and the Employee Stock Purchase Plan, such registration statement would cover
approximately 1,280,332 shares. See "Management--Employee Benefit Plans."
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates, be available for sale
in the open market, unless such shares are subject to vesting restrictions
with the Company or the lock-up agreements described above. As of March 31,
1996, options to purchase 746,997 shares were issued and outstanding under the
1987 Incentive Stock Plan, no options to purchase shares had been granted
under the 1996 Stock Plan or the 1996 Director Option Plan and no shares had
been issued under the Employee Stock Purchase Plan.
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and Oppenheimer & Co., Inc., Prudential Securities Incorporated
and HSBC Securities, Inc., as the Representatives of the Underwriters, each of
the Underwriters named below has severally agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Oppenheimer & Co., Inc. ..............................................
Prudential Securities Incorporated....................................
HSBC Securities, Inc. ................................................
---
Total...............................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters
by counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $ per share
of Common Stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
dealers may re-allow, concessions not in excess of $ per share to certain
other dealers.
The Underwriters have advised the Company that they do not intend to make
sales to discretionary accounts.
The Underwriters have been granted a 30-day over-allotment option to
purchase up to an aggregate of 300,000 additional shares of Common Stock,
exercisable at the public offering price less the underwriting discount. If
the Underwriters exercise such over-allotment option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof as the number of shares of
Common Stock to be purchased by it as shown in the above table bears to the
2,000,000 shares of
50
<PAGE>
Common Stock offered hereby. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of the shares of Common
Stock offered hereby.
The Company, its directors and officers, the holders of certain vested
options to purchase Common Stock and certain stockholders and warrantholders
of the Company holding 5,330,754 shares in the aggregate have agreed that they
will not sell, grant any option for the sale of, or otherwise dispose of any
shares of Common Stock, for a period of 180 days after the date hereof without
the prior written consent of the Representatives. The Representatives do not
presently intend to release any of the shares subject to lock-up agreements
and generally grant requests for waivers only in limited circumstances.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to
make in respect thereof.
There has been no previous public market for any of the Company's
securities. The public offering price for the Common Stock offered hereby has
been determined by negotiation between the Company and the Representatives.
The factors considered in determining the public offering price include the
history of and prospects for the industry in which the Company competes, the
ability of the Company's management, the past and present operations of the
Company, the prospects for future earnings of the Company, the general
condition of the securities markets at the time of this offering and the
prices of similar securities of generally comparable companies.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon by and for the
Underwriters by Morgan, Lewis & Bockius LLP, New York, New York. As of the
date of this Prospectus, a total of 8,940 shares of Common Stock were
beneficially owned by a member of Wilson Sonsini Goodrich & Rosati,
Professional Corporation and an investment partnership of which members of
such firm are partners. Mario M. Rosati, the Assistant Secretary of the
Company, is a member of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
EXPERTS
The audited consolidated financial statements and schedule of the Company
appearing in this Prospectus and Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. Statements relating
to patent matters in the portions of this Prospectus entitled "Risk Factors--
Proprietary Technology and Unpredictability of Patent Protection" and
"Business--Intellectual Property," insofar as they constitute summaries of
patent law, have been reviewed and approved by the Company's patent counsel,
Woodcock Washburn Kurtz Mackiewicz & Norris. Such statements are included
herein in reliance upon the review and approval of such firm as experts in
patent law.
51
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Securities and
Exchange Commission in Room 1024, 450 Fifth Street, NW, Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part of
the Registration Statement may be obtained from the Commission upon payment of
a prescribed fee.
52
<PAGE>
THERMATRIX INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................... F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Thermatrix Inc.:
We have audited the accompanying consolidated balance sheets of Thermatrix
Inc. (a Delaware corporation) and subsidiary as of December 31, 1994 and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Thermatrix Inc. and
subsidiary as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
San Jose, California
February 28, 1996 (except
for Note 11 as to which the
date is May 13, 1996)
F-2
<PAGE>
THERMATRIX INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, PRO FORMA
------------------ MARCH 31, STOCKHOLDERS'
1994 1995 1996 EQUITY (NOTE 2)
-------- -------- ----------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.......... $ 3,129 $ 981 $ 1,477
Short-term invest-
ments................ 3,801 -- --
Accounts receivable,
net of allowances of
$150,000, $190,000
and $165,000 at De-
cember 31, 1994 and
1995 and March 31,
1996, respectively... 1,459 2,140 2,959
Costs of uncompleted
contracts in excess
of billings.......... 308 85 254
Prepaid expenses and
other current as-
sets................. 51 181 173
-------- -------- --------
Total current as-
sets.............. 8,748 3,387 4,863
-------- -------- --------
PROPERTY AND EQUIPMENT:
Machinery and equip-
ment................. 365 529 560
Demonstration equip-
ment................. 29 165 187
Furniture and fix-
tures................ 53 134 134
-------- -------- --------
447 828 881
Less--Accumulated de-
preciation........... (110) (233) (283)
-------- -------- --------
Net property and
equipment......... 337 595 598
-------- -------- --------
PATENTS AND OTHER AS-
SETS, net............. 138 246 337
-------- -------- --------
$ 9,223 $ 4,228 $ 5,798
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...... $ 1,458 $ 1,487 $ 2,256
Billings on
uncompleted contracts
in excess of costs
and revenue
recognized........... 191 340 231
Accrued liabilities... 462 425 494
-------- -------- --------
Total current lia-
bilities.......... 2,111 2,252 2,981
-------- -------- --------
COMMITMENTS AND CONTIN-
GENCIES (Note 4)
REDEEMABLE CONVERTIBLE
PREFERRED STOCK....... 11,321 11,321 13,405 $ --
STOCKHOLDERS' EQUITY
(DEFICIT):
Convertible preferred
stock: $0.001 par
value
Authorized--
7,744,766 shares;
5,000,000 shares
pro forma
Outstanding--
2,554,631 shares as
of December 31,
1994 and 1995 and
March 31, 1996, and
none pro forma, re-
spectively; liqui-
dation preference
of $9,948.......... 9,304 9,304 9,304 --
Common stock: $0.001
par value
Authorized--
40,000,000 shares;
50,000,000 shares
pro forma
Outstanding--61,828,
129,358, 129,358
and 5,396,671
shares as of Decem-
ber 31, 1994 and
1995, March 31,
1996 and pro forma,
respectively....... -- -- -- 5
Additional paid-in
capital............. 3,480 3,538 3,538 26,242
Accumulated deficit.. (16,993) (22,187) (23,430) (23,430)
-------- -------- -------- --------
Total stockholders'
equity (deficit).. (4,209) (9,345) (10,588) $ 2,817
-------- -------- -------- ========
$ 9,223 $ 4,228 $ 5,798
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
THERMATRIX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES......................... $ 881 $ 3,135 $ 6,494 $ 549 $ 2,735
COST OF REVENUES................. 966 3,099 6,064 574 2,506
------- ------- ------- ------- -------
Gross margin................... (85) 36 430 (25) 229
------- ------- ------- ------- -------
OPERATING EXPENSES:
Research and development....... 483 1,326 1,084 327 138
Selling, general and adminis-
trative....................... 2,100 4,503 4,740 1,090 1,328
------- ------- ------- ------- -------
Total operating expenses..... 2,583 5,829 5,824 1,417 1,466
------- ------- ------- ------- -------
Loss from operations......... (2,668) (5,793) (5,394) (1,442) (1,237)
INTEREST INCOME (EXPENSE):
Interest income................ 47 44 231 97 7
Interest expense............... -- (72) -- -- (8)
------- ------- ------- ------- -------
Total interest income (ex-
pense)...................... 47 (28) 231 97 (1)
------- ------- ------- ------- -------
Net loss before provision for
income taxes................ (2,621) (5,821) (5,163) (1,345) (1,238)
PROVISION FOR INCOME TAXES....... -- -- 31 8 5
------- ------- ------- ------- -------
Net loss..................... $(2,621) $(5,821) $(5,194) $(1,353) $(1,243)
======= ======= ======= ======= =======
PRO FORMA NET LOSS PER SHARE..... $ (0.91) $ (0.24) $ (0.22)
======= ======= =======
PRO FORMA WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES.... 5,723 5,701 5,766
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THERMATRIX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------- --------------
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ------ ------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1992................... 2,047,090 $5,509 962 $ -- $3,462 $ (8,551) $ 420
Issuance of Series C
preferred stock at
$7.50 per share, net
of issuance costs of
$12................... 507,541 3,795 -- -- -- -- 3,795
Issuance of common
stock on exercise of
stock options at $0.30
per share............. -- -- 58,232 -- 17 -- 17
Net loss............... -- -- -- -- -- (2,621) (2,621)
--------- ------ ------- ----- ------ -------- --------
BALANCE, DECEMBER 31,
1993................... 2,554,631 9,304 59,194 -- 3,479 (11,172) 1,611
Issuance of common
stock on exercise of
stock options at $0.30
to $0.75 per share.... -- -- 2,647 -- 1 -- 1
Net loss............... -- -- -- -- -- (5,821) (5,821)
--------- ------ ------- ----- ------ -------- --------
BALANCE, DECEMBER 31,
1994................... 2,554,631 9,304 61,841 -- 3,480 (16,993) (4,209)
Issuance of common
stock on exercise of
stock options at $0.30
to $1.50 per share.... -- -- 57,549 -- 43 -- 43
Stock bonus at $1.50
per share............. -- -- 9,968 -- 15 -- 15
Net loss............... -- -- -- -- -- (5,194) (5,194)
--------- ------ ------- ----- ------ -------- --------
BALANCE, DECEMBER 31,
1995................... 2,554,631 9,304 129,358 -- 3,538 (22,187) (9,345)
Net loss............... -- -- -- -- -- (1,243) (1,243)
--------- ------ ------- ----- ------ -------- --------
BALANCE, MARCH 31, 1996
(unaudited)............ 2,554,631 $9,304 129,358 $ -- $3,538 $(23,430) $(10,588)
========= ====== ======= ===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THERMATRIX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net loss........................ $(2,621) $(5,821) $(5,194) $(1,353) $(1,243)
Adjustments to reconcile net
loss to net cash used in oper-
ating activities--
Depreciation and amortization... 31 71 162 30 64
Provision for doubtful ac-
counts......................... -- 150 229 -- (25)
Stock bonus compensation ex-
pense.......................... -- -- 15 -- --
Changes in assets and liabili-
ties--
(Increase) decrease in accounts
receivable.................... 328 (1,570) (910) 590 (794)
Decrease (increase) in costs of
uncompleted contracts in
excess of billings............ 31 (308) 223 (96) (169)
(Increase) decrease in prepaid
expenses and other current as-
sets.......................... (48) 24 (130) (3) 8
Increase in accounts payable... 42 954 29 (554) 769
Increase (decrease) in billings
on uncompleted contracts in
excess of costs and revenue
recognized.................... (137) 169 149 (148) (109)
(Decrease) increase in accrued
liabilities................... (24) 553 (37) (110) 69
------- ------- ------- ------- -------
Net cash used in operating ac-
tivities...................... (2,398) (5,778) (5,464) (1,644) (1,430)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Purchases of property and equip-
ment........................... (178) (181) (381) (129) (53)
Purchase of short-term invest-
ments.......................... (1,088) (2,713) -- (58) --
Proceeds from sale of short-term
investments.................... -- -- 3,801 -- --
Increase in patents and other
assets......................... -- (138) (147) (44) (105)
------- ------- ------- ------- -------
Net cash (used in) provided by
investing activities.......... (1,266) (3,032) 3,273 (231) (158)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Proceeds from bridge loans...... -- 1,541 -- -- --
Payment of note payable......... -- (25) -- -- --
Net proceeds from sale of Series
C preferred stock.............. 3,795 -- -- -- --
Net proceeds from sale of Series
D redeemable preferred stock... -- 9,780 -- -- 2,084
Proceeds from issuance of common
stock.......................... 17 1 43 -- --
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities.......... 3,812 11,297 43 -- 2,084
------- ------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................ 148 2,487 (2,148) (1,875) 496
CASH AND CASH EQUIVALENTS AT BE-
GINNING OF PERIOD............... 494 642 3,129 3,129 981
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD....................... $ 642 $ 3,129 $ 981 $ 1,254 $ 1,477
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest.......... $ -- $ 72 $ -- $ -- $ --
======= ======= ======= ======= =======
Cash paid for income taxes...... $ -- $ -- $ 26 $ -- $ --
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Thermatrix Inc. (the "Company") is an environmental technology company
engaged in the development, manufacture and sale of innovative, proprietary
industrial process equipment for the destruction of volatile organic compounds
and hazardous air pollutants (collectively, "VOCs"). The Company markets its
products to a wide variety of industries, including petroleum,
chemical/petrochemical, pharmaceutical, pulp and paper, medical sterilization
and soil and groundwater remediation, throughout the world. As of December 31,
1994, the Company had emerged from the development stage.
The Company is subject to certain risks that include, but are not limited
to, the following: limited operating history; history of operating losses and
uncertainty of future profitability; sensitivity to major projects and fixed
price contracts. To date, the Company has manufactured and sold only a limited
number of its flameless thermal oxidation systems for commercial use and has a
limited track record in the VOC emissions market. At March 31, 1996, the
Company had an accumulated deficit of approximately $23.4 million and expects
to incur additional losses in the future. The Company does not expect to be
profitable unless and until such time as sales of flameless thermal oxidation
systems generate sufficient revenue to fund its operations. There can be no
assurance that the Company will achieve such revenues. The Company's operating
results are sensitive to major projects such that results of operations and
financial condition could be adversely affected if the Company failed to
obtain major projects, if a major project order was delayed, if the Company
was unable to complete the project within its cost estimate or if such
installations encountered operating or warranty problems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited Interim Financial Data
The unaudited interim financial statements as of March 31, 1996 and for the
three months ended March 31, 1995 and 1996 have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. The data
disclosed in the notes to the consolidated financial statements for these
periods are unaudited. The Company believes the results of operations for the
interim periods are not necessarily indicative of the results to be expected
for any future period.
Effect of Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-
Based Compensation." The disclosure requirements of SFAS No. 123 are effective
as of the beginning of the Company's 1996 fiscal year. The Company does not
expect the new pronouncement to have an impact on its results of operations
since the intrinsic value-based method prescribed by APB Opinion No. 25 and
also allowed by SFAS No. 123 will continue to be used for the valuation of
stock-based compensation plans.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-7
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. The Company prepares and evaluates ongoing cost to complete estimates
in order to monitor its project costs. These estimates form the basis for
calculating revenues and gross margins for each project under the percentage-
of-completion method of accounting. Due to uncertainties inherent in the
estimation process, estimated total costs are subject to revision on an on-
going basis as additional information becomes available. The estimates are
subject to change and actual results could be materially different from these
estimates.
Principles of Consolidation and Foreign Currency Translation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. The functional currency of the subsidiary is
the U.S. dollar. Accordingly, all translation gains and losses resulting from
transactions denominated in currencies other than the U.S. dollar are included
in net income. To date, the translation gains and losses have not been
material. All intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less to be
cash equivalents.
Short-term Investments
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." There was no effect on the
Company's financial statements due to the adoption of this statement. Under
SFAS No. 115, the Company classifies its investments, which consisted entirely
of commercial paper as of December 31, 1994, as "available for sale."
Accordingly, these investments, which matured in September 1995, were valued
at market value as of December 31, 1994. The gross unrealized holding loss at
December 31, 1994 was not significant.
Revenue Recognition
The Company principally uses the percentage-of-completion method of
accounting for contract revenues. The percentage-of-completion method is based
on total costs incurred to date compared with estimated total costs upon
completion of contracts. The completed contract method of accounting is used
for certain contracts when the Company does not have sufficient historical
data to enable it to prepare dependable cost estimates. Losses on contracts
are charged to cost of revenues as soon as such losses become known. Due to
uncertainties inherent in the estimation process, estimated total costs are
subject to revision on an ongoing basis as additional information becomes
available. The Company recognizes revenue and costs attributable to priced and
unpriced change orders when it is probable that the contract price will be
adjusted and the amount of the change order can be reliably estimated. The
Company warrants only new systems manufactured by the Company for defective
workmanship and/or materials for a period of 12 months from initial operation
of the system or 18 months after shipment or notification that the system is
ready for shipment, whichever occurs first. A provision for estimated warranty
costs is provided upon shipment of the unit. In addition, the Company offers
certain customers a money-back guarantee payable in the event that the
Company's systems fail to meet performance criteria on start-up. To date, the
Company has not incurred any liability related to these guarantees and, based
on this historical experience, does not maintain a reserve for these
guarantees.
During 1993, the Company performed certain research and development
activities on behalf of a customer for which they were reimbursed $108,000.
The reimbursement for the research and development is included in revenues in
the accompanying statements of operations. Accordingly, the cost of performing
the research and development of $108,000 is included in cost of revenues.
F-8
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Accounts Receivable
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Billed, subject to retainer provisions........... $ -- $ 74 $ --
Billed........................................... 913 789 917
Unbilled, including unpriced change orders....... 696 1,467 2,207
------ ------ ------
Total receivables................................ 1,609 2,330 3,124
Less: Allowance for doubtful accounts............ (150) (190) (165)
------ ------ ------
$1,459 $2,140 $2,959
====== ====== ======
</TABLE>
The unbilled amounts represent revenues recognized under the percentage-of-
completion method of accounting which exceed the amounts that are billable
according to contract terms. The unbilled amounts are generally billable as
contract milestones and deliverables are accepted by the customer or as change
orders are submitted and approved. As of December 31, 1995 and March 31, 1996,
accounts receivable included approximately $1,129,000 and $810,000,
respectively, of unpriced change orders. As of December 31, 1994, there were
no significant amounts included in accounts receivable for unpriced change
orders.
As of December 31, 1994, 88% of accounts receivable was concentrated with
five customers. As of December 31, 1995, approximately 75% of accounts
receivable was concentrated with two customers. As of March 31, 1996,
approximately 69% of accounts receivable was concentrated with three
customers.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash investments and accounts
receivable. The Company has cash investment policies that limit its
investments to short-term, low risk investments. With respect to accounts
receivable, the Company performs ongoing credit evaluations of its customers'
financial condition. Additionally, the Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated lives of the assets of three to
five years. Leasehold improvements are amortized over the shorter of the
related lease term or the estimated useful life of the asset. Betterments,
renewals and extraordinary repairs that extend the life of the asset are
capitalized; other repairs and maintenance are expensed.
As required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company regularly
evaluates the remaining life and recoverability of its equipment. The Company
adopted the provisions of this statement in 1995. The adoption did not have a
significant effect on the Company's financial position and results of
operations. Given the emerging nature of its markets, it is possible that the
Company's estimate that it will recover the net carrying value of the
equipment from future operations could change in the future.
F-9
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Patent Costs
Direct costs incurred in connection with the filing of the Company's patent
claims are capitalized as patent costs. Such amounts are amortized over the
estimated economic useful lives of the patents (generally five to seven
years). Accumulated amortization as of December 31, 1994 and 1995 and March
31, 1996 was approximately $ -0-, $39,000 and $53,000, respectively.
Significant Customers
Sales to significant customers as a percentage of total revenues for the
years ended December 31, 1993, 1994 and 1995 and for the three months ended
March 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
------------------------ ---------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A................... -- 29% 2% -- --
Customer B................... -- 21% -- 4% --
Customer C................... -- 20% 7% -- --
Customer D................... -- 11% 1% 10% --
Customer E................... -- -- 41% 53% 13%
Customer F................... -- -- 18% -- 1%
Customer G................... 81% -- -- -- --
Customer H................... -- -- -- 11% --
Customer I................... -- -- -- 10% --
Customer J................... -- -- -- -- 13%
Customer K................... -- -- 4% 2% 29%
</TABLE>
Revenues from government contracts as a percentage of total revenues was
19%, 0% and 10% for the year ended December 31, 1995 and for the three months
ended March 31, 1995 and 1996, respectively. There were no revenues from
government contracts for the years ended December 31, 1993 and 1994. The
principal government agencies to which the Company sells are the Department of
Defense and the Department of Energy. To date, the Company's revenues have
been derived predominantly from customers located in the United States.
Revenues from international customers as a percentage of total revenues were
less than 10% for the years ended December 31, 1993, 1994 and 1995 and the
quarter ended March 31, 1995 and represented 20% of revenues for the three
months ended March 31, 1996.
Pro Forma Net Loss Per Share
Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of redeemable convertible preferred stock and
convertible preferred stock (using the "if converted" method) and stock
options and warrants (using the treasury stock method). As the Company has
incurred losses since inception, common equivalent shares have been excluded
from the computation as their effect is antidilutive; however, pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, such
computations include all common and common equivalent shares issued within the
12 months preceding the filing date as if they were outstanding for all
periods presented (using the treasury stock method and an assumed initial
public offering price of $13.00 per share). Redeemable convertible preferred
stock and convertible preferred stock outstanding during the period are
included (using the "if converted" method) in the computation as common
equivalent shares even though the effect is antidilutive. Historical earnings
per share prior to 1995 have not been presented since such amounts are not
deemed meaningful due to the significant change in the Company's capital
structure that will occur in connection with the proposed offering.
F-10
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Unaudited Pro Forma Stockholders' Equity
Upon the consummation of this initial public offering contemplated by this
Prospectus, all of the redeemable convertible and convertible preferred stock
outstanding as of the closing date will automatically be converted into shares
of common stock. Unaudited pro forma stockholders' equity as of March 31,
1996, adjusted for the conversion of all outstanding preferred stock, is
presented in the accompanying consolidated balance sheet.
3. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Commissions payable......................... $ 77 $ 177 $208
Reserve for contract losses................. 140 20 6
Other....................................... 245 228 280
------ ------ ----
$ 462 $ 425 $494
====== ====== ====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and certain equipment under operating
leases which expire through May 2000. Rent expense was approximately $126,000,
$252,000 and $269,000 for the years ended December 31, 1993, 1994 and 1995,
respectively and $65,000 and $56,000, for the three months ended March 31,
1995 and 1996, respectively. As of March 31, 1996, future minimum payments are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996 (nine months)..................... $205
1997................................... 218
1998................................... 170
1999................................... 59
2000................................... 2
----
$654
====
</TABLE>
In October 1995, the Company entered into a letter of intent with Purus,
Inc. ("Purus") to purchase all of the respective assets, rights and properties
of Purus's VOC adsorption technology ("PADRE"). Concurrent with the signing of
the letter of intent, the Company entered into a License Agreement ("License")
with Purus to manufacture, sell and distribute VOC treatment systems utilizing
the PADRE technology. Under this License the Company is required to make
quarterly royalty payments of 7% on the aggregate net invoice value of all
PADRE VOC equipment sales. Royalty payments will continue until the earlier
of: (i) five years from the date of the License or (ii) such date that Purus
has received $2.0 million in aggregate royalty payments. The purchase of PADRE
was completed in April 1996 for cash consideration of $300,000.
F-11
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
5. CONVERTIBLE PREFERRED STOCK:
Convertible preferred stock consisted of the following, net of issuance
costs (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Series B:
Authorized--6,194,766 shares
Outstanding--2,047,090 shares; liquidation
preference
of $6,141..................................... $5,509 $5,509 $5,509
Series C:
Authorized--1,550,000 shares
Outstanding--507,541 shares; liquidation
preference of $3,807.......................... 3,795 3,795 3,795
------ ------ ------
$9,304 $9,304 $9,304
====== ====== ======
</TABLE>
The rights, restrictions and preferences of the convertible preferred stock
are as follows:
. Each share of convertible preferred stock is convertible, at the option
of the stockholder, into one share of common stock, subject to
adjustments to prevent dilution as provided in the related stock
agreements.
. The holders of convertible preferred stock are entitled to the number of
votes equal to the number of shares of common stock into which each
share of convertible preferred stock could be converted.
. Each share of convertible preferred stock will convert automatically
into common stock in the event of the closing of an underwritten public
offering of the Company's common stock from which the Company receives
gross proceeds of not less than $20,000,000.
. Each preferred stockholder is entitled to receive annual dividends at a
rate of $0.24 per Series B share and $0.60 per Series C share when, and
if, declared by the Board of Directors, prior to payment of dividends on
common stock. Dividends are non-cumulative. No dividends have been
declared to date.
. In the event of liquidation, dissolution or winding up of the Company,
the holders of Series B and Series C convertible preferred stock are
entitled to receive $3.00 per Series B share and $7.50 per Series C
share, plus any declared but unpaid dividends, prior to any distribution
to the holders of common stock.
In connection with the issuance of the Series B convertible preferred stock
in 1992, warrants to purchase 17,857 shares of Series B convertible preferred
stock at $3.00 per share were issued. Subsequent to the initial public
offering, these warrants will be convertible into warrants to purchase common
stock. The warrants are exercisable at any time and expire in 1996. The value
of the warrants at the date of issuance was nominal; therefore no value was
assigned to the warrants for accounting purposes.
F-12
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Redeemable convertible preferred stock outstanding consisted of the
following, net of issuance costs (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Series D
Authorized--6,600,000 shares
Outstanding--1,614,284 shares as of
December 31, 1994
and 1995 and 1,898,878 shares as of March
31, 1996, respectively; liquidation
preference of $42,724 as of
March 31, 1996............................. $11,321 $11,321 $13,405
------- ------- -------
$11,321 $11,321 $13,405
======= ======= =======
</TABLE>
In November 1994, 1,614,284 shares of Series D redeemable preferred stock
were issued at $7.50 per share, net of issuance costs of $786,000. As part of
this issuance, the Company converted $1,541,486 of debt and accrued interest
into shares of Series D redeemable preferred stock.
In January 1996, the Company amended the Articles of Incorporation to
increase the number of authorized shares of convertible preferred stock to
14,344,766 and authorized the issuance and sale of up to an additional
1,653,760 shares of Series D redeemable preferred stock. In February 1996, the
Company sold 284,594 shares of Series D redeemable preferred stock at $7.50
per share.
The rights, restrictions, and preferences of the Series D redeemable
preferred stock are similar to the rights, restrictions and preferences of
Series B and C convertible preferred stock discussed in Note 5, except:
. Each preferred stockholder is entitled to receive annual dividends at a
rate of $0.60 per share when, and if, declared by the Board of
Directors, prior to payment of dividends on common stock. Dividends are
non-cumulative. No dividends have been declared to date.
. Stockholders may, at their option, require the Company to redeem the
Series D redeemable preferred shares after November 1999 or upon a
change in control of the Company, or a sale or merger of the Company, if
earlier. These rights will terminate upon a public offering of the
Company's common stock from which the Company receives gross proceeds of
not less than $20,000,000.
. In the event of liquidation, dissolution or winding up of the Company,
the stockholders shall be entitled to receive, prior and in preference
to any distribution to the holders of Series B and Series C convertible
preferred stock and common stock, an amount equal to the greater of: (i)
the amount that would be distributed on the shares of common stock
issued upon conversion of the Series D redeemable, preferred stock
assuming that all preferred stock was then converted into common stock,
or (ii) three times the original purchase price of the Series D
redeemable preferred stock of $7.50 per share, plus any declared but
unpaid dividends.
. In the event that an initial public offering is completed on or before
July 15, 1996, the conversion price of Series D redeemable preferred
stock will be adjusted automatically to $5.25 per share if the price to
the public in the initial public offering is below $15.75 per share.
This will result in an additional
F-13
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
813,804 shares of common stock being issued upon conversion. These
additional shares of Common Stock have been included in the unaudited
pro forma stockholder's equity as of March 31, 1996. If the price to the
public in the initial public offering is above $15.75 per share but
below $22.50 per share, the conversion price of the Series D redeemable
preferred stock will be adjusted automatically to one-third of the price
to the public in the initial public offering.
. If no initial public offering has been completed by July 15, 1996, the
conversion price of Series D redeemable preferred stock shall be $7.50
per share, subject to dilutive adjustments: (i) if revenues for the year
ended December 31, 1996 are below an established threshold as defined in
the Series D stock agreement; (ii) if an initial public offering price
is less than three times the conversion price; (iii) if common stock,
warrants, options or similar securities are issued at a price below the
conversion price; or (iv) if a stock split, stock dividend, or similar
event occurs.
In connection with a bridge financing in 1994, warrants to purchase 14,471
shares of convertible Series D redeemable preferred stock at $7.50 per share
were issued. Subsequent to the initial public offering, these warrants will be
convertible into warrants to purchase common stock. The warrants are
exercisable at any time and expire in 1999. These warrants will adjust to
$5.25 per share if the price to the public in the initial public offering is
below $15.75 per share. This will result in an additional 6,201 shares of
common stock being issued upon conversion. The value of the warrants at the
date of issuance was nominal; therefore no value was assigned to the warrants
for accounting purposes.
7. COMMON STOCK:
As of March 31, 1996, the Company had reserved shares of its common stock
for issuance as follows:
<TABLE>
<S> <C>
Conversion of Series B convertible preferred stock............ 2,047,090
Warrants to purchase Series B convertible preferred stock..... 17,857
Conversion of Series C convertible preferred stock............ 507,541
Conversion of Series D redeemable convertible preferred
stock........................................................ 2,712,682
Warrants to purchase Series D redeemable convertible preferred
stock........................................................ 49,243
Stock options under 1987 Stock Option Plan (see Note 8)....... 746,997
---------
Total shares reserved....................................... 6,081,410
=========
</TABLE>
8. STOCK OPTION PLAN:
Under the Company's 1987 Stock Option Plan (the "Plan"), the Board of
Directors may grant to employees and consultants options to purchase the
Company's common stock at terms and prices determined by the Board. Subsequent
to March 31, 1996, the Company adopted new stock plans (See Note 11C),
accordingly, the Company does not plan to issue further options to purchase
common stock under the Plan.
F-14
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
The following option activity in the Plan occurred during the three years
ended December 31, 1995 and the three months ended March 31, 1996:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE OUTSTANDING PER SHARE
FOR GRANT OPTIONS PRICE
--------- ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1992.............. 240,196 228,652 $ 0.30
Granted............................... (77,290) 77,290 $ 0.30-$.75
Exercised............................. -- (58,231) $ 0.30
Canceled.............................. 20,226 (20,227) $ 0.30
-------- -------- ------------
Balance, December 31, 1993.............. 183,132 227,484 $ 0.30-$ .75
Authorized............................ 331,124 --
Granted............................... (449,677) 449,677 $ 0.75-$5.25
Exercised............................. -- (2,646) $ 0.30-$0.75
Canceled.............................. 4,213 (4,213) $ 0.30-$0.75
-------- -------- ------------
Balance, December 31, 1994.............. 68,792 670,302 $ 0.30-$5.25
Authorized............................ 107,317 --
Granted............................... (262,020) 262,020 $ 1.50
Exercised............................. -- (57,549) $ 0.30-$1.50
Canceled.............................. 320,296 (320,296) $ 0.30-$5.25
-------- -------- ------------
Balance, December 31, 1995.............. 234,385 554,477 $ 0.30-$1.50
Granted............................... (192,520) 192,520 $ 3.00-$7.50
Exercised............................. -- -- --
Canceled.............................. -- -- --
-------- -------- ------------
Balance, March 31, 1996 (unaudited)..... 41,865 746,997 $ 0.30-$7.50
======== ======== ============
</TABLE>
As of March 31, 1996, options to purchase 299,314 of common stock at $0.30
to $3.00 per share were fully vested and exercisable under the Plan.
9. INCOME TAXES:
The Company has adopted a liability approach to income taxes under which
deferred income taxes are provided based upon enacted tax laws and rates
applicable to the periods in which the taxes become payable.
The provision for income taxes differs from the statutory U.S. Federal
income tax rate due to the following:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE THREE
ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- --------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision (benefit) at U.S. statu-
tory rate........................ (34.0)% (34.0)% (34.0)% (34.0)% (34.0)%
State income taxes, net of
Federal benefit.................. (6.1) (6.1) (6.1) (6.1) (6.1)
Increase (decrease) in
valuation allowance.............. 40.0 40.0 40.0 40.0 40.0
Other............................. 0.1 0.1 0.1 0.1 0.1
------ ------ ------ ------ ------
-- % -- % -- % -- % -- %
====== ====== ====== ====== ======
</TABLE>
F-15
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
The provision for income taxes for the year ended December 31, 1995 and the
three months ended March 31, 1995 and 1996 relates to state taxes against
which no net operating loss can be applied.
The net deferred income tax asset consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards............ $5,938 $7,843 $8,362
Tax credit carryforwards.................... 26 83 83
Cumulative temporary differences............ 260 235 285
------ ------ ------
6,224 8,161 8,730
Valuation allowance........................... (6,224) (8,161) (8,730)
------ ------ ------
Net deferred income tax asset................. $ -- $ -- $ --
====== ====== ======
</TABLE>
As of March 31, 1996, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $22,400,000 and
$13,100,000, respectively. The net operating loss carryforwards and tax credit
carryforwards expire on various dates through 2010. The utilization of
cumulative net operating losses prior to the offering will be subject to
annual limitations as a result of the change of control, for taxation
purposes, that will occur on completion of this proposed offering. The
Internal Revenue Service Code also contains other provisions which may limit
the net operating loss and tax credit carryforwards to be used in any given
year upon the occurrence of certain events. Cumulative temporary differences
consist of reserves and accruals currently deductible for financial reporting
purposes, but not for tax purposes. The Company believes sufficient
uncertainty exists regarding the realizability of the operating loss and
credit carryforwards and, accordingly, has continued to provide a valuation
allowance against the deferred income tax asset.
10. LOAN AND SECURITY AGREEMENT:
In December 1995, the Company entered into a Loan and Security Agreement
("Agreement") with a bank which provides for a $3,000,000 bridge loan,
available in two equal parts of $1,500,000 and bears interest at the prime
interest rate plus 2.5%. All or any part of the first $1,500,000 may be
requested until October 4, 1996. All or any part of the second $1,500,000 may
be requested after the bank accepts the terms under which a prospective
investor will purchase equity securities from the Company.
Any time after the bridge loan has been paid in full, the bank will make
available a committed line of $3,000,000. This committed line will bear
interest at the prime interest rate plus 0.75% and will be subject to certain
financial and nonfinancial covenants. In addition, borrowings under the line
of credit in excess of $750,000 are limited to 80% of qualified accounts
receivable. As of December 31, 1995 and March 31, 1996, there were no amounts
outstanding under the Agreement. In April 1996, the Company borrowed $500,000
under the Agreement.
The Agreement expires on December 15, 1996 unless the Company has been
granted a bridge extension request, in which case the term will be one year
from the date of the bridge extension request.
On February 8, 1996, the Company granted the bank a warrant to purchase
20,000 shares of Series D redeemable convertible preferred stock at $7.50 per
share. This warrant is adjustable to $5.25 per share for conversion (see Note
6) which will result in an additional 8,571 shares of common stock being
issued upon
F-16
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
conversion. Subsequent to the initial public offering, these warrants will be
convertible into warrants to purchase common stock. This warrant carries a
right to purchase an additional 20,000 shares of Series D redeemable
convertible preferred stock at $7.50 per share if the Company draws down
against the $1,500,000 available under the second part of the bridge loan. The
value of the warrants at the date of issuance was nominal; therefore no value
was assigned to the warrants for accounting purposes.
11. SUBSEQUENT EVENTS:
A. Reincorporation in Delaware
In April 1996, the Company's stockholders authorized the reincorporation of
the Company in Delaware. The reincorporation was completed in May 1996 and has
been reflected in the accompanying consolidated financial statements.
Effective upon the closing of the proposed offering, the par value of each
share of common and undesignated preferred stock becomes $0.001 per share, the
Company will be authorized to issue 50,000,000 shares of common stock and
5,000,000 shares of undesignated preferred stock and the Board of Directors
will have the authority to issue the undesignated preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof.
B. Stock Split:
In May 1996, the Board of Directors approved a one for three reverse stock
split of all common stock and all designated series of preferred stock
outstanding. The effect of the stock split has been retroactively reflected in
the accompanying consolidated financial statements.
C. Stock Plans
The following stock plans were adopted by the Company's stockholders in
April 1996.
1996 Stock Plan ("1996 Plan")
A total of 333,334 shares of common stock has been reserved for issuance
under the 1996 Plan. The 1996 Plan provides that options and stock purchase
rights may be granted to employees and consultants to the Company. Options
granted under the 1996 Plan may be either incentive stock options or
nonstatutory stock options. The Company may also grant stock purchase rights
under the 1996 Plan. The exercise price and vesting of all grants are to be
determined by the Board of Directors or its designee. Options granted under
the 1996 Plan expire 10 years from the date of grant. The 1996 Plan will
terminate in 2006.
1996 Directors Stock Option Plan ("Directors Plan")
The Directors Plan will not become effective until the effective date of the
proposed offering. A total of 83,334 shares of common stock has been reserved
for issuance under the Directors Plan. The Directors Plan provides for an
automatic grant to each director of an initial option to purchase 6,667 shares
of common stock ("First Option") upon the later of the effective date of this
offering or the date on which such person becomes a non-employee director, and
an additional option to purchase 1,667 shares of common stock ("Subsequent
Option") each year, if the director has served on the Company's Board of
Directors for at least six months. Options granted under the Directors Plan
expire ten years after the date of grant. Twelve and one-half percent of the
shares subject to a First Option will vest six months after its date of grant
and an additional twelve and one-half percent will vest at the end of each
six-month period thereafter. One-half of the shares subject to a Subsequent
Option will vest six months after the date of the option grant and as to the
remaining one-half, one
F-17
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATING TO THE THREE MONTHS ENDED
MARCH 31,1995 AND 1996 IS UNAUDITED)
year after the date of grant. The exercise price per share of all options
shall be equal to the fair market value of the Company's common stock on the
date of grant. The Directors Plan will terminate in 2006.
Employee Stock Purchase Plan ("Purchase Plan")
A total of 116,667 shares of common stock are reserved for issuance under
the Purchase Plan. The Purchase Plan will enable eligible employees to
purchase common stock at the lower of 85% of the fair market value of the
Company's common stock on the first or last day of each six-month offering
period. The first offering period, however, will begin upon the closing date
of the proposed initial public offering and end on the last market trading day
on or before April 30, 1997. The Purchase Plan will terminate in 2006.
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURIS-
DICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUM-
STANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 23
Management............................................................... 36
Certain Transactions..................................................... 43
Principal Stockholders................................................... 44
Description of Capital Stock............................................. 46
Shares Eligible for Future Sale.......................................... 48
Underwriting............................................................. 50
Legal Matters............................................................ 51
Experts.................................................................. 51
Additional Information................................................... 52
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
Thermatrix Inc.
COMMON STOCK
---------------
PROSPECTUS
---------------
OPPENHEIMER & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED
HSBC JAMES CAPEL
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
APPENDIX
PAGE 2
a graphical illustration of the Thermatrix Flameless Thermal Oxidation
system.
ON GATEFOLD
photograph of a Thermatrix system installed at a FMC Corporation chemical plant.
photograph of a Thermatrix system in operation at a Chevron refinery.
photograph of a Thermatrix assembly facility in Knoxville, Tennessee and three
units in final assembly for a Department of Energy remediation project.
Photograph of Thermatrix system installed at a pulp and paper mill.
PAGE 24
A graphical illustration of the Thermatrix Flameless Thermal Oxidizer.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
Registration Fee.................................................... $ 11,104
NASD Filing Fee..................................................... 3,720
Nasdaq National Market listing fee.................................. 37,000
Printing and Engraving.............................................. 100,000
Legal Fees and Expenses............................................. 300,000
Accounting Fees and Expenses........................................ 175,000
Blue Sky Fees and Expenses.......................................... 15,000
Directors and Officers Insurance.................................... 100,000
Transfer Agent Fees................................................. 10,000
Miscellaneous....................................................... 48,176
--------
Total............................................................. $800,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach or alleged breach of their duty of care. In addition, as permitted by
Section 145 of the Delaware General Corporation Law, the Amended and Restated
Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers and persons serving in such
capacities in other business enterprises (including, for example, subsidiaries
of the Registrant) at the Registrant's request, to the fullest extent
permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (ii) the Registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (iii) the Registrant is required to
advance expenses, as incurred, to its directors and executive officers in
connection with defending a proceeding (except that it is not required to
advance expenses to a person against whom the Registrant brings a claim) for
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct, knowing violation of law or deriving an improper personal benefit;
(iv) the rights conferred in the Amended and Restated Bylaws are not
exclusive, and the Registrant is authorized to enter into indemnification
agreements with its directors, executive officers and employees; and (v) the
Registrant may not retroactively amend the Bylaw provisions in a way that it
adverse to such directors, executive officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum
indemnity allowed to directors and executive officers by Section 145 of the
Delaware General Corporation Law and the Amended and Restated Bylaws, as well
as certain additional procedural protections. In addition, the indemnity
agreement provide that directors and executive officers will be indemnified to
the fullest possible extent not prohibited by law against all expenses
(including attorney's fees) and settlement amounts paid or incurred by them in
any action or proceeding, including any derivative action by or in the right
of the Registrant, on account of their services as directors or executive
officers of the Registrant or as directors or officers of any other company or
enterprise when they are serving in such capacities at the request of the
Registrant. The Company will not be obligated pursuant to the indemnity
agreements to indemnify or advance expenses to an indemnified party with
respect to proceedings or claims initiated by the indemnified
II-1
<PAGE>
party and not by way of defense, except with respect to proceedings
specifically authorized by the Board of Directors or brought to enforce a
right to indemnification under the indemnity agreement, the Company's Amended
and Restated Bylaws or any statute or law. Under the agreements, the Company
is not obligated to indemnify the indemnified party (i) for any expenses
incurred by the indemnified party with respect to any proceeding instituted by
the indemnified party to enforce or interpret the agreement, if a court of
competent jurisdiction determines that each of the material assertions made by
the indemnified party in such proceeding was not made in good faith or was
frivolous; (ii) for any amounts paid in settlement of a proceeding unless the
Company consents to such settlement; (iii) with respect to any proceeding
brought by the Company against the indemnified party for willful misconduct,
unless a court determines that each of such claims was not made in good faith
or was frivolous; (iv) on account of any suit in which judgment is rendered
against the indemnified party for an accounting of profits made from the
purchase or sale by the indemnified party of securities of the Company
pursuant to the provisions of (S) 16(b) of the Securities Exchange Act of 1934
and related laws; (v) on account of the indemnified party's conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct or a knowing violation of the law; (vi) an
account of any conduct from which the indemnified party derived an improper
personal benefit; (vii) on account of conduct the indemnified party believed
to be contrary to the best interests of the Company or its stockholders;
(viii) on account of conduct that constituted a breach of the indemnified
party's duty of loyalty to the Company or its stockholders; or (ix) if a final
decision by a court having jurisdiction in the matter shall determine that
such indemnification is not lawful.
The indemnification provision in the Amended and Restated Bylaws and the
indemnification agreements entered into between the Registrant and its
directors and executive officers, may be sufficiently broad to permit
indemnification of the Registrant's officers and directors for liabilities
arising under the 1933 Act.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of Underwriting Agreement..................................... 1.1
Restated Certificate of Incorporation.............................. 3.2
Amended and Restated Bylaws........................................ 3.4
Form of Indemnification Agreement entered into by the Registrant
with each of its directors and executive officers................. 10.1
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 31, 1993, the Registrant has issued and sold the following
securities (assuming the Company's one-for-three stock split):
1. From March 31, 1993 to March 31, 1996 the Registrant issued and sold
118,427 shares of Common Stock to directors, employees and consultants at
prices ranging from $0.30 to $3.00 per share, upon exercise of stock
options pursuant to the Registrant's 1987 Incentive Stock Plan.
2. On April 21, 1993, the Registrant issued and sold 507,541 shares of
Series C Preferred Stock to a total of 5 investors at $7.50 per share.
3. From November 21, 1994 to February 8, 1996 the Registrant issued
warrants to purchase an aggregate of 34,471 shares of Series D Preferred
Stock to a total of 5 investors with an exercise price of $7.50 per share.
4. On November 21, 1994, the Registrant issued and sold 1,614,284 shares
of Series D Preferred Stock to a total of 19 investors at $7.50 per share.
5. On April 11, 1995, the Registrant issued 9,968 shares of Common Stock
to a total of 10 employees as bonuses at a fair market value of $1.50 per
share.
II-2
<PAGE>
6. On February 6, 1996, the Registrant issued and sold 284,594 shares of
Series D Preferred Stock to a total of 18 investors at $7.50 per share.
7. On April 22, 1996, the Registrant issued and sold 4,167 shares of
Common Stock to a director of the Company at $12.00 per share.
The sale of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or rule 701 promulgated under Section
3(b) of the Securities Act as transactions by an issuer not involving any
public offering or transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates issued in such transactions. All recipients
had adequate access, through their relationship with the Registrant, to
information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 Form of Restated Certificate of Incorporation of the Registrant to be
filed prior to the effective date of the offering made under this
Registration Statement.
*3.3 Form of Restated Certificate of Incorporation to be filed immediately
following the closing of the offering made under this Registration
Statement.
*3.4 Amended and Restated Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.
*4.2 Amended and Restated Investor Rights Agreement.
*5.1 Opinion of Wilson Sonsini Goodrich & Rosati Professional Corporation.
*10.1 Form of Indemnification Agreement between the Registrant and each of its
directors and executive officers.
*10.2 1987 Incentive Stock Plan, as amended and related agreements.
*10.3 1996 Stock Plan and form of Stock Option Agreement thereunder.
*10.4 Employee Stock Purchase Plan and forms of agreement thereunder.
1996 Director Option Plan and form of Director Stock Option Agreement
*10.5 thereunder.
Asset Purchase Agreement between the Registrant and Purus, Inc. dated
*10.6 January 4, 1996.
Lease dated June 12, 1995 between the Registrant and Westmark Metro
*10.7 Plaza, Inc., as amended.
Lease dated June 24, 1995 between the Registrant and American General
*10.8 Life Insurance Company.
*10.9 Loan and Security Agreement between the Registrant and Cupertino
National Bank and Trust, dated December 15, 1995.
*11.1 Statement of computation of pro forma Common Shares and Equivalents.
*21.1 Subsidiary of the Registrant.
*23.1 Consent of Counsel (included in Exhibit 5.1).
23.2 Consent of Woodcock Washburn Kurtz Mackiewicz & Norris.
23.3 Consent of Arthur Andersen LLP (see page II-7).
*24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* previously filed
(b) Financial Statement Schedules
Report of Independent Public Accountants on Schedule
II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Restated
Certificate of Incorporation or Bylaws of the Registrant, the Underwriting
Agreement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-1 TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF SAN JOSE, STATE OF CALIFORNIA, ON THIS 10TH DAY OF JUNE, 1996.
Thermatrix Inc.
/s/ John T. Schofield
By: _________________________________
JOHN T. SCHOFIELD
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
Chairman of the June 10, 1996
/s/ John T. Schofield Board, President
- ------------------------------------- and Chief Executive
JOHN T. SCHOFIELD Officer (Principal
Executive Officer)
Vice President, June 10, 1996
*/s/ Steven J. Guerrettaz Finance and
- ------------------------------------- Accounting and
STEVEN J. GUERRETTAZ Chief Financial
Officer (Principal
Financial and
Accounting Officer)
*/s/ Robi Blumenstein Director June 10, 1996
- -------------------------------------
ROBI BLUMENSTEIN
*/s/ Harry J. Healer, Jr. Director June 10, 1996
- -------------------------------------
HARRY J. HEALER, JR.
Director
- -------------------------------------
REBECCA P. MARK
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
*/s/ Robert W. Page Director June 10, 1996
- -------------------------------------
ROBERT W. PAGE
- ------------------------------------- Director
FRANK R. POPE
*/s/ John M. Toups Director June 10, 1996
- -------------------------------------
JOHN M. TOUPS
*By /s/ John T. Schofield
---------------------------------
JOHN T. SCHOFIELD
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made part of this
Registration Statement.
Arthur Andersen LLP
San Jose, California
June 10, 1996
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited in accordance with generally accepted auditing standards,
the financial statements of Thermatrix Inc. included in this Registration
Statement and have issued our report thereon dated February 28, 1996. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Part II Item 16(b) is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
February 28, 1996
II-8
<PAGE>
SCHEDULE II
THERMATRIX INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
- ----------- ------------ ---------- ------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31,
1993................... $-- $-- $ -- $--
Allowance for doubtful
accounts
Year ended December 31,
1994................... $-- $150 $ -- $150
Allowance for doubtful
accounts
Year ended December 31,
1995................... $150 $229 $(189) $190
Allowance for doubtful
accounts
</TABLE>
- --------
(1) Deductions represent accounts receivable amounts that were considered
doubtful and previously reserved for that became uncollectible and were
written off in the year.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT EXHIBIT DESCRIPTION NUMBERED PAGE
------- ------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 Form of Restated Certificate of Incorporation of the
Registrant to be filed prior to the effective date of
the offering made under this Registration Statement.
*3.3 Form of Restated Certificate of Incorporation to be
filed immediately following the closing of the
offering made under this Registration Statement.
*3.4 Amended and Restated Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.
*4.2 Amended and Restated Investor Rights Agreement.
*5.1 Opinion of Wilson Sonsini Goodrich & Rosati
Professional Corporation.
*10.1 Form of Indemnification Agreement between the
Registrant and each of its directors and executive
officers.
*10.2 1987 Incentive Stock Plan, as amended and related
agreements.
*10.3 1996 Stock Plan and form of Stock Option Agreement
thereunder.
*10.4 Employee Stock Purchase Plan and forms of agreement
thereunder.
*10.5 1996 Director Option Plan and form of Director Stock
Option Agreement thereunder.
*10.6 Asset Purchase Agreement between the Registrant and
Purus, Inc. dated January 4, 1996.
*10.7 Lease dated June 12, 1995 between the Registrant and
Westmark Metro Plaza, Inc., as amended.
*10.8 Lease dated June 24, 1995 between the Registrant and
American General Life Insurance Company.
*10.9 Loan and Security Agreement between the Registrant and
Cupertino National Bank and Trust, dated December 15,
1995.
*11.1 Statement of computation of pro forma Common Shares
and Equivalents.
*21.1 Subsidiary of the Registrant.
*23.1 Consent of Counsel (included in Exhibit 5.1).
23.2 Consent of Woodcock Washburn Kurtz Mackiewicz &
Norris.
23.3 Consent of Arthur Andersen LLP (see page II-7).
*24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* previously filed
<PAGE>
EXHIBIT 1.1
2,000,000 Shares
Thermatrix Inc.
Common Stock
UNDERWRITING AGREEMENT
----------------------
________ __, 1996
Oppenheimer & Co., Inc.
Prudential Securities Incorporated
HSBC Securities, Inc.
c/o Oppenheimer & Co., Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named in
Schedule I attached hereto.
Gentlemen:
Thermatrix Inc., a Delaware corporation (the "Company"), proposes to
sell to you and the other underwriters named in Schedule I to this Agreement
(the "Underwriters"), for whom you are acting as Representatives, an aggregate
of 2,000,000 shares (the "Firm Shares") of the Company's common stock, $0.001
par value (the "Common Stock"). In addition, the Company proposes to grant to
the Underwriters an option to purchase up to an additional 300,000 shares (the
"Option Shares") of Common Stock from it for the purpose of covering over-
allotments in connection with the sale of the Firm Shares. The Firm Shares and
the Option Shares are together called the "Shares."
1. Sale and Purchase of the Shares. On the basis of the
-------------------------------
representations, warranties and agreements contained in, and subject to the
terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from
the Company, at $[ ] per share (the "Initial Price"), the number
-1-
<PAGE>
of Firm Shares set forth opposite the name of such Underwriter in
Schedule I to this Agreement.
(b) The Company grants to the several Underwriters an option to
purchase, severally and not jointly, all or any part of the Option Shares
at the Initial Price. The number of Option Shares to be purchased by
each Underwriter shall be the same percentage (adjusted by the
Representatives to eliminate fractions) of the total number of Option
Shares to be purchased by the Underwriters as such Underwriter is
purchasing of the Firm Shares. Such option may be exercised only to
cover over-allotments in the sales of the Firm Shares by the Underwriters
and may be exercised in whole or in part at any time on or before 12:00
noon, New York City time, on the business day before the Firm Shares
Closing Date (as defined below), and only once thereafter within 30 days
after the date of this Agreement, in each case upon written or
telegraphic notice, or verbal or telephonic notice confirmed by written
or telegraphic notice, by the Representatives to the Company no later
than 12:00 noon, New York City time, on the business day before the Firm
Shares Closing Date or at least two business days before the Option
Shares Closing Date (as defined below), as the case may be, setting forth
the number of Option Shares to be purchased and the time and date (if
other than the Firm Shares Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company of the Firm
--------------------
Shares to the Representatives for the respective accounts of the Underwriters,
and payment of the purchase price by certified or official bank check or checks
payable in New York Clearing House (next day) funds to the Company, shall take
place at the offices of Oppenheimer & Co., Inc., at Oppenheimer Tower, World
Financial Center, New York, New York 10281, at 10:00 a.m., New York City time,
on the third business day following the date of this Agreement, provided,
however, that if the Shares sold hereunder are priced after 4:30 p.m., New York
time, on any business day, payment and delivery in respect of the Firm Shares
shall take place on the fourth business day following the date of this
Agreement; if it is determined that settlement within the foregoing time frame
is not feasible, then payment and delivery in respect of the Firm Shares shall
occur at such time on such other date, not later than 10 business days after the
date of this Agreement, as shall be agreed upon by the Company and the
Representatives (such time and date of delivery and payment are called the "Firm
Shares Closing Date").
In the event the option with respect to the Option Shares is
exercised, delivery by the Company of the Option Shares to the Representatives
for the respective accounts of the Underwriters and payment of the purchase
price by certified or
-2-
<PAGE>
official bank check or checks payable in New York Clearing House (next day)
funds to the Company shall take place at the offices of Oppenheimer & Co., Inc.
specified above at the time and on the date (which may be the same date as, but
in no event shall be earlier than, the Firm Shares Closing Date) specified in
the notice referred to in Section 1(b) (such time and date of delivery and
payment are called the "Option Shares Closing Date"). The Firm Shares Closing
Date and the Option Shares Closing Date are called, individually, a "Closing
Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such names
and shall be in such denominations as the Representatives shall request at least
two full business days before the Firm Shares Closing Date or, in the case of
Option Shares, on the day of notice of exercise of the option as described in
Section l(b) and shall be made available to the Representatives for checking and
packaging, at such place as is designated by the Representatives, at least one
full business day before the Firm Shares Closing Date (or the Option Shares
Closing Date in the case of the Option Shares).
3. Registration Statement and Prospectus; Public Offering. The
------------------------------------------------------
Company has prepared in conformity with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), and the published rules and
regulations thereunder (the "Rules") adopted by the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (No. 333-
4370), including a preliminary prospectus relating to the Shares, and has filed
with the Commission the Registration Statement and such amendments thereto as
may have been required to the date of this Agreement. Copies of such
Registration Statement (including all amendments thereto) and of the related
preliminary prospectus have heretofore been delivered by the Company to you.
The Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Shares, which registration shall be effective upon filing with the
Commission. The term "Registration Statement" means the Registration Statement
as amended at the time and on the date it becomes effective (the "Effective
Date"), including all exhibits and information, if any, deemed to be part of the
Registration Statement pursuant to Rule 424(a), Rule 430A and Rule 462(b) of the
Rules. The term "preliminary prospectus" means any preliminary prospectus (as
described in Rule 430 of the Rules) included at any time as a part of the
Registration Statement. The term "Prospectus" means the prospectus in the form
first used to confirm sales of the Shares (whether such prospectus was included
in the Registration Statement at the time of effectiveness or was subsequently
filed with the Commission pursuant to Rule 424(b) of the Rules) or the
preliminary prospectus forming part of the Registration Statement at the time
-3-
<PAGE>
it was declared effective together with the term sheet permitted under Rule
434(b) and filed with the Commission pursuant to Rule 424(b), as applicable.
The Company understands that the Underwriters propose to make a public
offering of the Shares, as set forth in and pursuant to the Prospectus, as soon
after the Effective Date and the date of this Agreement as the Representatives
deem advisable. The Company hereby confirms that the Underwriters and dealers
have been authorized to distribute or cause to be distributed each preliminary
prospectus and are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments or supplements
thereto to the Underwriters).
4. Representations and Warranties of the Company. The Company
---------------------------------------------
hereby represents and warrants to each Underwriter as follows:
(a) On the Effective Date the Registration Statement complied, and
on the date of the Prospectus, on the date any post-effective amendment
to the Registration Statement shall become effective, on the date any
supplement or amendment to the Prospectus is filed with the Commission
and on each Closing Date, the Registration Statement and the Prospectus
(and any amendment thereof or supplement thereto) will comply in all
material respects with the applicable provisions of the Securities Act
and the Rules; the Registration Statement did not, as of the Effective
Date, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and on the other dates
referred to above neither the Registration Statement nor the Prospectus,
nor any amendment thereof or supplement thereto, will contain any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. When any related preliminary prospectus was
first filed with the Commission (whether filed as part of the
Registration Statement or any amendment thereto or pursuant to Rule
424(a) of the Rules) and when any amendment thereof or supplement thereto
was first filed with the Commission, such preliminary prospectus as
amended or supplemented complied in all material respects with the
applicable provisions of the Securities Act and the Rules and did not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not
-4-
<PAGE>
misleading. The Company makes no representation or warranty as to the
paragraph with respect to stabilization on the inside front cover page of
the Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus. The Company acknowledges that such
statements constitute the only information furnished in writing by the
Representatives on behalf of the several Underwriters specifically for
inclusion in the Registration Statement, any preliminary prospectus or
the Prospectus.
(b) All contracts and other documents required to be filed as
exhibits to the Registration Statement have been filed with the
Commission as exhibits to the Registration Statement.
(c) The financial statements of the Company (including all notes and
schedules thereto) included in the Registration Statement and Prospectus
fairly present the financial position, the results of operations and cash
flows and the stockholders' equity (deficit) and the other information
purported to be shown therein of the Company at the respective dates and
for the respective periods to which they apply; and such financial
statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods
involved, and all adjustments necessary for a fair presentation of the
results for such periods have been made.
(d) To the Company's knowledge, Arthur Andersen LLP, whose reports
are filed with the Commission as a part of the Registration Statement,
are and, during the periods covered by their reports, were independent
public accountants as required by the Securities Act and the Rules.
(e) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
The Company has no subsidiary or subsidiaries and does not control,
directly or indirectly, any corporation, partnership, joint venture,
association or other business organization other than Thermatrix Ltd., a
company formed under the laws of England and Wales. The Company is duly
qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its assets or
properties (owned, leased or licensed) or the nature of its business
makes such qualification necessary. Except as disclosed in the
Registration Statement and the Prospectus, the Company does not own,
lease or license any asset or property or conduct any business outside
the
-5-
<PAGE>
United States of America that is required to be disclosed in the
Registration Statement and Prospectus. The Company has all requisite
corporate power and authority, and all necessary authorizations,
approvals, consents, orders, licenses, certificates and permits of and
from all governmental or regulatory bodies or any other person or entity
("Permits"), to own, lease and license its assets and properties and
conduct its businesses as now being conducted and as described in the
Registration Statement and the Prospectus; no such Permit contains a
materially burdensome restriction other than as disclosed in the
Registration Statement and the Prospectus; and the Company has all
requisite corporate power and authority, and such authorizations,
approvals, consents, orders, licenses, certificates and permits to enter
into, deliver and perform this Agreement and to issue and sell the Shares
(except as may be required under the Securities Act and state and foreign
Blue Sky laws).
(f) The Company owns each of the patents referred to in the
Registration Statement and the Prospectus under the caption "Business-
Intellectual Property" (the "Patents") and, except as disclosed in the
Registration Statement and the Prospectus, owns or possesses adequate and
enforceable rights to use all other patents, patent applications,
trademarks, trademark applications, service marks, copyrights, copyright
applications, licenses and other similar rights (collectively with the
Patents, "Intangibles") necessary for the conduct of its business as now
being conducted and as described in the Registration Statement and the
Prospectus. The Company has not infringed, is not infringing, and has
not received any notice of infringement of, any Intangible of any other
person and the Company does not know of any basis therefor. The Company
has not received any notice of infringement of any of its Intangibles and
the Company does not know of any basis therefor.
(g) The Company has good and marketable title in to each of the
items of personal property which are reflected in the financial
statements referred to in Section 4(c) or are referred to in the
Registration Statement and the Prospectus as being owned by it and valid
and enforceable leasehold interests in each of the items of real and
personal property which are referred to in the Registration Statement and
the Prospectus as being leased by it, in each case free and clear of all
liens, encumbrances, claims, security interests and defects, other than
those described in the Registration Statement and the Prospectus.
-6-
<PAGE>
(h) Except as disclosed in the Registration Statement and the
Prospectus, there is no litigation or governmental or other proceeding or
investigation before any court or before or by any public body or board
pending or, to the Company's best knowledge, threatened (and the Company
does not know of any basis therefor) against, or involving the assets,
properties or businesses of, the Company which, if adversely determined
would materially adversely affect the value or the operation of any such
assets or properties or the business, results of operations or financial
condition of the Company.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
described therein, there has not been any material adverse change or any
material adverse development or event involving a prospective material
change in the assets or properties, earnings, business affairs or
business prospects, results of operations or condition (financial or
otherwise) of the Company, whether or not arising from transactions in
the ordinary course of business; the Company has not entered into any
transaction, other than in the ordinary course of business, that is
material to the Company; the Company has not sustained any material loss
or interference with its assets, businesses or properties from fire,
explosion, earthquake, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree; and since the date of the latest
balance sheet included in the Registration Statement and the Prospectus,
except as reflected therein, the Company has not undertaken any liability
or obligation, direct or contingent, except for liabilities or
obligations undertaken in the ordinary course of business.
(j) Each agreement listed in the Exhibits to the Registration
Statement is in full force and effect and is valid and enforceable by the
Company in accordance with its terms, assuming the due authorization,
execution and delivery thereof by each of the other parties thereto and
except as the enforcement of such agreement may be limited by bankruptcy,
insolvency, reorganization, arrangement, fraudulent conveyance,
moratorium or other similar laws relating to or affecting creditors'
rights generally and by general principles of equity, regardless of
whether considered in a proceeding in equity or at law. Neither the
Company, nor to the best of the Company's knowledge, any other party is
in default in the observance or performance of any term or obligation to
be performed by it under any such agreement, and no event has occurred
which with notice or lapse of time or both would
-7-
<PAGE>
constitute such a default which default or event would have a material
adverse effect on the assets or properties, business, results of
operations or financial condition of the Company. No default exists, and
no event has occurred which with notice or lapse of time or both would
constitute a default, in the due performance and observance of any term,
covenant or condition, by the Company of any other indenture, mortgage,
deed of trust, note or any other agreement or instrument to which the
Company is a party or by which it or its properties or businesses may be
bound or affected which default or event would have a material adverse
effect on the assets or properties, business, results of operations or
financial condition of the Company.
(k) The Company is not in violation of any term or provision of its
charter or by-laws or of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation, where the consequences of
such violation would have a material adverse effect on the assets or
properties, business, results of operations or financial condition of the
Company.
(l) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the transactions
contemplated hereby or thereby (including, without limitation, the
issuance and sale by the Company of the Shares) will give rise to a right
to terminate or accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or provision of, or
constitute a default (or an event which with notice or lapse of time or
both would constitute a default) under, or require any consent or waiver
under, or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company pursuant to the
terms of, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company is a party or by which it or any its
properties or businesses is bound, or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation applicable to the
Company or violate any provision of the charter or by-laws of the
Company, except for such consents or waivers which have already been
obtained and are in full force and effect.
(m) The Company has an authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus as of the
date specified therein. All of the outstanding shares of Common Stock,
Series B Convertible Preferred Stock, Series C Convertible Preferred
Stock and Series D Convertible Preferred Stock have been duly and validly
issued and are
-8-
<PAGE>
fully paid and nonassessable and none of them was issued in violation of
any preemptive or other similar right. The Shares, when issued and sold
pursuant to this Agreement, will be duly and validly issued, fully paid
and nonassessable and none of them will be issued in violation of any
preemptive or other similar right. All of the outstanding shares of
Series B Convertible Preferred Stock, Series C Convertible Preferred
Stock and Series D Convertible Preferred Stock have been, or upon
consummation of this Offering, will be, converted into Common Stock in
accordance with the respective terms of the Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock and Series D
Convertible Preferred Stock. Except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding option, warrant or
other right calling for the issuance of, and no commitment, plan or
arrangement to issue, any share of stock of the Company or any security
convertible into, or exercisable or exchangeable for, such stock. The
Common Stock and the undesignated preferred stock, $0.001 par value (the
"Preferred Stock") and the Shares conform to all statements in relation
thereto contained in the Registration Statement and the Prospectus.
(n) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
described or referred to therein, the Company has not (i) issued any
securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction not in the ordinary
course of business or (iii) declared or paid any dividend or made any
distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire any
shares of its stock.
(o) No holder of any security of the Company has any right to have
any security owned by such holder included in the Registration Statement
or to demand registration of any security owned by such holder during the
period ending 180 days from the date of this Agreement. The Company has
obtained from all officers and directors of the Company, the holders of
certain vested options to purchase Common Stock and certain other
stockholders and warrantholders of the Company, who together hold
5,330,754 shares of Common Stock (including 814,097 shares of Common
Stock issuable upon exercise of stock options and warrants), their
enforceable written agreement that for a period of at least 180 days from
the date of this Agreement they will not, without the prior written
consent of the Company or the Representatives, sell, distribute, pledge,
grant any option for the sale
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<PAGE>
of, or otherwise dispose of or encumber, or exercise any registration
rights with respect to, any shares of Common Stock owned by them. The
Company hereby agrees that it will not consent to the sale, distribution,
pledge, grant of any option for the sale of, or other disposition or
encumbrance of, or exercise of any registration right with respect to,
any shares of Common Stock subject to the above-described lock-ups,
without the prior written consent of the Representatives.
(p) All necessary corporate action has been duly and validly taken
by the Company to authorize the execution, delivery and performance of
this Agreement and the issuance and sale of the Shares. This Agreement
has been duly and validly executed and delivered by the Company and
constitutes and will constitute the legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its
terms, except (A) as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles and (B) with respect to this Agreement, to the
extent that rights to indemnity or contribution under this Agreement may
be limited by federal and state securities laws or the public policy
underlying such laws.
(q) The Company is conducting its business in compliance with all
applicable laws, rules and regulations of the jurisdictions in which it
is conducting business, including, without limitation, all applicable
local, state and federal environmental laws and regulations, except where
the failure to be so in compliance would not have a material adverse
effect on the assets or properties, business, results of operations or
financial condition of the Company.
(r) No transaction has occurred between or among the Company and any
of its officers or directors or any affiliate or affiliates of any such
officer or director that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(s) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be expected
to cause or result in, or which has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of any of the
Shares.
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<PAGE>
(t) The Company has filed all federal, state, local and foreign tax
returns which are required to be filed through the date hereof, or has
received extensions thereof, and has paid all taxes shown on such returns
and all assessments received by it.
(u) The Shares have been approved for quotation on the National
Association of Securities Dealers Automated Quotation ("Nasdaq") National
Market, subject to official notice of issuance.
(v) The Company has complied with all of the requirements and filed
the required forms as specified in Florida Statutes Section 517.075.
(w) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and
in such amounts as are prudent and customary in the businesses in which
they are engaged; neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business.
(x) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's
authorizations and are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles; (ii) access to assets is permitted only in accordance with
management's authorization; and (iii) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(y) The Company has not distributed and, prior to the later of (i)
the Closing Date and (ii) the completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto, or other materials, if any permitted
by the Act.
5. Conditions of the Underwriters' Obligations. The obligations
-------------------------------------------
of the Underwriters under this Agreement are several and not joint. The
respective obligations of the
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<PAGE>
Underwriters to purchase the Shares are subject to each of the following terms
and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 6(A)(a).
(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect, and
no order suspending the effectiveness of the Registration Statement shall
be in effect and no proceedings for such purpose shall be pending before
or threatened by the Commission, and any requests for additional
information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been
complied with to the satisfaction of the Representatives.
(c) The representations and warranties of the Company contained in
this Agreement and in the certificates delivered pursuant to Section 5(d)
shall be true and correct when made and on and as of each Closing Date as
if made on such date and the Company shall have performed all covenants
and agreements and satisfied all the conditions contained in this
Agreement required to be performed or satisfied by it at or before such
Closing Date.
(d) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives and dated such Closing
Date, of the chief executive or chief operating officer and the chief
financial officer or chief accounting officer of the Company, to the
effect that the signers of such certificate have carefully examined the
Registration Statement, the Prospectus and this Agreement and that the
representations and warranties of the Company in this Agreement are true
and correct on and as of such Closing Date with the same effect as if
made on such Closing Date and the Company has performed all covenants and
agreements and satisfied all conditions contained in this Agreement
required to be performed or satisfied by it at or prior to such Closing
Date.
(e) The Representatives shall have received at the time this
Agreement is executed and on each Closing Date a letter or letters signed
by Arthur Andersen LLP, addressed to the Representatives and dated,
respectively, the date of this Agreement and each such Closing Date, in
form and substance satisfactory to the Representatives, confirming that
they are independent accountants within the meaning of the Securities Act
and the Rules, that the response to
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<PAGE>
Item 10 of the Registration Statement is correct insofar as it relates to
them and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement
and the Prospectus and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act and the Rules;
(ii) on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the headings
"Summary Consolidated Financial Information" and "Selected
Consolidated Financial Data," carrying out certain procedures (but
not an examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such letter,
a reading of the minutes of the meetings of the stockholders and
directors of the Company, and inquiries of certain officials of the
Company who have responsibility for financial and accounting matters
of the Company as to transactions and events subsequent to the date
of the latest audited financial statements, nothing came to their
attention which caused them to believe that:
(A) the amounts in "Summary Consolidated Financial
Information" and "Selected Consolidated Financial Data"
included in the Registration Statement and the Prospectus do
not agree with the corresponding amounts in the audited and
unaudited financial statements from which such amounts were
derived; or
(B) the unaudited financial statements as of and for the
three months ended March 31, 1996 included in the Registration
Statement (i) do not comply in form in all material respects
with the applicable accounting requirements of the Securities
Act and the Rules and (ii) are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements; or
(C) (i) with respect to the Company there were, at a
specified date not more than five business days prior to the
date of the letter, any increases in the short-term and long-
term liabilities of the Company or capital stock of
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<PAGE>
the Company or decreases in working capital or the
stockholders' equity (deficit) of the Company, as compared with
the amounts shown on the Company's unaudited March 31, 1996
balance sheet included in the Registration Statement, or (ii)
for the period from March 31, 1996 to such specified date not
more than five business days prior to the date of the letter,
there were any increases in net losses except for increases in
net losses set forth and in the Registration Statement, in
which case the Company shall deliver to the Representatives a
letter containing an explanation by the Company as to the
significance thereof unless said explanation is not deemed
necessary by the Representatives; and
(iii) they have performed certain other procedures as a result
of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting,
financial or statistical information derived from the general
accounting records of the Company) set forth in the Registration
Statement and the Prospectus and reasonably specified by the
Representatives agrees with the accounting records of the Company.
References to the Registration Statement and the Prospectus in this
paragraph (e) are to such documents as amended and supplemented at the
date of the letter.
(f) The Representatives shall have received on each Closing Date
from Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel
for the Company, an opinion, addressed to the Representatives and dated
such Closing Date, and stating in effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the
State of Delaware.
(ii) The Company has all requisite corporate power and
authority to own, lease and license its assets and properties and
conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus; and the Company has all
requisite corporate power and authority and all necessary
governmental, and all other necessary authorizations, approvals,
consents, orders, licenses, certificates and permits, to enter into,
deliver and perform this Agreement and to issue and
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<PAGE>
sell the Shares, other than those required under the Securities Act
and state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital stock as
set forth under the caption "Capitalization" in the Prospectus as of
the date specified therein; the certificates evidencing the Shares
are in due and proper legal form and have been duly authorized for
issuance by the Company; all of the outstanding shares of Common
Stock of the Company have been duly and validly authorized and have
been duly and validly issued and are fully paid and nonassessable
and none of them was issued in violation of any statutory preemptive
or other similar statutory right. The Shares when issued and sold
pursuant to this Agreement will, upon payment therefor, be duly and
validly issued, fully paid and nonassessable and none of them will
have been issued in violation of any statutory preemptive or other
similar right. All of the outstanding shares of Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock
and Series D Convertible Preferred Stock have been converted into
Common Stock in accordance with the respective terms of the Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock
and Series D Convertible Preferred Stock. To the best of such
counsel's knowledge, except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding option,
warrant or other right calling for the issuance of, and no
commitment or agreement to issue, any share of stock of the Company
or any security convertible into, exercisable for, or exchangeable
for stock of the Company. The Common Stock, the Preferred Stock and
the Shares conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus.
(iv) All necessary corporate action has been duly and validly
taken by the Company to authorize the execution, delivery and
performance of this Agreement. This Agreement has been duly and
validly executed and delivered by the Company and this Agreement
constitutes the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms except
(A) as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and by general equitable
principles and (B) with respect to this Agreement, to the extent
that rights to indemnity or contribution under this
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<PAGE>
Agreement may be limited by federal or state securities laws or the
public policy underlying such laws.
(v) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including the issuance and sale by
the Company of the Shares) will give rise to a right to terminate or
accelerate the due date of any payment due under, or conflict with
or result in the breach of any term or provision of, or constitute a
default (or any event which with notice or lapse of time, or both,
would constitute a default) under, or require consent or waiver
under, or result in the execution or imposition of any lien, charge
or encumbrance upon any properties or assets of the Company pursuant
to the terms of, any indenture, mortgage, deed of trust, note or
other agreement or instrument of which such counsel is aware and to
which the Company is a party or by which it or any of its properties
or businesses is bound, or any franchise, license, permit, judgment,
decree, order, statute, rule or regulation of which such counsel is
aware or violate any provision of the charter or by-laws of the
Company.
(vi) To the best of such counsel's knowledge, no default
exists, and no event has occurred which with notice or lapse of
time, or both, would constitute a default, in the due performance
and observance by the Company of any term, covenant or condition, of
any indenture, mortgage, deed of trust, note or any other agreement
or instrument to which the Company is a party or by which its assets
or properties or businesses are bound where the consequences of such
default would have a material and adverse effect on the properties,
business, results of operations or financial condition of the
Company.
(vii) To the best of such counsel's knowledge, the Company is
not in violation of any term or provision of its charter or by-laws
or any franchise, license, permit, judgment, decree or order or
statute, rule or regulation where the consequences of such violation
would have a material and adverse effect on the assets or
properties, businesses, results of operations or financial condition
of the Company.
(viii) No consent, approval, authorization or order of any
court or governmental agency or body is
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<PAGE>
required for the performance of this Agreement by the Company or the
consummation of the transactions contemplated hereby or thereby,
except such as have been obtained under the Securities Act and such
as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
several Underwriters and such as may be required under the rules of
the National Association of Securities Dealers, Inc. with respect to
the underwriting arrangements reflected in this Agreement.
(ix) Except as described in the Registration Statement and the
Prospectus, to the best of such counsel's knowledge, there is no
litigation or governmental or other proceeding or investigation
before any court or before or by any public body or board pending or
threatened against, or involving the assets, properties or
businesses of, the Company.
(x) The agreement of (i) the Company, its officers and
directors, the holders of certain vested options to purchase Common
Stock and certain other stockholders and warrantholders of the
Company stating that for a period of 180 days from the date of the
Prospectus they will not, without the Company's or Representatives'
prior written consent, sell, distribute, pledge grant any option for
the sale of, or otherwise dispose of, directly or indirectly, or
encumber, or exercise any registration rights with respect to, any
shares of Common Stock (or any securities convertible into,
exercisable for, or exchangeable for any shares of Common Stock)
owned by them and (ii) the Company that it will not consent to the
sale, distribution, pledge, grant of any option for the sale of, or
other disposition or encumbrance of, or exercise of any registration
right with respect to, any shares of Common Stock subject to the
above-described lock-ups, without the prior written consent of the
Representatives, has been duly and validly delivered by such persons
and constitute legal, valid and binding obligations of each such
person enforceable against each such person in accordance with its
terms, except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles.
(xi) The statements in the Prospectus under the captions "Risk
Factors - Uncertainty of Regulatory
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<PAGE>
Acceptance;" "-Potential Environmental Liability;" "-Effect of Anti-
Takeover Provisions;" "Business -Environmental Matters" "Management
- Employment Agreement;" "-Director Compensation;" "-Limitation on
Liability and Indemnification Matters;" "-Employee Benefit Plans;"
"Shares Eligible For Future Sale;" "Description of Capital Stock"
and "Certain Transactions" insofar as such statements constitute a
summary of documents referred to therein or matters of law, are fair
summaries of the material provisions thereof and accurately present
the information called for with respect to such documents and
matters. All contracts and other documents required to be filed as
exhibits to, or described in, the Registration Statement have been
so filed with the Commission or are fairly described in the
Registration Statement, as the case may be.
(xii) The Registration Statement, all preliminary prospectuses
and the Prospectus and each amendment or supplement thereto (except
for the financial statements and notes and schedules and other
financial and statistical data included therein, as to which such
counsel need express no opinion) comply as to form in all material
respects with the requirements of the Securities Act and the Rules.
(xiii) The Registration Statement has become effective under
the Securities Act, and no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for
that purpose have been instituted or are threatened, pending or to
such counsel's knowledge are contemplated.
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates of responsible officers of the Company and
public officials and on the opinions of other counsel satisfactory to the
Representatives as to matters which are governed by laws other than the laws of
the State of California, the General Corporation Law of the State of Delaware
and the federal laws of the United States; provided that such counsel shall
state that in their opinion the Underwriters and they are justified in relying
on such other opinions. With respect to the opinion that this Agreement
constitutes the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, such counsel may assume that
the laws of the State of California are identical to the laws of the State of
New York in each instance without regard to conflicts of laws. Copies of such
certificates and other
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<PAGE>
opinions shall be furnished to the Representatives and counsel for the
Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent certified public accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except as
specified in the foregoing opinion), on the basis of the foregoing no facts have
come to the attention of such counsel which lead such counsel to believe that
the Registration Statement at the time it became effective (except with respect
to the financial statements and notes and schedules thereto and other financial
and statistical data, as to which such counsel need make no statement) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus as amended or supplemented (except with
respect to the financial statements and notes and schedules thereto and other
financial and statistical data, as to which such counsel need make no statement)
on the date thereof contained any untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(g) The Representatives shall have received on each Closing Date
from Woodcock Washburn Kurtz Mackiewicz & Norris, patent counsel for the
Company, an opinion, addressed to the Representatives and dated such
Closing Date, stating in effect that:
(i) The statements in the Registration Statement and
Prospectus under the captions relating to provisions of statutes,
regulations, contracts, agreements, patents, patent applications or
matters of United States patent law are accurate and correct in all
material respects;
(ii) The applications filed by such counsel on behalf of the
Company with the United States Patent and Trademark Office have been duly
and adequately filed;
(iii) To the best of such counsel's knowledge, the Company
owns of record all right, title and interest in and to the patents and
patent applications necessary for the conduct of its business as now
being conducted and
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<PAGE>
as described in the Registration Statement and Prospectus free and clear
of any adverse claim of any third party. To the best of such counsel's
knowledge, the Company has not infringed, is not infringing and has not
received any notice of infringement of any patents of any other person
which might have a material and adverse effect on the properties,
business, financial condition or results of operations of the Company.
(iv) There is no litigation or governmental or other
proceeding relating to the Patents, before any court or before or by any
public body or board (other than the United States Patent and Trademark
Office) pending to which the Company is a party or, to the best of such
counsel's knowledge, threatened against the Company which might
materially and adversely affect the properties, business, financial
condition or results of operations of the Company; the Company has not
given notice to any third party of any claim of infringement of its
patents.
(v) All contracts and other documents relating to the Patents
which are required to be filed as exhibits to, or described in, the
Registration Statement have been so filed with the Commission or are
fairly described in the Registration Statement, as the case may be.
(h) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be reasonably
satisfactory in form and substance to the Representatives and their
counsel and the Underwriters shall have received from Morgan, Lewis &
Bockius LLP a favorable opinion, addressed to the Representatives and
dated such Closing Date, with respect to the Shares, the Registration
Statement and the Prospectus, and such other related matters, as the
Representatives may reasonably request, and the Company shall have
furnished to Morgan, Lewis & Bockius LLP such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
(i) The Representatives shall have received on each Closing Date a
certificate, including exhibits thereto, addressed to the Representatives
and dated such Closing Date, of the Secretary or an Assistant Secretary
of the Company, signed in such officer's capacity as such officer, as to
the (i) certificate of incorporation and bylaws of the Company, (ii)
resolutions authorizing the execution and delivery of the Registration
Statement, this Agreement and the performance of the transactions
contemplated by this Agreement, the Registration Statement, the
Prospectus and the offering of the Shares, and (iii) incumbency of the
person or persons authorized
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to execute and deliver the Registration Statement, this Agreement and any
other documents contemplated by the offering of the Shares.
(j) The Representatives shall have received on each Closing Date
certificates of the Secretaries of States where the Company is
incorporated and doing business as to the good standing of the Company,
listing all charter documents on file, qualification of the Company to do
business as a foreign corporation, payment of taxes and filing of annual
reports. In addition, the Representatives shall have received copies of
all charter documents of the Company certified by the Secretary of State
of the State of Delaware.
(k) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives, and dated such Closing
Date, of an executive officer of the Company to the effect that the
signer of such certificate has reviewed and understands the provisions of
Section 517.075 of the Florida Statutes, and represents that the Company
has complied, and at all times will comply, with all provisions of
Section 517.075 and further, that as of such Closing Date, neither the
Company nor any of its affiliates does business with the government of
Cuba or with any person or affiliate located in Cuba.
6. Covenants of the Company. (A) The Company covenants and
------------------------
agrees as follows:
(a) The Company shall prepare the Prospectus in a form approved by
the Representatives and file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than the Commission's close of
business on the second business day following the execution and delivery
of this Agreement, or, if such second business day would be more than
fifteen business days after the Effective Date of the Registration
Statement or any post-effective amendment thereto, such earlier date as
would permit such Prospectus to be filed without filing a post-effective
amendment as set forth in Rule 430A(a)(3) under the Securities Act, and
shall promptly advise the Representatives (i) when the Registration
Statement shall have become effective, (ii) when any amendment thereof
shall have become effective, (iii) of any request by the Commission for
any amendment of the Registration Statement or the Prospectus or for any
additional information, (iv) of the prevention or suspension of the use
of any preliminary prospectus or the Prospectus or of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the
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institution or threatening of any proceeding for that purpose and (v) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company shall not file any amendment of the Registration
Statement or amendment or supplement to the Prospectus unless the Company
has furnished the Representatives a copy for its review prior to filing
and shall not file any such proposed amendment or supplement to which the
Representatives reasonably object. The Company shall use its best
efforts to prevent the issuance of any such stop order and, if issued, to
obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Securities Act and the Rules, any
event occurs as a result of which the Prospectus as then amended or
supplemented would include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein
in the light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend or supplement the
Prospectus to comply with the Securities Act or the Rules, the Company
promptly shall prepare and file with the Commission, subject to the
second sentence of paragraph (a) of this Section 6(A), an amendment or
supplement which shall correct such statement or omission or an amendment
which shall effect such compliance.
(c) The Company shall make generally available to its security
holders and to the Representatives as soon as practicable, but not later
than 45 days after the end of the 12-month period beginning at the end of
the fiscal quarter of the Company during which the Effective Date occurs
(or 90 days if such 12-month period coincides with the Company's fiscal
year), an earnings statement (which need not be audited) of the Company,
covering such 12-month period, which shall satisfy the provisions of
Section 11(a) of the Securities Act or Rule 158 of the Rules.
(d) The Company shall furnish to the Representatives and counsel for
the Underwriters, without charge, signed copies of the Registration
Statement (including all exhibits thereto and amendments thereof) and to
each other Underwriter a copy of the Registration Statement (without
exhibits thereto) and all amendments thereof and, so long as delivery of
a prospectus by an Underwriter or dealer may be required by the
Securities Act or the Rules, as many copies of any preliminary prospectus
and the
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Prospectus and any amendments thereof and supplements thereto as the
Representatives may reasonably request.
(e) The Company shall cooperate with the Representatives and their
counsel in endeavoring to qualify the Shares for offer and sale under the
laws of such jurisdictions as the Representatives may designate and shall
maintain such qualifications in effect so long as required for the
distribution of the Shares; provided, however, that the Company shall not
be required in connection therewith, as a condition thereof, to qualify
as a foreign corporation or to execute a general consent to service of
process in any jurisdiction or subject itself to taxation as doing
business in any jurisdiction.
(f) For a period of five years after the date of this Agreement, the
Company shall supply to the Representatives, and to each other
Underwriter who may so request in writing, copies of such financial
statements and other periodic and special reports as the Company may from
time to time distribute generally to the holders of any class of its
capital stock and to furnish to the Representatives a copy of each annual
or other report it shall be required to file with the Commission.
(g) Without the prior written consent of the Representatives, for a
period of 180 days after the date of this Agreement, the Company shall
not issue, sell or register with the Commission, or otherwise encumber or
dispose of, directly or indirectly, any equity securities of the Company
(or any securities convertible into or exercisable or exchangeable for
equity securities of the Company), except for (i) the issuance of the
Shares pursuant to the Registration Statement and (ii) the issuance of
shares pursuant to the exercise of outstanding options under the
Company's existing stock option plans.
(h) On or before completion of this offering, the Company shall make
all filings required under applicable securities laws and by the Nasdaq
National Market (including any required registration under the Exchange
Act).
(B) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses of the
Company incident to the public offering of the Shares and the performance of the
obligations of the Company under this Agreement including those relating to (i)
the preparation, printing, filing and distribution of the Registration Statement
including all exhibits thereto, each preliminary prospectus, the Prospectus, all
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amendments and supplements to the Registration Statement and the Prospectus, and
the printing, filing and distribution of this Agreement; (ii) the preparation
and delivery of certificates for the Shares to the Underwriters; (iii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the various jurisdictions referred to in Section
6(A)(e), including the fees and disbursements of counsel for the Underwriters in
connection with such registration and qualification and the preparation,
printing, distribution and shipment of preliminary and supplementary Blue Sky
memoranda; (iv) the furnishing (including costs of shipping and mailing) to the
Representatives and to the Underwriters of copies of each preliminary
prospectus, the Prospectus and all amendments or supplements to the Prospectus,
and of the several documents required by this Section to be so furnished, as may
be reasonably requested for use in connection with the offering and sale of the
Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the
filing fees of the National Association of Securities Dealers, Inc. in
connection with its review of the terms of the public offering; (vi) the
furnishing (including costs of shipping and mailing) to the Representatives and
to the Underwriters of copies of all reports and information required by Section
6(A)(f); and (vii) inclusion of the Shares for quotation on the Nasdaq National
Market.
7. Indemnification.
----------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act against any and all losses, claims, damages and liabilities,
joint or several (including any reasonable investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claim asserted), to which they,
or any of them, may become subject under the Securities Act, the Exchange
Act or other federal or state law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities arise
out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment thereof or
supplement thereto, or arise out of or are based upon any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that such indemnity shall not inure to the benefit of
any Underwriter (or any person controlling such Underwriter) on account
of any losses, claims, damages or liabilities arising from the sale of
the Shares to any person by such Underwriter if such
-24-
<PAGE>
untrue statement or omission or alleged untrue statement or omission was
made in such preliminary prospectus, the Registration Statement or the
Prospectus, or such amendment or supplement, in reliance upon and in
conformity with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use
therein. This indemnity agreement will be in addition to any liability
which the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, each director of the Company, and each officer of
the Company who signs the Registration Statement, to the same extent as
the foregoing indemnity from the Company to each Underwriter, but only
insofar as such losses, claims, damages or liabilities arise out of or
are based upon any untrue statement or omission or alleged untrue
statement or omission which was made in any preliminary prospectus, the
Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, contained in the last paragraph of the cover page, in
the paragraph relating to stabilization on the inside front cover page of
the Prospectus and the statements with respect to the public offering of
the Shares under the caption "Underwriting" in the Prospectus; provided,
however, that the obligation of each Underwriter to indemnify the Company
(including any controlling person, director or officer thereof) shall be
limited to the net proceeds received by the Company from such
Underwriter.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which
a claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 7(a) or 7(b) shall be available
to any party who shall fail to give notice as provided in this Section
7(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by
the failure to give such notice but the omission so to notify such
indemnifying party of any such action, suit or proceeding shall not
relieve it from any liability that it may have to any indemnified party
for contribution or otherwise than under this Section. In case any such
action, suit or
-25-
<PAGE>
proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and, to the
extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to
assume the defense thereof and the approval by the indemnified party of
such counsel, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses, except as provided
below and except for the reasonable costs of investigation subsequently
incurred by such indemnified party in connection with the defense
thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the
employment of counsel by such indemnified party has been authorized in
writing by the indemnifying parties, (ii) the indemnified party shall
have reasonably concluded that there may be a conflict of interest
between the indemnifying parties and the indemnified party in the conduct
of the defense of such action (in which case the indemnifying parties
shall not have the right to direct the defense of such action on behalf
of the indemnified party) or (iii) the indemnifying parties shall not
have employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of
which cases the fees and expenses of counsel shall be at the expense of
the indemnifying parties. An indemnifying party shall not be liable for
any settlement of any action, suit, proceeding or claim effected without
its written consent.
8. Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnification provided for in
Section 7(a) is due in accordance with its terms but for any reason is held to
be unavailable from the Company, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages and liabilities (including
any investigation, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims asserted, but after deducting any contribution received by the
Company from persons other than the Underwriters, such as persons who control
the Company within the meaning of the Securities Act, officers of the Company
who signed the Registration Statement and directors of the Company, who may also
be liable for contribution) to which the Company and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
-26-
<PAGE>
Underwriters on the other from the offering of the Shares or, if such allocation
is not permitted by applicable law or indemnification is not available as a
result of the indemnifying party not having received notice as provided in
Section 7 hereof, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts but before deducting expenses) received by the
Company, as set forth in the table on the cover page of the Prospectus, bear to
(y) the underwriting discounts received by the Underwriters, as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company
and the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact related to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. Notwithstanding
the provisions of this Section 8, (i) in no case shall any Underwriter (except
as may be provided in the Agreement Among Underwriters) be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, and (ii) the Company shall be liable
and responsible for any amount in excess of such underwriting discount;
provided, however, that no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Exchange Act shall have the same rights to contribution
as such Underwriter, and each person, if any, who controls the Company within
the meaning of the Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) in the
immediately preceding sentence of this Section 8. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution
-27-
<PAGE>
may be made against another party or parties under this Section, notify such
party or parties from whom contribution may be sought, but the omission so to
notify such party or parties from whom contribution may be sought shall not
relieve the party or parties from whom contribution may be sought from any other
obligation it or they may have hereunder or otherwise than under this Section.
No party shall be liable for contribution with respect to any action, suit,
proceeding or claim settled without its written consent. The Underwriter's
obligations to contribute pursuant to this Section 8 are several in proportion
to their respective underwriting commitments and not joint.
9. Termination. This Agreement may be terminated with respect to
-----------
the Shares to be purchased on a Closing Date by the Representatives by notifying
the Company at any time
(a) in the absolute discretion of the Representatives at or before
any Closing Date: (i) if there has been any material adverse change in
the condition (financial or otherwise), earnings, business affairs or
business prospects of the Company, whether or not arising in the ordinary
course of business; (ii) if on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or in
the opinion of the Representatives will in the future materially disrupt,
the securities markets; (iii) if there has occurred any new outbreak or
material escalation of hostilities or other calamity or crisis the effect
of which on the financial markets of the United States is such as to make
it, in the judgment of the Representatives, inadvisable to proceed with
the offering; (iv) if there shall be such a material adverse change in
general financial, political or economic conditions or the effect of
international conditions on the financial markets in the United States is
such as to make it, in the judgment of the Representatives, inadvisable
or impracticable to market the Shares; (v) if trading in the Shares has
been suspended by the Commission or trading generally on the New York
Stock Exchange, Inc. or on the American Stock Exchange, Inc. has been
suspended or limited, or minimum or maximum ranges for prices for
securities shall have been fixed, or maximum ranges for prices for
securities have been required, by said exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc., or any
other governmental or regulatory authority; or (vi) if a banking
moratorium has been declared by any state or federal authority, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 5 shall not have been fulfilled when and as required
by this Agreement.
-28-
<PAGE>
If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no Underwriter
shall be under any liability to the Company, except that (y) if this Agreement
is terminated by the Representatives or the Underwriters because of any failure,
refusal or inability on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company will reimburse the
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of their counsel) incurred by them in connection with the proposed
purchase and sale of the Shares or in contemplation of performing their
obligations hereunder and (z) no Underwriter who shall have failed or refused to
purchase the Shares agreed to be purchased by it under this Agreement, without
some reason sufficient hereunder to justify cancellation or termination of its
obligations under this Agreement, shall be relieved of liability to the Company
or to the other Underwriters for damages occasioned by its failure or refusal.
10. Substitution of Underwriters. If one or more of the
----------------------------
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 9) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more substitute
underwriters to purchase such Shares or make such other arrangements as the
Representatives may deem advisable or one or more of the remaining Underwriters
may agree to purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date, then
each of the nondefaulting Underwriters shall be obligated to purchase
such Shares on the terms herein set forth in proportion to their
respective obligations hereunder; provided, that in no event shall the
maximum number of Shares that any Underwriter has agreed to purchase
pursuant to Section 1 be increased pursuant to this Section 10 by more
than one-ninth of such number of Shares without the written consent of
such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that all
the Underwriters are obligated to purchase on such Closing Date, then the
Company shall be entitled to an additional business day within which it
may, but is not obligated to, find one or more substitute
-29-
<PAGE>
underwriters reasonably satisfactory to the Representatives to purchase
such Shares upon the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall have
the right to postpone the applicable Closing Date for a period of not more than
five business days in order that necessary changes and arrangements (including
any necessary amendments or supplements to the Registration Statement or
Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company and without liability
on the part of the Company, except in both cases as provided in Sections 6B, 7,
8 and 9. The provisions of this Section shall not in any way affect the
liability of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
11. Miscellaneous. The respective agreements, representations,
-------------
warranties, indemnities and other statements of the Company or its officers and
of the Underwriters set forth in or made pursuant to this Agreement shall remain
in full force and effect, regardless of any investigation made by or on behalf
of any Underwriter or the Company or any of the officers, directors or
controlling persons referred to in Sections 7 and 8 hereof, and shall survive
delivery of and payment for the Shares. The provisions of Sections 6(B), 7, 8
and 9 shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and assigns, and,
to the extent expressed herein, for the benefit of persons controlling any of
the Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and
mailed or delivered or by telephone or telegraph if subsequently confirmed in
writing, (a) if to the Representatives,
-30-
<PAGE>
c/o Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New
York, New York 10281 Attention: Marshall A. Heinberg, and (b) if to the Company,
to its agent for service as such agent's address appears on the cover page of
the Registration Statement.
-31-
<PAGE>
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
among us.
Very truly yours,
THERMATRIX INC.
By _____________________________
Title: President and Chief
Executive Officer
Confirmed:
OPPENHEIMER & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED
HSBC SECURITIES, INC.
Acting severally on behalf of itself
and as representative of the several
Underwriters named in Schedule I annexed
hereto.
By Oppenheimer & Co., Inc.
By____________________________
Title: Managing Director
-32-
<PAGE>
SCHEDULE I
Number of
Firm Shares to
Name Be Purchased
---- --------------
1. Oppenheimer & Co. Inc.
2. Prudential Securities Incorporated
3. HSBC Securities, Inc.
TOTAL
---------
-33-
<PAGE>
EXHIBIT 4.1
NUMBER SHARES
TMX THERMATRIX INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR STATEMENTS RELATING
THE CITY OF BOSTON, MA OR NEW YORK, NY TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
This Certifies that CUSIP 883550 10 5
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
THERMATRIX INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
(Signature) (Signature)
- ------------------------ ------------------------------------
SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[CORPORATE SEAL OF
THERMATRIX INC.
MARCH 5, 1996
* DELAWARE *]
COUNTERSIGNED AND REGISTERED:
THE FIRST NATIONAL BANK OF BOSTON
TRANSFER AGENT AND REGISTRAR
BY [Signature]
- ----------------------------
AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY MAY 20, 1996
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 043654fc
(310) 989-2333
(FAX) (310) 426-7450 308-19X REV 2
<PAGE>
A statement of the powers, designations,preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- __________Custodian_____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act____________________________
in common (State)
UNIF TRF MIN ACT-- ______Custodian (until age ____)
(Cust)
________ under Uniform Transfers
(Minor)
to Minors Act___________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- -----------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------
X _____________________________________________
X _____________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By
-----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKHOLDERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17ad-15.
- --------------------------------------------
AMERICAN BANK NOTE COMPANY MAY 16, 1996
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 043654bk
(310) 989-2333
(FAX) (310) 426-7450 REV 1
- ---------------------------------------------
<PAGE>
EXHIBIT 23.2
June 10, 1996
Thermatrix Inc.
101 Metro Drive, Suite 248
San Jose, CA 95110
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We consent to the use of our name wherever appearing in the Registration
Statement, including the prospectus constituting a part thereof and any
amendments thereto, which has been approved by us, as such may be further
amended, supplemented, or incorporated by reference in any registration
statement relating to the prospectus filed pursuant to Rule 462(b) of the Act.
Sincerely yours,
/s/ Henrik D. Parker
------------------------------------------------
WOODCOCK WASHBURN KURTZ MACKIEWICZ & NORRIS
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 981 1,477
<SECURITIES> 0 0
<RECEIVABLES> 2,330 3,124
<ALLOWANCES> 190 165
<INVENTORY> 85 254
<CURRENT-ASSETS> 3,387 4,863
<PP&E> 828 881
<DEPRECIATION> 233 283
<TOTAL-ASSETS> 4,228 5,798
<CURRENT-LIABILITIES> 2,252 2,981
<BONDS> 0 0
11,321 13,405
9,304 9,304
<COMMON> 0 0
<OTHER-SE> (18,649) (19,892)
<TOTAL-LIABILITY-AND-EQUITY> (4,228) (5,798)
<SALES> 6,494 2,735
<TOTAL-REVENUES> 6,494 2,735
<CGS> 6,064 2,506
<TOTAL-COSTS> 6,064 2,506
<OTHER-EXPENSES> 5,824 1,466
<LOSS-PROVISION> 229 25
<INTEREST-EXPENSE> 231 (1)
<INCOME-PRETAX> (5,163) (1,238)
<INCOME-TAX> (31) (5)
<INCOME-CONTINUING> (5,194) (1,243)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,194) (1,243)
<EPS-PRIMARY> (0.91) (0.22)
<EPS-DILUTED> (0.91) (0.22)<FN>
<FN>All per share information has been retroactively adjusted to reflect a one
for three reverse stock split that was approved in May, 1996.
</TABLE>
