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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________.
COMMISSION FILE NUMBER
0-20819
THERMATRIX INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2958515
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
101 METRO DRIVE, SUITE 248
SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices)
(408) 453-0490
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days:
Yes X No
-------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding at September 30, 1997
----- ---------------------------------
Common stock, $.001 par value 7,584,898
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THERMATRIX INC.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. 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 "Certain Business Considerations" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in, or incorporated by reference into, this report.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Item 1. Financial Statements................................................... 3
Condensed Consolidated Balance Sheets.................................. 3
Condensed Consolidated Statements of Operations........................ 4
Condensed Consolidated Statements of Cash Flows........................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 14
Item 2. Changes in Securities.................................................. 14
Item 3. Defaults Upon Senior Securities........................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.................... 14
Item 5. Other Information...................................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................... 15
SIGNATURE.............................................................. 16
</TABLE>
2
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THERMATRIX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 8,490 $ 16,199
Accounts receivable, net 5,356 4,899
Costs of uncompleted contracts 1,141 809
Prepaid expenses and other current assets 292 334
---------- ---------
Total current assets 15,279 22,241
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PROPERTY AND EQUIPMENT
Machinery and equipment 889 750
Demonstration equipment 439 179
Furniture and fixtures 322 307
---------- ---------
1,650 1,236
Less -- Accumulated depreciation and
amortization (633) (423)
---------- ---------
Net property and equipment 1,017 813
---------- ---------
PATENTS AND OTHER ASSETS, net 1,128 955
---------- ---------
$ 17,424 $ 24,009
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,460 $ 1,779
Accrued liabilities 741 824
Billings on uncompleted contracts
in excess of costs -- 8
---------- ---------
Total current liabilities 2,201 2,611
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value 8 7
Additional paid-in capital 48,571 48,454
Accumulated deficit (33,356) (27,063)
---------- ---------
Total stockholders' equity 15,223 21,398
---------- ---------
$ 17,424 $ 24,009
========== =========
</TABLE>
3
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THERMATRIX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
-------- --------- --------- --------
<S> <C> <C> <C> <C>
REVENUES $ 2,304 $ 4,402 $ 5,638 $ 10,543
COST OF REVENUES 2,311 3,585 6,200 9,056
-------- -------- -------- --------
Gross margin (7) 817 (562) 1,487
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 302 179 922 506
Selling, general and administrative 1,877 1,729 5,309 4,543
-------- -------- -------- --------
Total operating expenses 2,179 1,908 6,231 5,049
-------- -------- -------- --------
Loss from operations (2,186) (1,091) (6,793) (3,562)
INTEREST INCOME (EXPENSE) (net) 153 268 550 262
-------- -------- -------- --------
Net loss before income taxes (2,033) (823) (6,243) (3,300)
PROVISION FOR INCOME TAXES (17) (13) (50) (28)
-------- -------- -------- --------
Net loss $ (2,050) $ (836) $ (6,293) $ (3,328)
======== ======== ======== ========
NET LOSS PER SHARE $ (0.27) $ (0.11) $ (0.84) $ (0.52)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 7,573 7,435 7,526 6,399
======== ======== ======== ========
</TABLE>
4
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THERMATRIX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
September 30, September 30,
1997 1996
-----------------------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,293) $ (3,328)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization 308 211
Provision for doubtful accounts 175 175
Changes in assets and liabilities -
Accounts receivable (632) (2,806)
Costs of uncompleted contracts (332) (603)
Prepaid expenses and other current assets 42 (154)
Accounts payable (319) 1,001
Accrued liabilities (83) 287
Billings on uncompleted contracts in excess of costs (8) (240)
---------- ---------
Net cash (used in) operating activities (7,142) (5,457)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments 6,291 (11,844)
Purchases of property and equipment (429) (133)
Increase in patents and other assets (256) (492)
---------- ---------
Net cash provided by (used in) investing activities 5,606 (12,469)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit -- 1,000
Repayment of line of credit borrowings -- (1,000)
Net proceeds from sale of preferred stock -- 2,084
Net proceeds from sale of common stock 118 22,186
---------- ---------
Net cash provided by financing activities 118 24,270
---------- ---------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (1,418) 6,344
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD 4,781 981
---------- ---------
CASH & CASH EQUIVALENTS END OF PERIOD $ 3,363 $ 7,325
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest 24 40
Cash paid for income taxes 99 13
</TABLE>
5
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THERMATRIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. The condensed
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three months and nine months ended September 30, 1997 and 1996. 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, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The results for the nine months ended September
30, 1997 are not necessarily indicative of the results expected for the full
fiscal year.
2. NET LOSS PER SHARE
Net loss per share for the three months and nine months ended September 30, 1997
and 1996 is computed using the weighted average number of common shares
outstanding during the periods. Common equivalent shares have been excluded
from the computation as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which
is required to be adopted by the Company in its fourth quarter of fiscal 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating earnings per share, primary earnings per share will
be replaced with basic earnings per share and fully diluted earnings per share
will be replaced with diluted earnings per share. Under basic earnings per
share, the dilutive effect of stock options will be excluded. Under SFAS 128,
basic and diluted earnings per share for the three months and nine months ended
September 30, 1997 and 1996 would have been substantially the same as the
reported primary earnings per share.
3. SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments
of an Enterprise and Related Information," which is required to be adopted by
the Company in its fiscal year beginning January 1, 1998. SFAS 131 adopts the
"management approach" for determining segments. The Company has identified two
segments in its management approach, core business and emerging business. The
core
6
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business segment includes current products for the treatment and destruction of
VOCs. The emerging business segment addresses new applications for diesel engine
emission control and radioactive mixed wastes. The following information is
provided pursuant to SFAS 131 for the nine months ended September 30, 1997. The
Company had only one segment in 1996.
<TABLE>
<CAPTION>
Core Emerging
Business Business Total
-------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 5,575 $ 63 $ 5,638
Net Operating Loss (6,277) (516) (6,793)
Operating Assets 16,092 1,332 17,424
</TABLE>
7
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THERMATRIX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking information that involves
known and unknown risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from those indicated herein as a
result of certain factors, including those set forth under "Certain Business
Considerations."
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1996, contained in the Company's Annual Report on Form 10-K.
GENERAL
- -------
Thermatrix Inc. is a global industrial technology company engaged in the
development, manufacture and sale of 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 ("FTO"). The Company's products also
include PADRE(R), a proprietary technology used to capture and recover very low
concentration VOCs from low to medium flow vapor streams, and B.O.S.S.(TM), a
proprietary Boiler Oxidation Steam System that destroys VOCs and produces steam
for process applications. Through its exclusive marketing agreement with White
Horse Technologies, Inc., the Company also provides other thermal oxidizers for
treatment of VOCs.
The Company derives its revenues primarily from contracts to develop,
manufacture and install systems for the treatment of VOCs. 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 Company pursues new market applications to
control 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. 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.
The Company has experienced a shift in market demand for its products. The US
VOC market has declined, reflecting low capital expenditures in new process
facilities coupled with increased capital expenditures overseas associated with
continued globalization of the chemical and pharmaceutical industries. The
increased adoption of ISO 14000 standards is expected to reinforce this trend as
global companies focus on the areas of most needed improvement which will tend
to be outside the US. In 1997, the Company has responded to this shift by
reducing its US sales and operating staff and increasing its presence overseas.
The Company has increased its own staff presence in Europe and has added
engineering and manufacturing partners in the Far East.
8
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RESULTS OF OPERATIONS
- ---------------------
Revenues were $2.3 million and $5.6 million for the three months and nine months
ended September 30, 1997, down from $4.4 million and $10.5 million for the three
months and nine months ended September 30, 1996. The decrease in revenues
reflects a slowdown in orders for large, turnkey systems, as well as
discontinuance of three orders due to changing customer circumstances after
engineering work had been completed. Due to the shift in demand to complex,
turnkey systems, the Company has re-structured its sales organization to
increase focus on marketing and account management and to replace indirect
selling through manufacturers' representatives with direct selling by process
and application engineers. One customer accounted for 31% and 34%,
respectively, of revenues in the three months and nine months ended September
30, 1997. A second customer accounted for 17% of revenues in the three months
ended September 30, 1997. Revenues from international customers for the three
months and nine months ended September 30, 1997, were 33% and 38%, respectively,
compared to 7% and 13%, respectively, of revenues for the three months and nine
months ended September 30, 1996. The substantial increase in international
sales revenues during these periods reflects concentrated activity for the
construction of a large project to meet the customer delivery schedule. This
increase directly relates to the timing of revenue recognition under the
percentage of completion accounting method and is not necessarily indicative of
the level of international sales for any future periods.
Gross margin losses of $7,000 and $562,000, respectively, were reflected in the
three months and nine months ended September 30, 1997 versus gross margin
contribution of $817,000 and $1,487,000, respectively, in the comparable periods
in 1996. The decrease in gross margins was primarily attributable to lower
revenues which were insufficient to absorb the ongoing fixed costs of
engineering and operations. In addition, the Company increased its operating
costs by adding infrastructure in Europe and Asia to manage the anticipated
increase in customer orders for the Company's products. If customer orders for
the Company's products do not materialize in Europe and Asia, the Company's
gross margin and operating results could be negatively impacted in future
periods.
Research and development expenses increased to $302,000 and $922,000,
respectively, in the three months and nine months ended September 30, 1997
compared to $179,000 and $506,000, respectively, for the comparable periods in
1996. Significant product development activities were conducted in the nine
months ended September 30, 1997. A modified recuperative oxidizer was designed
and installed which will improve the operability and increase the range of the
FTO. A portion of the increase in research and development expenses is
attributable to a newly designed continuous process PADRE(R) system. Also, a
first test unit for the treatment of emissions from dry cleaning operations was
completed and shipped and is undergoing testing. Finally, another new design of
the FTO was begun and is undergoing tests in connection with the possible
application to diesel engine emission control and, potentially, to the
development of lower cost versions of the core FTO product.
Selling, general and administrative expenses increased to $1.9 million and $5.3
million, respectively, for the three months and nine months ended September 30,
1997, compared to $1.7 million and $4.5 million, respectively, for the
comparable periods in 1996. The increase in selling, general and administrative
expenses reflects increased staffing and related costs in anticipation of higher
sales levels in Europe and Asia. It also reflects the increased costs of being
a public company. The Company's IPO was completed June 20, 1996.
Net interest income of $153,000 and $550,000, respectively, for the three months
and nine months ended September 30, 1997, primarily results from the investment
of the net proceeds from the Company's initial public offering completed in June
1996.
9
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LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total cash and short-term investments were $8.5 million at September 30, 1997, a
decrease of $7.7 million from December 31, 1996. This decrease was primarily
due to cash used in operations and a build-up in receivables for a major project
for which an irrevocable letter of credit was established. The letter of credit
was paid ($1.5 million) in October. Net cash used in operating activities
increased to $7.1 million in the nine months ended September 30, 1997 from $5.5
million in the nine months ended September 30, 1996. This increase is primarily
a result of the increased operating losses in 1997.
The Company has a $4.0 million revolving receivable bank line of credit which
expires February 25, 1998. There were no outstanding borrowings as of September
30, 1997. The Company believes that its current cash and short-term
investments, together with the availability of its line of credit, will be
sufficient to finance its working capital and other capital requirements through
1998.
CERTAIN BUSINESS CONSIDERATIONS
- -------------------------------
The Company's business is subject to the following risks and uncertainties, in
addition to those described elsewhere.
Operating Losses and Accumulated Deficit; Uncertainty of Future Profitability.
The Company had a net loss of approximately $4.9 million in 1996 and $6.3
million for the nine months ended September 30, 1997, and had an accumulated
deficit of approximately $33.4 million at September 30, 1997. The Company does
not expect to be profitable unless and until sales of its systems generate
sufficient revenues to fund its operations. There can be no assurance that the
Company will achieve such revenues.
Uncertainty of Market Acceptance. To date, FTO systems have been installed in
a small segment of a number of industries. There can be no assurance that the
Company's FTO technology will receive broad market acceptance. 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 a significant
number of potential customers to adopt its FTO technology would have a material
adverse effect on the growth of the Company's business, results of operations
and financial condition.
Sensitivity to Major Projects. For the nine months ended September 30, 1997,
one project accounted for 34% of the Company's revenues. In 1996, three
projects accounted for 38% of the Company's revenues and in 1995, two projects
accounted for 59% of the Company's revenues. The average size and dollar volume
of each installation has been 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.
10
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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 timing and
amount of project change orders, the amount of first-time engineering needed,
the introduction of new products or services by the Company or its competitors,
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 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.
Management of Growth. Although the Company's revenues have decreased in 1997
compared to the prior year, the Company's revenues increased from $6.5 million
in the year ended December 31, 1995 to $13.6 million in the year ended December
31, 1996. The Company's growth has placed, and could 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 1996, 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 and performance of the individual employees in
managing 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. 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.
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. Expansion internationally
encompasses the need to provide an infrastructure for operations, sales and
administration. There can be no assurance that the Company will be able to
attract, hire and train personnel or develop the infrastructure needed on a
timely basis which may have an adverse impact on the Company's business, results
of operations and financial condition.
11
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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, including currency devaluations, 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 some 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.
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.
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 has begun tests involving diesel engine emission control
and radioactive mixed waste treatment. The engineering challenges involved in
treating diesel emissions and radioactive mixed wastes 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.
12
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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.
13
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company has been, or may become, involved in litigation
proceedings incidental to the conduct of its business. The Company does not
believe that any such proceedings presently pending will have a material adverse
effect on the Company's financial position or its results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
14
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.3 Restated Certificate of Incorporation of Registrant.
3.4 Amended and Restated Bylaws of Registrant.(*)
4.2 Amended and Restated Investor Rights Agreement.(*)
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.(*)
10.10 Amended and Restated Loan and Security Agreement between the
Registrant and Cupertino National Bank and Trust, dated February 25,
1997.(**)
27.1 Financial Data Schedule.
- -----------------------
(*) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-4370) which became
effective June 19, 1996.
(**) Incorporated by reference to exhibits filed with The Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMATRIX INC.
Date: November 13, 1997 By: /s/ Steven J. Guerrettaz
------------------------
Steven J. Guerrettaz
Vice President - Finance & Accounting,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
<PAGE>
Exhibit 3.3
Page 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "THERMATRIX INC.", FILED IN THIS OFFICE ON THE TWENTY-SECOND DAY OF
AUGUST, A.D. 1997, AT 3:30 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL OF THE DELAWARE SECRETARY'S OFFICE APPEARS HERE]
/s/ Edward J. Freel
-----------------------------
Edward J. Freel,
Secretary of State
AUTHENTICATION: 8621778
DATE: 08-25-97
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
THERMATRIX INC.
Thermatrix Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Company"), hereby certifies:
FIRST: That at a meeting of the Board of Directors of the Company,
resolutions were duly adopted setting forth a proposed amendment to the Restated
Certificate of Incorporation of the Company, declaring said amendment to be
advisable, it was presented to the stockholders of the Company at the annual
meeting of stockholders of the Company for consideration thereof. The resolution
of the proposed amendment provided that the Certificate of Incorporation of the
Company be amended to change the Fourth Article thereof so that as amended, said
Article shall read as follows:
"FOURTH: This Corporation is authorized to issue two classes of
shares to be designated, respectively, Common Stock and Preferred Stock. The
total number of shares which this corporation shall have authority to issue is
Thirty Million (30,000,000) of which Twenty-Five Million (25,000,000) shall be
Common Stock with a par value of $.001 per share and Five Million (5,000,000)
shall be Preferred Stock with a par value of $.001 per share.
The Preferred Stock may be issued from time to time in one or more
series pursuant to a resolution or resolutions providing for such issue duly
adopted by the Board of Directors (authority to do so being hereby expressly
vested in the Board). The Board of Directors is further authorized to determine
or alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and, to fix the
number of shares or any such series of Preferred Stock and the designation of
any such series of Preferred Stock. The Board of Directors is authorized, within
the limits and restrictions stated in any resolution or resolutions of the Board
of Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares thereof then
outstanding) the number of shares of any such series subsequent to the issue of
shares of that series, to determine the designation of any series, and to fix
the number of shares of any series."
<PAGE>
SECOND: That a meeting of the stockholders of the Company was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provision of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Thermatrix Inc. has caused this Certificate of
Amendment to be signed by John T. Schofield, its President, and attested by
Barbara E. Krimsky, its Secretary, this 19 day of August, 1997.
THERMATRIX INC.
/s/ John T. Schofield
-----------------------------
John T. Schofield, President
Attested:
/s/ Barbara E. Krimsky
- ------------------------------
Barbara E. Krimsky, Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 4,781 3,363
<SECURITIES> 11,418 5,127
<RECEIVABLES> 5,164 5,654
<ALLOWANCES> 265 298
<INVENTORY> 809 1,141
<CURRENT-ASSETS> 22,241 15,279
<PP&E> 1,236 1,650
<DEPRECIATION> 423 633
<TOTAL-ASSETS> 24,009 17,424
<CURRENT-LIABILITIES> 2,611 2,201
<BONDS> 0 0
0 0
0 0
<COMMON> 7 8
<OTHER-SE> 21,391 15,215
<TOTAL-LIABILITY-AND-EQUITY> 24,009 17,424
<SALES> 13,605 5,638
<TOTAL-REVENUES> 13,605 5,638
<CGS> 12,002 6,200
<TOTAL-COSTS> 12,002 6,200
<OTHER-EXPENSES> 6,916 6,231
<LOSS-PROVISION> 190 175
<INTEREST-EXPENSE> 500 550
<INCOME-PRETAX> (4,813) (6,243)
<INCOME-TAX> (63) (50)
<INCOME-CONTINUING> (4,876) (6,293)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,876) (6,293)
<EPS-PRIMARY> (0.73) (0.84)
<EPS-DILUTED> (0.73) (0.84)<FN>
<FN> Per share information in 1996 has been retroactively adjusted to reflect
a one for three reverse stock split that was approved in May, 1996.
</TABLE>
