<PAGE>
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 March 31, 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 April 14, 1997
----- -----------------------------
Common stock, $.001 par value 7,490,114
1
<PAGE>
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
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <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............................................................ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 12
Item 2. Changes in Securities................................................... 12
Item 3. Defaults Upon Senior Securities...........................................12
Item 4. Submission of Matters to a Vote of Security Holders..................... 12
Item 5. Other Information....................................................... 12
Item 6. Exhibits and Reports on Form 8-K........................................ 13
SIGNATURE.................................................................14
</TABLE>
2
<PAGE>
THERMATRIX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash & cash equivalents ............................ $ 3,789 $ 4,781
Short-term investments ............................. 11,352 11,418
Accounts receivable, net ........................... 2,666 4,899
Costs of uncompleted contracts ..................... 901 809
Prepaid expenses and other current assets .......... 308 334
-------- --------
Total current assets .................... 19,016 22,241
PROPERTY AND EQUIPMENT
Machinery and equipment ............................ 802 750
Demonstration equipment ............................ 189 179
Furniture and fixtures ............................. 320 307
-------- --------
1,311 1,236
Less - Accumulated depreciation and amortization .. (476) (423)
-------- --------
Net property and equipment .............. 835 813
-------- --------
PATENTS AND OTHER ASSETS, net ...................... 1,040 955
-------- --------
$ 20,891 $ 24,009
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................... $ 694 $ 1,779
Accrued liabilities ................................ 631 824
Billings on uncompleted contracts in excess of costs 97 8
-------- --------
Total current liabilities ............... 1,422 2,611
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value .......... 7 7
Additional paid-in capital .............. 48,477 48,454
Accumulated deficit ..................... (29,015) (27,063)
-------- --------
Total stockholders' equity ........ 19,469 21,398
-------- --------
$ 20,891 $ 24,009
======== ========
</TABLE>
3
<PAGE>
THERMATRIX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months
Ended March 31,
------------------
1997 1996
--------- -------
REVENUES ................................... $ 1,084 $ 2,735
COST OF REVENUES ........................... 1,406 2,506
------- -------
Gross Margin ................... (322) 229
------- -------
OPERATING EXPENSES
Research and development .......... 183 138
Selling, general and administrative 1,644 1,328
------- -------
Total operating expenses ........ 1,827 1,466
------- -------
Loss from operations ............ (2,149) (1,237)
INTEREST INCOME, NET ....................... 213 (1)
------- -------
Net loss before income taxes ...... (1,936) (1,238)
PROVISION FOR INCOME TAXES ................. (16) (5)
------- -------
Net loss .......................... $(1,952) $(1,243)
======= =======
NET LOSS PER SHARE ......................... $ (0.26) $ (0.22)
======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES ................... 7,470 5,763
======= =======
4
<PAGE>
THERMATRIX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
MARCH 31, MARCH 31,
1997 1996
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss ........................................ $(1,952) $(1,243)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization ................ 68 64
Provision for doubtful accounts .............. 15 (25)
Changes in assets and liabilities -
Accounts receivable ......................... 2,218 (794)
Costs of uncompleted contracts .............. (92) (169)
Prepaid expenses and other .................. 26 8
Accounts payable ............................ (1,085) 769
Accrued liabilities ......................... (193) 69
Billings in excess of costs ................. 89 (109)
------- -------
Net cash used in operating activities ............ (906) (1,430)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (Purchase) of short-term investments ........ 66 --
Purchases of property and equipment .............. (90) (53)
Increase in patents and other assets ............. (85) (105)
------- -------
Net cash (used in) investing activities .......... (109) (158)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of preferred stock ........ -- 2,084
Net proceeds from sale of common stock ........... 23 --
------- -------
Net cash provided by financing activities ........ 23 2,084
------- -------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ............ (992) 496
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD ............... 4,781 981
------- -------
CASH & CASH EQUIVALENTS END OF PERIOD ..................... $ 3,789 $ 1,477
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ........................... 3 --
Cash paid for income taxes ....................... 24 --
</TABLE>
5
<PAGE>
THERMATRIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 ended March 31, 1997 and 1996. The results for the three-months
ended March 31, 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 ended March 31, 1997 is computed using
the weighted average number of common shares outstanding during the period.
Common equivalent shares have been excluded from the computation as their effect
is antidilutive.
Net loss per share for the three months ended March 31, 1996 is computed on a
pro forma basis. 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 of the Registration Statement on Form S-1 as
if they were outstanding for all periods presented using the treasury stock
method. 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.
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 first quarter ended March 31, 1997
and 1996 would have been substantially the same as the reported primary earnings
per share.
6
<PAGE>
THERMATRIX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking information and 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 primarily 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 derives its revenues primarily from contracts to develop and
manufacture FTO 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.
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 margin. 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 generally have higher gross margins.
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 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 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
7
<PAGE>
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.
Although the Company is expanding the number of its customers and installations,
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.
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 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.
RESULTS OF OPERATIONS
- ---------------------
Revenues were $1.1 million for the three months ended March 31, 1997, down from
$2.7 million for the three months ended March 31, 1996. The decrease in revenues
was primarily attributable to an increase in the number of projects which were
in the final phase of installation, which phase generates lower revenues under
the percentage of completion method of accounting, in the first quarter of 1997
as compared to the same period in 1996. The first quarter of 1997 was also
impacted by the postponement of one order by a customer, a three-month delay of
a significant order by another customer, and the cancellation of orders by two
other customers after engineering work had already been completed. Significant
customers accounted for 24%, 12%, and 11%, respectively, of revenues in the
three month period ended March 31, 1997. Revenues from international customers
for the three months ended March 31, 1997, were 28% compared to 21% of revenues
for the three months ended March 31, 1996.
Gross margin losses of $322,000 were reflected in the three months ended March
31, 1997 versus gross margin contribution of $229,000 in the comparable period
in 1996. The decrease in gross margins was primarily attributable to lower
revenues which were insufficient to absorb the ongoing fixed and semi-fixed
costs of engineering and operations. In addition, the Company increased its
costs in operations by adding infrastructure in Europe and Asia to manage the
anticipated increase in customer interest in the Company's products. If customer
interest in the Company's products does not increase in Europe and Asia, the
Company's gross margin and operating results could be negatively impacted in
future periods.
Research and development expenses increased from $138,000 in the three months
ended March 31, 1996 to $183,000 in the three months ended March 31, 1997. A
portion of the increase in research and development expenses is attributable to
work directed toward improvements of the PADRE technology acquired from Purus,
Inc. in April 1996. Also, the Company augmented its staff through hiring
temporary contract labor to assist in various development efforts, including
work on emerging business opportunities.
Selling, general and administrative expenses increased from $1.3 million in the
three months ended March 31, 1996 to $1.6 million in the three months ended
March 31, 1997. The increase in selling, general and
8
<PAGE>
administrative expenses reflects higher proposal activity, increased
compensation and staffing levels and expansion in Europe, Asia and the U.S. for
higher anticipated sales levels, as well as increases in liability insurance,
travel and other costs related to the increased level of sales, and the costs of
being a public company.
Net interest income of $213,000 for the three months ended March 31, 1997,
primarily results from the investment of the net proceeds from the Company's
initial public offering completed in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total cash and short-term investments were $15.1 million at March 31, 1997, a
decrease of $1.1 million from December 31, 1996. This decrease was primarily due
to cash used in operations. Net cash used in operating activities decreased to
$900,000 in the three months ended March 31, 1997 from $1.4 million in the three
months ended March 31, 1996. This decrease is primarily a result of the net
change in operating assets and liabilities.
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 March 31,
1997. The Company believes that its current cash and short-term investments,
together with the availability of its line of credit, should 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 $2.0
million for the three months ended March 31, 1997, and had an accumulated
deficit of approximately $29.0 million at March 31, 1997. 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.
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 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 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. 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.
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 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
9
<PAGE>
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. 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 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 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. 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 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.
10
<PAGE>
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 emission control,
radioactive mixed waste treatment and chemical weapons destruction. The
engineering challenges involved in treating diesel emissions, radioactive mixed
wastes and chemical warfare agents 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.
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.
11
<PAGE>
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.
12
<PAGE>
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.(*)
10.9 Loan and Security Agreement between the Registrant and
Cupertino National Bank and Trust, dated December 15, 1995.(*)
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
13
<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: May 14, 1997 By: /s/ Steven J. Guerrettaz
-------------------------------
Steven J. Guerrettaz
Vice President - Finance & Accounting,
Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 4,781 3,789
<SECURITIES> 11,418 11,352
<RECEIVABLES> 5,164 2,946
<ALLOWANCES> 265 280
<INVENTORY> 809 901
<CURRENT-ASSETS> 22,241 19,016
<PP&E> 1,236 1,311
<DEPRECIATION> 423 476
<TOTAL-ASSETS> 24,009 20,891
<CURRENT-LIABILITIES> 2,611 1,422
<BONDS> 0 0
0 0
0 0
<COMMON> 7 7
<OTHER-SE> 21,391 19,462
<TOTAL-LIABILITY-AND-EQUITY> 24,009 20,891
<SALES> 13,605 1,084
<TOTAL-REVENUES> 13,605 1,084
<CGS> 12,002 1,406
<TOTAL-COSTS> 12,002 1,406
<OTHER-EXPENSES> 6,916 1,827
<LOSS-PROVISION> 190 15
<INTEREST-EXPENSE> 500 213
<INCOME-PRETAX> (4,813) (1,936)
<INCOME-TAX> (63) (16)
<INCOME-CONTINUING> (4,876) (1,952)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,876) (1,952)
<EPS-PRIMARY> (0.73) (0.26)
<EPS-DILUTED> (0.73) (0.26)<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>
