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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996.
[_] 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Paragraph 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. _______
On February 28, 1997, there were issued and outstanding 7,469,552 shares of
Common Stock. The aggregate market value of Common Stock held by non-affiliates
of the Registrant on that date was approximately $15,978,000, based on the
closing sale price of the Common Stock, as reported by the NASDAQ National
Market.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING INFORMATION
Statements in this report concerning expectations for the future
constitute 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.
These statements are subject to a number of known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements of the Company or industry trends to differ materially from those
expressed or implied by such forward-looking statements. Relevant risks and
uncertainties include, among others, those discussed in Item 1 of Part I under
the heading "Risk Factors" and elsewhere in this Report and those described from
time to time in the Company's other filings with the Securities and Exchange
Commission, press releases and other communications.
DESCRIPTION OF BUSINESS
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"), 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
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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 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) low operating and maintenance costs; (ii) product safety; (iii)
broad application to a wide range of VOCs, including difficult-to-treat
chlorinated, sulfonated and fluorinated compounds; (iv) the ability to
economically treat fume streams with variable flows and concentrations; (v) high
operating reliability; (vi) high DRE; and (vii) de minimis formation of
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hazardous by-products.
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, medical sterilization and pharmaceutical industries with "market
leader" customers, and for soil and groundwater remediation; (ii) selling more
than 60 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, Taiwan and France. The Company's customers include: Chevron
U.S.A. Inc., Dow Chemical Company, Chesebrough-Pond's USA Co., Monsanto Company,
FMC Corporation, Formosa Petrochemical Corporation, Mobil Chemical Company, PPG
Industries, Inc., Bayer 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 control of diesel
emissions, treatment of mixed radioactive wastes and destruction of chemical
weapons.
The Company is also pursuing a strategy to selectively provide
complementary technologies in order to expand its presence in the VOC treatment
market. In April 1996, the Company acquired all rights to the PADRE VOC
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adsorption technology from Purus, Inc. The Company sold seven PADRE systems in
1996 and plans to sell PADRE units on a stand-alone basis as well as combined
with Thermatrix systems in the future.
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 pharmaceutical.
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 NO\x\that, in combination with
VOCs, produce smog. The CAAA introduced new regulatory requirements and
timetables for the abatement of VOCs and NO\x\ for most geographic areas that
become progressively more stringent through the year 2010.
International demand for VOC control equipment is 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.
THE THERMATRIX SYSTEM
The Thermatrix system is a unique proprietary FTO technology for the
destruction of VOCs. The Thermatrix oxidizer 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
degrees and 1800 degrees Farenheit. Once the preheating has been completed, a
VOC-laden fume stream along with supplemental air or fuel (as 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 degrees and 1800 degrees
Farenheit. Due to its flameless design and consistent temperature profile, the
Company's FTO system achieves high destruction with very low energy usage and
with de minimis formation of NO\x\and CO.
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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. The FTO system can also be combined with a heat recovery or material
recycling system from the exhaust gases.
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The Thermatrix technology has the following attributes, which
individually or in combination provide direct and indirect cost advantages over
competing VOC treatment methods:
Energy Efficiency. The Company's FTO system is energy efficient
-----------------
because its ceramic matrix absorbs and utilizes the exothermic 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 30% of the energy
required for many flame-based systems. This energy efficiency is particularly
significant in geographic locations where the cost of energy is many times
higher than in the United States.
Cost Efficiency. The Company's FTO system can be incorporated up-
---------------
stream in the customer's process and can be configured, dependent upon the
customer's fume stream, for energy recovery or product recovery. Due to the
high DRE achieved by the system there is typically no waste generated for
further treatment or disposal. Since there are no moving parts, on-going
maintenance is minimal and because it is fully automatic there is little
requirement for operator interface. The combination of these factors leads to a
low overall life cycle cost when compared to other technologies, as supported by
independent demonstrations conducted by the DOD and DOE.
Safety. The Thermatrix system is certified for use in flame proof
------
areas 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
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VOCs, including difficult-to-treat compounds and those with variable flows and
concentrations. This attribute is particularly desirable in industries 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 could flame out or suffer reduced destruction efficiencies
under similar conditions.
Reliability. The Thermatrix oxidizer is highly reliable because it
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operates within wide tolerance limits, is fully automatic, has no moving parts,
no catalysts and requires little off-line maintenance. On-line reliability is
critical because regulatory permits generally require a production line to be
shut down if the emission control device fails.
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.
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 NO\x\, CO
and PICs. The Company's FTO technology typically achieves thermal NO\x\ levels
not exceeding two parts per million volume ("ppmv") with de minimis PIC and CO
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formation. The reduced energy requirement for the FTO system also results in a
corresponding reduction in the formation of greenhouse gases.
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, Taiwan 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
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technology often exceeds regulatory requirements, its customers are able to
earn emission credits and capitalize on these regulations.
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 provide 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
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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,
pharmaceutical 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
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Market. The Company is continuing to identify new strategic customers within
- ------
industrial VOC applications not currently served by the Company, such as the
electronics and semiconductor industries. There is an increasing demand from
customers to supply comprehensive systems that combine the Company's FTO
technology with other technologies. These "hybrid" systems may provide for
energy recovery or product recovery as well as treatment of the customer's fume
stream. The Company intends to continue to provide a full range of systems that
provide a fully integrated solution to meet the customer's needs.
Expand International Operations. The Company believes that its
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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 the United Kingdom and in 1996 expanded its United Kingdom work force
and capabilities to include applications engineering, fabrication, assembly and
service. The Company has established distribution relationships in Japan,
Taiwan and the People's Republic of China. In 1997, the Company plans to add
expanded capability in Asia including project management, applications
engineering, and subcontracted vendor support.
Establish New Market Applications. In addition to the market for
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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 control of diesel engine
emissions, and treatment of radioactive mixed wastes and is seeking a strategic
partner to pursue destruction of chemical weapons.
Selectively Provide Complementary Technologies. Customers are
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increasingly requiring integrated system solutions. To provide such solutions
the Company seeks to expand its technology portfolio through joint ventures,
selective marketing arrangements and acquisitions. In April 1996, the Company
acquired all rights from Purus, Inc. to a VOC adsorption technology known as
PADRE. 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 for flows with low VOC content or
where the customer requires destruction rather than recovery of the captured
VOCs.
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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 60 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, FMC, Chlorinated and
Manufacturing Mobil Chemical Company, Formosa Fluorinated Compounds
Petrochemical Corporation, PPG
Industries, Inc., Bayer Corporation
Pharmaceuticals Manufacturing Zeneca, Chesebrough-Pond's USA Chlorinated Compounds
Pulp and Paper Manufacturing Georgia Pacific, Simpson Paper Sulfonated Compounds
Medical Sterilization Sorex Medical Ethylene Oxide
Soil and Groundwater Remediation DOD, DOE, Thermo Remediation, Chlorinated Compounds and
Envirogreen Hydrocarbons
</TABLE>
Petroleum. The petroleum industry is a large generator of VOCs.
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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 Federal 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 flame proof areas.
The primary advantages of the Company's technology as applied to the
petroleum industry includes cost effectiveness and 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 flame proof environments.
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, 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 cost effective and
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 NO\\X\\, 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.
Pharmaceutical. The pharmaceutical industry uses large volumes of
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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
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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.
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.
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
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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.
Soil and Groundwater Remediation. The soil and groundwater
--------------------------------
remediation market continues to seek proven, low cost, expedient solutions. The
Company has sold eight FTO units and six PADRE systems 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 at Savannah River 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 FTO technology was less than one-third that
of the 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 cost savings of almost 20% compared to
the alternate technology.
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.
Diesel Engine Emission Control. The fume and soot emissions from
------------------------------
static and mobile diesel engines create a serious environmental problem for
which there is currently 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. The
Company delivered a prototype unit in late 1996 which was fitted to a diesel
engine test bed. Tests have been conducted with varying diesel injection
scenarios to test the ability of the system to handle a range of particulate
sizes and VOC emissions. Initial test results received in 1997 have been
encouraging and the Company intends to conduct further development activity.
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 prior to
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landfilling or encapsulation, vitrification or stabilization of the radioactive
components for final disposal or storage. In October 1996, the Company
announced the formation of Formatrix, LLC ("Formatrix"), a joint venture with
ThermoChem, Inc., a Maryland-based leader in steam reforming systems.
Formatrix, LLC will combine, under license, the patented technologies from
Thermatrix and ThermoChem to create a treatment system for significantly
reducing the volume of the radioactive wastes prior to their encapsulation or
vitrification for long-term burial. Formatrix, LLC will initially focus on
treating radioactive wastes from spent ion exchange resins. A prototype
Thermatrix-ThermoChem system has been constructed under a contract with the DOE
and has successfully treated a number of non-radioactive surrogate mixed wastes.
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 is seeking a
strategic operating partner to pursue this market.
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.
SALES AND MARKETING
The Company has established a network of independent commissioned
sales representatives. The Company currently has agreements with 17
representative organizations with over 50 sales agents selling the Company's FTO
system throughout the United States and Canada. The representative organization
network was established to introduce the technology by utilizing the long-
standing relationships 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 typically hold
science or engineering degrees and have an average of 14 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; Westford, Massachusetts; 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 six people and
handles sales and technical support directly for the European market. In 1995,
the Company entered into representative agreements with ICI Taiwan Limited and
ICI Japan Limited for sales representation in Taiwan and Japan, respectively.
In 1996, the Company expanded its coverage in Asia to include the Peoples'
Republic of China and signed a three-way agreement with ICI Japan Limited and
Toray Engineering Co. to include support for engineering, assembly, installation
and commissioning services in Japan.
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 primarily on the development of applications for its FTO technology
as a thermal destruction process for the treatment of VOCs. In 1996, the
Company expanded its development activities to include engineering improvements
to the existing PADRE technology and development of a hybrid system utilizing
both FTO and PADRE.
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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 diesel emission control, radioactive mixed waste treatment
and chemical demilitarization. When areas of specialized expertise are required,
such as advanced metallurgy, the Company relies on consulting and collaboration
relationships with SRI International.
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 February 28, 1997, the Company owned seven United States and
seven international patents, had received notice of allowance for three
additional United States patent applications and two additional international
patent applications, and had an additional five United States and 25
international patent applications pending relating to its thermal treatment
technology. All issued United States patents expire during the period between
July 31, 2005 and February 11, 2014. The Company has granted a license of its
patents to Formatrix, LLC, a joint venture 40% of which is owned by the Company,
for restricted use in the field of low level radioactive spent ion exchange
resins.
The Company's ten 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.
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.
In addition to the foregoing patents and patent applications, the
Company has three issued United States trademarks, and has an additional two
United States and four international trademark applications pending for certain
of the Company's tradenames and other intellectual property.
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 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);
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(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. 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. Some 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.
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.
REGULATION
VOCs are an unavoidable by-product of many manufacturing and process
industries worldwide and must be controlled due to the significant health,
safety and environmental risks. Many of these VOCs are flammable, explosive or
highly toxic. To control these significant health and safety risks, regulations
have been promulgated and enforced in the United States and overseas. These
regulatory requirements are expanding globally into developing nations.
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 the
10
<PAGE>
reduction of NO\x\ that, in combination with VOCs, produce smog. The CAAA
introduced new regulatory requirements and timetables for the abatement of VOCs
and NO\x\ 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 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 NO\x\ 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 February 28, 1997, the Company had 61 full-time employees, 17 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 permanent, full-time employees is covered by
collective bargaining agreements.
RISK FACTORS
Operating Losses and Accumulated Deficit; Uncertainty of Future
---------------------------------------------------------------
Profitability. The Company had a net loss of approximately $4.9 million in
- -------------
1996, and had an accumulated deficit of approximately $27.1 million at December
31, 1996. Since 1992 when the Company restructured its operations, the Company
has financed its operations primarily through private placements of equity
securities totaling approximately $20.3 million, an initial public offering of
its common stock with net proceeds totaling approximately $22.1 million, and a
credit facility with its bank of $4.0 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.
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
11
<PAGE>
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. 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.
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
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
12
<PAGE>
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.
Risks Associated with Commercialization of Technology. 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.
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.
13
<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.
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, 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.
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.
14
<PAGE>
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.
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, 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.
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.
ITEM 2. PROPERTIES
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 15,000 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 a
sales office in Houston, Texas and an office in Rockville, Maryland under month-
to-month leases. The Company leases approximately 1,000 square feet of office
space in London, England under a five-year lease, which it uses for sales and a
5,000 square foot office in Hessle, England under a six year lease which it uses
for operations and engineering. The Company anticipates subletting the London
office in 1997 and housing all European activities in the Hessle office space
thereafter.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incident
to the ordinary course of its business. Management believes that the outcome of
all pending legal proceedings in the aggregate will not have a material effect
on the Company's business, financial condition or result of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the Company's fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on the NASDAQ National
Market under the symbol "TMXI." The following table sets forth, for the periods
indicated, the high and low sales prices of the common stock (as reported by
NASDAQ):
PERIOD HIGH LOW
------ ---- ---
June 19, 1996 to June 30, 1996 13 12-1/2
Third Quarter 1996 13 7-1/2
Fourth Quarter 1996 12 7-1/8
As of February 28, 1997 there were over 1,000 holders of the Company's Common
Stock. The Company has never declared or paid dividends on its 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.
16
<PAGE>
ITEM 6. 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, 1996 and with respect to the Company's balance sheets
as of December 31, 1996 and 1995 are derived from the consolidated financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
statement of operations data for the years ended December 31, 1993 and 1992 and
the balance sheet data as of December 31, 1994, 1993 and 1992 are derived from
audited financial statements not included in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
--------- -------------------- ------------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............... $13,605 $ 6,494 $ 3,135 $ 881 $ 1,041
Cost of revenues....... 12,002 6,064 3,099 966 937
------- ------- ------- ------- -------
Gross margin........... 1,603 430 36 (85) 104
------- ------- ------- ------- -------
Research and development 748 1,084 1,326 483 414
Selling, general and
administrative ........ 6,168 4,740 4,503 2,100 1,290
------- ------- ------- ------- -------
Loss from operations.... (5,313) (5,394) (5,793) (2,668) (1,600)
Net loss................ $(4,877) $(5,194) $(5,821) $(2,621) $(1,751)
======= ======= ======= ======= =======
Net loss per share/(1)/. $(0.73)
=======
Pro forma net loss
per share/(1)/........ $(0.91)
=======
Shares used in per share
computation............ 6,664 5,720
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments... $16,199 $ 981 $ 6,930 $ 1,730 $ 494
Total assets.............. 24,009 4,228 9,223 2,072 999
Long-term debt............ -- -- -- -- --
Redeemable convertible
preferred stock.......... -- 11,321 11,321 -- --
Stockholders' equity
(deficit)................ 21,398 (9,345) (4,209) 1,611 419
</TABLE>
- ------------
(1) See Note 2 of Notes to Consolidated Financial Statements - Summary of
Significant Accounting Policies -- Net Loss Per Share and Pro Forma Net Loss
Per Share.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. 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. 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 Company's core technology has been successfully commercialized in
the industrial VOC control market for applications in the petroleum,
chemical/petrochemical, pharmaceutical, medical sterilization 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.
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. In
October 1996, the Company entered into a joint venture (Formatrix, LLC) with
ThermoChem, Inc. to explore the commercialization of a system to treat mixed
wastes. Also, the Company is completing tests to address 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 more extensive 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.
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.
18
<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.
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.
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.
RESULTS OF OPERATIONS
Fiscal years Ended December 31, 1996, 1995 and 1994
---------------------------------------------------
Revenues increased 110% to $13.6 million in 1996 from $6.5 million in
1995. The increase in revenues is primarily attributable to an increased
acceptance of the Company's technology which included contracts for systems used
in chemical/petrochemical, petroleum, and pulp and paper industry applications,
orders for systems used in remediation projects, and the first unit for use in
medical sterilization. Revenues in 1996 also reflected the Company's first
sales of PADRE units, the technology acquired from Purus, Inc. in April 1996.
Three customers accounted for 13%, 13% and 12% of revenues, respectively, as the
Company's customer base increased and the Company's dependence on specific major
customers decreased. In 1996, sales to international customers increased to 14%
with orders in Europe and in Asia. Revenues grew 107% to $6.5 million in 1995,
from $3.1 million in 1994, 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.
Gross profit as a percentage of revenues for 1996, 1995 and 1994 was
11.8%, 6.6% and 1.1%, respectively. The increase in gross profit is
attributable in part to an increase in follow-on sales for existing
applications, increased pricing as the Company begins to value price its systems
and, to a lesser extent, reductions in costs from repeat sales of systems for
established applications. Gross profit margins are affected by numerous factors
including growth of the operations infrastructure, international expansion,
initial systems addressing new industries or new applications, larger, more
complex systems and the extent and timing of change orders. The growth in the
Company's business has necessitated hiring additional design engineers,
instrumentation and control engineers and project management personnel.
Significant training and familiarization with the Company's FTO
19
<PAGE>
technology results in these new individuals not being fully engaged in revenue
producing activities which reduces gross profit percentages. As the Company
grows internationally, operations infrastructure needs to be added to support
the sales activities. In 1997, the Company will add an applications engineer in
Asia and will add project management support on assignment from the U.S.
operations. In Europe, the Company is recruiting project management and
engineering capabilities and has added a senior operations director. In
addition, the European operations are being supported by people on assignment
from the U.S. Engineering costs and gross margins are impacted by first-time
shipments to a foreign country as the Company must comply with the different
construction and regulatory codes of that country location. New industry and/or
fume characteristics require the Company to expend significantly greater
engineering resources in process design and system design. Also such new
applications are usually sold at lower initial gross margins as the customer and
Company make investments in the development effort. As systems get larger and
more complex with hybrid technologies and purchased components, overall gross
margin percentages are affected by the Company's ability to mark up the
purchased components in the final system. Project change orders can be nominal
or can be significant. The Company does not recognize change orders as revenue
until the change order is accepted by the customer or acceptance is probable.
Depending upon the magnitude of the change order, gross margins can also be
affected.
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 during 1996, 1995 and 1994
were $748,000, $1.1 million and $1.3 million, respectively. The reduction in
research and development expenses primarily reflects the Company's success in
developing collaborative efforts with its industrial customers, thereby reducing
its own independent expenditures for applications development.
The Company's sales cycle is affected by numerous conditions outside
of the Company's control and can extend up to two years. The Company therefore
incurs sales and marketing costs well in advance of the receipt of orders.
Bookings of new orders are not consistent from month to month or from quarter to
quarter, which can have a material effect on the Company's quarterly revenues.
In addition, the booking of any large order in any quarter can have a material
effect on the revenue for a subsequent quarter or quarters as revenue generated
on large orders is typically recognized over six to seven months. Based on the
Company's current level of revenues these larger orders have a more significant
impact. Orders are often booked in phases and initial phases may be performed
but the subsequent phases may be delayed or canceled. These factors can lead to
unusual quarterly fluctuations in revenue, gross margins and net income.
Selling, general and administrative expenses increased to $6.2 million in 1996
as compared to $4.7 million in 1995 and $4.5 million in 1994, primarily as a
result of increased sales commissions, proposal activity, liability insurance
and other costs related to the increased level of sales. Also, the second half
of 1996 reflected the increased costs of complying with the additional reporting
requirements and other costs of a public company. The Company anticipates that
these costs will increase in 1997 as a result of being a public company for a
full year. As a percentage of revenues, selling, general and administrative
expenses decreased to 45.3% in 1996 as compared to 73.0% in 1995 and 143.6% in
1994.
Interest income of $548,000 in 1996 primarily results from the
investment of the net proceeds from the Company's initial public offering
completed in June 1996. Interest income of $231,000 in 1995 resulted from the
investment of the net proceeds of an equity private placement in November 1994.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company sold 284,594 shares of its Series D
Preferred Stock at $7.50 per share to existing investors for net cash of $2.1
million. In June 1996, the Company completed its initial public offering
raising net proceeds of $22.1 million.
During 1996, 1995 and 1994, the Company used $7.9 million, $5.5
million and $5.8 million, respectively, in operating activities and $1.2
million, $528,000 and $319,000, respectively, in investing activities primarily
for capital equipment and patent and other asset expenditures. The Company
anticipates it will continue to incur losses and will require increased levels
of working capital to finance any future growth. Total cash and short-term
investments were $16.2 million at December 31, 1996. The Company has a $4.0
million bank line of credit which expires February 25, 1998. There are no
borrowings outstanding under the line of credit as of February 28, 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 1997.
20
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 23 through 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 1996, the executive officers of the Company, who
are elected by and serve at the discretion of the Board of Directors, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John T. Schofield.................................. 59 Chairman, President and Chief Executive Officer
A. Judson Hill..................................... 42 Executive Vice President, Corporate Development
David R. Wright ................................... 58 Executive Vice President, Europe
Alexander G. Baldwin............................... 44 Vice President, Engineering and Operations
Steven J. Guerrettaz............................... 51 Vice President, Finance and Accounting and Chief Financial Officer
Howard M. Hohl..................................... 42 Vice President, North American Sales
Barbara E. Krimsky................................. 36 Vice President, Administration and Secretary
</TABLE>
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 Waste Management, Inc. a hazardous waste management
company. Mr. Guerrettaz holds a B.S. in Accounting from San Jose State
University.
21
<PAGE>
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.
Information concerning the Company's Directors and compliance with
Section 16 of the Securities Exchange Act is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Stockholders
to be held on June 2, 1997, which is intended to be filed with the Securities
and Exchange Commission no later than 120 days after the close of the fiscal
year ended December 31, 1996.
ITEMS 11, 12 AND 13.
The information called for by Part III (Items 11, 12 and 13) is
incorporated herein by reference to the Company's definitive proxy statement for
its Annual Meeting of Stockholders to be held on June 2, 1997, which is intended
to be filed with the Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended December 31, 1996.
22
<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, 1996
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, 1996. These financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The schedule listed
under Item 14 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
February 27, 1997
23
<PAGE>
THERMATRIX INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 4,781 $ 981
Short-term investments..................................... 11,418 --
Accounts receivable........................................ 4,899 2,140
Costs of uncompleted contracts in excess of billings....... 809 85
Prepaid expenses and other current assets.................. 334 181
------- --------
Total current assets..................................... 22,241 3,387
------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment.................................... 750 529
Demonstration equipment.................................... 179 165
Furniture and fixtures..................................... 307 134
------- --------
1,236 828
Less--Accumulated depreciation............................. (423) (233)
------- --------
Net property and equipment............................... 813 595
------- --------
PATENTS AND OTHER ASSETS, net............................... 955 246
------- --------
$24,009 $ 4,228
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................... $ 1,779 $ 1,487
Billings on uncompleted contracts in excess of costs and
revenue recognized........................................ 8 340
Accrued liabilities........................................ 824 425
------- --------
Total current liabilities................................ 2,611 2,252
------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
REDEEMABLE CONVERTIBLE PREFERRED STOCK...................... -- 11,321
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock: $0.001 par value
Authorized--5,000,000 shares
Outstanding--None and 2,554,631 shares,
respectively............................................ -- 9,304
Common stock: $0.001 par value
Authorized--50,000,000 shares
Outstanding--7,466,683 and 129,358 shares,
respectively........................................... 7 --
Additional paid-in capital................................ 48,454 3,538
Accumulated deficit....................................... (27,063) (22,187)
-------- -------
Total stockholders' equity (deficit)..................... 21,398 (9,345)
------- --------
$24,009 $ 4,228
======= ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
24
<PAGE>
THERMATRIX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES $13,605 $ 6,494 $ 3,135
COST OF REVENUES........................................... 12,002 6,064 3,099
------- ------- -------
Gross margin.................................... 1,603 430 36
------- ------- -------
OPERATING EXPENSES:
Research and development........................ 748 1,084 1,326
Selling, general and administrative............. 6,168 4,740 4,503
------- ------- -------
Total operating expenses..................... 6,916 5,824 5,829
------- ------- -------
Loss from operations......................... (5,313) (5,394) (5,793)
INTEREST INCOME (EXPENSE):
Interest income................................. 548 231 44
Interest expense................................ (48) -- (72)
------- ------- -------
Total interest income (expense).............. 500 231 (28)
------- ------- -------
Net loss before provision for income taxes... (4,813) (5,163) (5,821)
PROVISION FOR INCOME TAXES................................. 63 31 --
------- ------- -------
Net loss..................................... $(4,876) $(5,194) $(5,821)
======= ======= =======
NET LOSS PER SHARE......................................... $(0.73)
=======
PRO FORMA NET LOSS PER SHARE............................... $(0.91)
=======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES...................................... 6,664 5,720
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
THERMATRIX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------- ----------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
- ----------------------------- ----------- ------- ----------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993... 2,554,631 $ 9,304 59,194 $ -- $ 3,479 $(11,172) $ 1,611
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)
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)
Common stock issued in
initial public offering at
$12.50 per share, net of
issuance costs of $2,940.. -- -- 2,000,000 2 22,058 -- 22,060
Exercise of stock options at
$0.30 to $3.00 per share.. -- -- 44,430 -- 33 -- 33
Exercise of warrants at
$3.00 to $5.25 per share.. -- -- 21,415 -- 72 -- 72
Common stock issued for cash
at $12.00 per share........ -- -- 4,167 -- 50 -- 50
Conversion of redeemable
convertible preferred stock -- -- 2,712,682 3 13,401 -- 13,404
Conversion of convertible
preferred stock............ (2,554,631) (9,304) 2,554,631 2 9,302 -- --
Net loss........... -- -- -- -- -- (4,876) (4,876)
BALANCE, DECEMBER 31, 1996... -- $ -- 7,466,683 $ 7 $ 48,454 $(27,063) $21,398
========== ======= ========= ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
THERMATRIX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $(4,876) $(5,194) $(5,821)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization.................................... 281 162 71
Provision for doubtful accounts.................................. 190 229 150
Stock bonus compensation expense................................. -- 15 --
Changes in assets and liabilities--
(Increase) in accounts receivable.............................. (2,949) (910) (1,570)
(Increase) decrease in costs of uncompleted contracts in
excess of billings........................................... (724) 223 (308)
(Increase) decrease in prepaid expenses and other current
assets........................................................ (153) (130) 24
Increase in accounts payable................................... 292 29 954
Increase (decrease) in billings on uncompleted contracts
in excess of costs and revenue recognized..................... (332) 149 169
Increase (decrease) in accrued liabilities.................... 399 (37) 553
------- ------- -------
Net cash used in operating activities.......................... (7,872) (5,464) (5,778)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (408) (381) (181)
Purchase of short-term investments................................ (11,844) -- (2,713)
Proceeds from sale of short-term investments...................... 426 3,801 --
Increase in patents and other assets.............................. (800) (147) (138)
-------- ------- -------
Net cash (used in) provided by investing activities............ (12,626) 3,273 (3,032)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loans........................................ -- -- 1,541
Payment of note payable........................................... -- -- (25)
Borrowings under line of credit................................... 1,000 -- --
Repayment of line of credit borrowing............................. (1,000) -- --
Net proceeds from sale of Series D redeemable preferred stock..... 2,083 -- 9,780
Net proceeds from sale/issuance of common stock................... 22,215 43 1
-------- ------- -------
Net cash provided by financing activities...................... 24,298 43 11,297
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 3,800 (2,148) 2,487
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 981 3,129 642
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 4,781 $ 981 $ 3,129
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:..................
Cash paid for interest............................................ $ 48 $ -- $ 72
======== ======= =======
Cash paid for income taxes........................................ $ 13 $ 26 $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
Thermatrix Inc. (the "Company") 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 Company markets its
products to a wide variety of industries, including petroleum,
chemical/petrochemical, pharmaceutical, pulp and paper, and medical
sterilization and for soil and groundwater remediation, throughout the world.
In June 1996, the Company completed an initial public offering of
2,000,000 shares of common stock at $12.50 per share. Total proceeds to the
Company, net of underwriting discounts and other direct expenses, were
approximately $22.1 million.
The Company is subject to certain risks that include, but are not
limited to, the following: history of operating losses and uncertainty of
future profitability; sensitivity to major projects and fixed price contracts.
At December 31, 1996, the Company had an accumulated deficit of approximately
$27.1 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
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
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 the statement of operations. To date, the translation gains and
losses have not been material. All intercompany accounts and transactions have
been eliminated.
Joint Venture
-------------
In October 1996, the Company entered into an agreement with ThermoChem, Inc. to
establish a joint venture, Formatrix, LLC, to combine, under license, the
patented technologies of the joint venture partners. The Company owns 40% of
Formatrix, LLC and, as of December 31, 1996, the carrying amount of the
investment in
28
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Formatrix, LLC was $252,000. Formatrix, LLC had no operations in the period
from its inception to December 31, 1996. The Company's investment in Formatrix,
LLC is accounted for under the equity method.
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
- ----------------------
Under Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" the Company
classifies its short-term investments as "held to maturity." Therefore all of
these investments are carried at amortized cost. Unrealized holding gains or
losses as of December 31, 1996 were not material. As of December 31, 1996,
short-term investments mature at various dates through December 1997.
At December 31, 1996 the amortized cost, aggregate fair value and
gross unrealized holding gains (losses) by major security type are as follows
(in thousands):
Amortized Aggregate Unrealized
Cost Fair Value Gains (Losses)
--------- ---------- --------------
Certificates of deposit $ 2,022 $ 2,022 $ -
Corporate debt securities 8,247 8,251 4
Money market instruments 1,149 1,149 -
------- ------- ----
$11,418 $11,422 $ 4
======= ======= ====
As of December 31, 1994, investments, which consisted entirely of commercial
paper, were classified as "available for sale." 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 material.
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 for
each unit produced by the Company.
29
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounts Receivable
Accounts receivable consisted of the following (in thousands):
DECEMBER 31,
-----------------
1996 1995
------- -------
Billed, subject to retainer provisions....... $ 19 $ 74
Billed....................................... 3,389 789
Unbilled, including unpriced change orders... 1,756 1,467
------ ------
Total receivables............................ 5,164 2,330
Less: Allowance for doubtful accounts........ (265) (190)
------ ------
$4,899 $2,140
====== ======
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, 1996 and 1995,
accounts receivable included approximately $793,000 and $1,129,000,
respectively, of unpriced change orders.
As of December 31, 1996, 61% of accounts receivable was concentrated
with five customers. As of December 31, 1995, approximately 75% of accounts
receivable was concentrated with two customers.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of short-term 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.
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 ten years).
30
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accumulated amortization as of December 31, 1996 and 1995 was approximately
$88,000 and $39,000, respectively.
Significant Customers
---------------------
Sales to significant customers as a percentage of total revenues for
the years ended December 31, 1996, 1995 and 1994 were as follows:
FOR THE YEARS
ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Customer A................ -- 2% 29%
Customer B................ -- -- 21%
Customer C................ -- 7% 20%
Customer D................ -- 1% 11%
Customer E................ 5% 41% --
Customer F................ -- 18% --
Customer G................ 13% -- --
Customer H................ 13% -- --
Customer I................ 12% -- --
Revenues from government contracts as a percentage of total revenues
was 15%, 19% and 0% for the years ended December 31, 1996, 1995 and 1994,
respectively. 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 14% for the year ended December 31, 1996 and less than 10% for each of the
years ended December 31, 1995 and 1994.
Net Loss Per Share and Pro Forma Net Loss Per Share
---------------------------------------------------
Net loss per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares have been excluded from the computation as their effect is
antidilutive.
Pro forma net loss per share was computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consisted of redeemable convertible preferred stock
and convertible preferred stock (using the if converted method) and stock
options and warrants (using the treasury stock method). Common equivalent
shares were excluded from the computation if their effect was antidilutive
except that pursuant to the 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 Company's
Registration Statement as if they were outstanding for all periods presented
(using the treasury stock method and an initial public offering price of $12.50
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 resulting from its initial public
offering.
31
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
DECEMBER 31,
-----------------
1996 1995
----- -----
Commissions payable..................... $ 242 $ 177
Other................................... 582 248
----- -----
$ 824 $ 425
===== =====
4. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under
operating leases which expire through January 2003. Rent expense was
approximately $338,000, $269,000 and $252,000 for the years ended December 31,
1996, 1995 and 1994, respectively. As of December 31, 1996, future minimum
payments are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
------------
1997........................... $ 462
1998........................... 375
1999........................... 279
2000........................... 67
2001 and thereafter............ 133
------
$1,316
======
In April 1996, the Company purchased all of the respective assets,
rights and properties of Purus Inc.'s VOC adsorption technology ("PADRE").
Concurrent with the purchase, 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.
5. PREFERRED STOCK
Convertible Preferred Stock
---------------------------
Convertible preferred stock consisted of the following, net of
issuance costs (dollars in thousands):
DECEMBER 31,
1995
----
Series B Outstanding--2,047,090 shares $5,509
Series C Outstanding--507,541 shares 3,795
-----
$9,304
======
Each share of convertible preferred stock converted automatically into common
stock upon the closing of the Company's initial public offering in June 1996.
32
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. These warrants were exercised
during 1996.
Redeemable Convertible Preferred Stock
--------------------------------------
Redeemable convertible preferred stock outstanding as of December 31,
1995, consisted of 1,614,284 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.
Pursuant to the terms of the preferred stock agreement, the conversion
price of Series D redeemable preferred stock was adjusted to $5.25 per share.
The Series D preferred stock was automatically converted into 2,712,682 shares
of common stock upon the closing of the Company's initial public offering.
In connection with a bridge financing in 1994, warrants to purchase
20,672 shares of convertible Series D redeemable preferred stock at $5.25 per
share (as adjusted) were issued. Subsequent to the Company's initial public
offering, these warrants were convertible into warrants to purchase common
stock. The warrants are exercisable at any time and expire in 1999. Warrants to
purchase 3,558 shares of common stock were exercised during 1996.
Preferred Stock
---------------
The Company is authorized to issue 5,000,000 shares of $.001 par value
undesignated preferred stock. Upon issuance, the Board of Directors will have
the authority to fix the rights, preferences, privileges and restrictions
thereof.
6. COMMON STOCK
As of December 31, 1996, the Company had reserved shares of its common
stock for issuance as follows:
Warrants to purchase common stock.................... 45,685
Stock options under 1987 Stock Option Plan........... 697,179
Stock options under 1996 Stock Plan.................. 333,334
Stock options under 1996 Director Option Plan........ 83,334
Employee Stock Purchase Plan......................... 116,667
---------
Total shares reserved........................... 1,276,199
=========
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 applied in
the consolidated financial statements.
7. STOCK OPTION PLANS
1987 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. Options
granted under the Plan generally expire ten (10) years from the date of grant.
During 1996, the Company
33
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
adopted new stock plans (see below); accordingly, the Company does not plan to
issue further options to purchase common stock under the Plan.
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 Director Option Plan ("Directors Plan")
-------------------------------------------
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 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 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.
The following option activity occurred in all stock option plans
during the three years ended December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
AVAILABLE OUTSTANDING PER SHARE AVERAGE
FOR GRANT OPTIONS PRICE EXERCISE PRICE
---------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993....... 183,132 227,484 $ 0.30-$ .75 $ 0.38
Authorized..................... 331,124 --
Granted........................ (449,677) 449,677 $ 0.75-$5.25 2.61
Exercised...................... -- (2,646) $ 0.30-$0.75 0.33
Canceled....................... 4,213 (4,213) $ 0.30-$0.75 0.58
-------- --------
Balance, December 31, 1994....... 68,792 670,302 $ 0.30-$5.25 1.99
Authorized..................... 107,317 --
Granted........................ (262,020) 262,020 $ 1.50 1.50
Exercised...................... -- (57,549) $ 0.30-$1.50 0.75
Canceled....................... 320,296 (320,296) $ 0.30-$5.25 3.55
-------- --------
Balance, December 31, 1995....... 234,385 554,477 $ 0.30-$1.50 0.98
Authorized..................... 416,668 --
Granted........................ (273,522) 273,522 $3.00-$12.50 5.74
Exercised...................... -- (44,430) $ 0.30-$3.00 0.74
Expired........................ (47,253) --
Canceled....................... 5,388 (5,388) $ 0.75-$7.50 2.67
-------- --------
Balance, December 31, 1996....... 335,666 778,181 $0.30-$12.50 $ 2.66
======== ======== ============
</TABLE>
As of December 31, 1996, options to purchase 373,212 of common stock
at $0.30 to $12.50 per share were fully vested and exercisable under the Plans.
34
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices As of 12/31/96 Contractual Life Exercise Price As of 12/31/96 Exercise Price
- --------------- -------------- ---------------- ------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.30 - $ 0.75 258,520 6.52 $ 0.54 192,579 $ 0.47
$ 1.50 252,385 8.43 $ 1.50 120,142 $ 1.50
$ 3.00 - $ 10.125 227,274 9.17 $ 4.62 40,487 $ 3.45
$12.50 40,002 9.47 $ 12.50 20,004 $12.50
------- ------- -------- ------- -------
778,181 8.06 $ 2.66 373,212 $ 1.77
======= ======= ======== ======= =======
</TABLE>
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 enables 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, began on June 19, 1996 and will end
on the last market trading day on or before April 30, 1997. The Purchase Plan
will terminate in 2006.
The Company applies Accounting Principles Board Opinion No. 25.
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock plans. Had compensation cost for the Company's plans been
determined based on the fair value at the grant dates for awards under the plans
consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net loss and net loss per share would have been
changed to the pro forma amounts indicated below (in thousands):
1996 1995
--------- ---------
Net loss
As reported..................... $(4,876) $(5,194)
Pro forma....................... $(5,087) $(5,220)
Net loss per share
As reported..................... (0.73) (0.91)
Pro forma....................... (0.76) (0.91)
For the purpose of SFAS No. 123, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes multiple option-
pricing model with the following weighted-average assumptions used for grants in
1995 and 1996 respectively: dividend yield of 0% for all grants; expected
volatility of 0 prior to initial public offering and 85 percent thereafter;
risk-free interest rates ranging from 5.20 to 6.80 percent; and expected lives
of one to two years for each grant.
35
<PAGE>
THERMATRIX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. 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:
FOR THE YEARS
ENDED
DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- -------
Provision (benefit) at U.S. statutory rate....... (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal benefit....... (6.1) (6.1) (6.1)
Increase (decrease) in valuation allowance....... 40.0 40.0 40.0
Other............................................ 0.1 0.1 0.1
------ ------ ------
- % - % - %
====== ====== ======
The provision for income taxes for the years ended December 31, 1996
and 1995 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):
DECEMBER 31,
----------------------------
1996 1995
----- -----
Deferred income tax assets:
Net operating loss carryforwards....... $9,406 $7,843
Tax credit carryforwards............... 193 83
Cumulative temporary differences....... 381 235
----- -----
9,980 8,161
Valuation allowance......................... (9,980) (8,161)
----- -----
Net deferred income tax asset............... $ -- $ --
====== ======
As of December 31, 1996, the Company had net operating loss
carryforwards for Federal and state income tax purposes of approximately $25.8
million and $13.0 million, respectively. The net operating loss carryforwards
and tax credit carryforwards expire on various dates through 2011. The Internal
Revenue Service Code contains 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. Certain of the Company's net operating loss and tax credit
carryforwards are limited due to an ownership change. 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.
36
<PAGE>
9. LOAN AND SECURITY AGREEMENT
In December 1995, the Company entered into a Loan and Security
Agreement ("Agreement") with a bank which provided for a $3,000,000 bridge loan,
available in two equal parts of $1,500,000, and bore interest at the bank's
prime interest rate plus 2.5%. The Agreement was extended past its original
expiration date while new terms and conditions were negotiated. No amounts were
outstanding under the Agreement as of December 31, 1996 and 1995.
In consideration for the Agreement, the Company granted the bank a
warrant to purchase 28,571 shares of Series D redeemable convertible preferred
stock at $5.25 per share (as adjusted). The fair value of the warrants at the
date of issuance was not significant and, therefore, no value was assigned to
the warrants for accounting purposes. Subsequent to the Company's initial
public offering, these warrants were convertible into warrants to purchase
common stock.
In February 1997, the Company entered into an Amended and Restated
Loan and Security Agreement (the "New Agreement") which provides for a
$4,000,000 committed line of credit and a $2,500,000 acquisition facility. The
committed line will bear interest at the prime interest rate plus 0.50% and will
be subject to certain financial and nonfinancial covenants. Any borrowings
under the acquisition facility will bear interest at the prime interest rate
plus 1.00%. The New Agreement expires on February 25, 1998.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements. The following Consolidated Financial Statements
--------------------
of Thermatrix Inc. and Report of Independent Public Accountants are filed as a
part of this Report:
PAGE
----
Report of Independent Public Accountants............................... 23
Consolidated Balance Sheets -- As of December 31, 1996 and 1995........ 24
Consolidated Statements of Operations -- For the Three Years
Ended December 31, 1996.............................................. 25
Consolidated Statements of Stockholders' Equity
(Deficit) -- For the Three Years Ended December 31, 1996............. 26
Consolidated Statements of Cash Flows -- For the Three Years
Ended December 31, 1996.............................................. 27
Notes to Consolidated Financial Statements............................. 28-36
2. Financial Statement Schedules. For years ended December 31, 1996,
-----------------------------
1995 and 1994:
Schedule II. Valuation and Qualifying Accounts and Reserves........... 39
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
3. 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.(*)
38
<PAGE>
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.
21.1 Subsidiary of the Registrant.(*)
23.1 Consent of Independent Public Accountants.
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.
(b) Reports on Form 8-K
None
TRADEMARK ACKNOWLEDGMENTS
. Thermatrix and PADRE are registered trademarks of the Company.
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, 1994............ $ - $150 $ - $150
Allowance for doubtful
accounts
Year ended December 31, 1995............ $150 $229 $(189) $190
Allowance for
doubtful
accounts
Year ended December 31, 1996............ $190 $190 $(115) $265
Allowance for
doubtful
accounts
- -----------------
(1) Deductions represent accounts that were considered doubtful and previously reserved
for that became uncollectible and were written off in the year.
</TABLE>
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THERMATRIX INC.
By: /s/ John T. Schofield Date: March 27, 1997
---------------------
John T. Schofield
Chairman of the Board
President and CEO
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ John T. Schofield Chairman, President and March 27, 1997
--------------------- Chief Executive Officer
John T. Schofield
/s/ Robi Blumenstein Director March 27, 1997
--------------------
Robi Blumenstein
/s/ Harry J. Healer, Jr. Director March 27, 1997
------------------------
Harry J. Healer, Jr.
/s/ Rebecca P. Mark Director March 27, 1997
-------------------
Rebecca P. Mark
/s/ Robert W. Page Director March 27, 1997
------------------
Robert W. Page
/s/ Frank R. Pope Director March 27, 1997
-----------------
Frank R. Pope
/s/ John M. Toups Director March 27, 1997
-----------------
John M. Toups
/s/ Steven J. Guerrettaz Vice President-Finance & March 27, 1997
------------------------ Accounting
Steven J. Guerrettaz Chief Financial Officer
40
<PAGE>
- --------------------------------------------------------------------------------
THERMATRIX INC.
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION..................................... 1
1.1 Definitions............................................... 1
1.2 Accounting Terms.......................................... 6
2. LOAN AND TERMS OF PAYMENT........................................ 7
2.1 Acquisition Facility...................................... 7
2.2 Revolving Advances........................................ 7
2.3 Overadvances.............................................. 9
2.4 Interest Rates, Payments, and Calculations................ 9
2.5 Crediting Payments........................................ 9
2.6 Fees...................................................... 10
2.7 Additional Costs.......................................... 10
2.8 Term...................................................... 11
3. CONDITIONS OF LOANS.............................................. 11
3.1 Conditions Precedent to Initial Advance................... 11
3.2 Conditions Precedent to all Advances...................... 11
4. CREATION OF SECURITY INTEREST.................................... 11
4.1 Grant of Security Interest................................ 11
4.2 Delivery of Additional Documentation Required............. 12
4.3 Right to Inspect.......................................... 12
5. REPRESENTATIONS AND WARRANTIES................................... 12
5.1 Due Organization and Qualification........................ 12
5.2 Due Authorization; No Conflict............................ 12
5.3 No Prior Encumbrances..................................... 12
5.4 Bona Fide Eligible Accounts............................... 12
5.5 Merchantable Inventory.................................... 12
5.6 Name; Location of Chief Executive Office.................. 12
5.7 Litigation................................................ 12
5.8 No Material Adverse Change in Financial Statements........ 12
5.9 Solvency.................................................. 13
5.10 Regulatory Compliance..................................... 13
5.11 Environmental Condition................................... 13
5.12 Taxes..................................................... 13
5.13 Subsidiaries.............................................. 13
5.14 Government Consents....................................... 13
5.15 Full Disclosure........................................... 13
6. AFFIRMATIVE COVENANTS............................................ 13
6.1 Good Standing............................................. 14
6.2 Government Compliance..................................... 14
6.3 Financial Statements, Reports, Certificates............... 14
6.4 Inventory; Returns........................................ 14
6.5 Taxes..................................................... 14
6.6 Insurance................................................. 15
6.7 Principal Depository...................................... 15
6.8 Quick Ratio............................................... 15
6.9 Debt-Net Worth Ratio...................................... 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<C> <S>.............................................................. <C>
6.10 Tangible Net Worth........................................ 15
6.11 Profitability............................................. 15
6.12 Minimum Liquidity/Debt Service Coverage................... 15
6.13 Registration of Intellectual Property Rights.............. 16
6.14 Further Assurances........................................ 16
7. NEGATIVE COVENANTS............................................... 16
7.1 Dispositions............................................... 16
7.2 Change in Business......................................... 16
7.3 Mergers or Acquisitions.................................... 16
7.4 Indebtedness............................................... 16
7.5 Advances to Employees or Shareholders...................... 16
7.6 Encumbrances............................................... 17
7.7 Distributions.............................................. 17
7.8 Investments................................................ 17
7.9 Transactions with Affiliates............................... 17
7.10 Subordinated Debt.......................................... 17
7.11 Inventory.................................................. 17
7.12 Compliance................................................. 17
8. EVENTS OF DEFAULT................................................ 17
8.1 Payment Default............................................ 17
8.2 Covenant Default........................................... 17
8.3 Material Adverse Change.................................... 18
8.4 Attachment................................................. 18
8.5 Insolvency................................................. 18
8.6 Other Agreements........................................... 18
8.7 Subordinated Debt.......................................... 18
8.8 Judgments.................................................. 18
8.9 Misrepresentations......................................... 18
9. BANK'S RIGHTS AND REMEDIES....................................... 18
9.1 Rights and Remedies......................................... 18
9.2 Power of Attorney........................................... 19
9.3 Accounts Collection......................................... 20
9.4 Bank Expenses............................................... 20
9.5 Bank's Liability for Collateral............................. 20
9.6 Remedies Cumulative......................................... 20
9.7 Demand; Protest............................................. 20
10. NOTICES.......................................................... 20
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER....................... 21
12. GENERAL PROVISIONS............................................... 21
12.1 Successors and Assigns..................................... 21
12.2 Indemnification............................................ 21
12.3 Time of Essence............................................ 22
12.4 Severability of Provisions................................. 22
12.5 Amendments in Writing, Integration......................... 22
12.6 Counterparts............................................... 22
12.7 Survival................................................... 22
12.8 Confidentiality............................................ 22
</TABLE>
ii
<PAGE>
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as
of February 25, 1997, by and between VENTURE LENDING, a division of Cupertino
National Bank & Trust ("Bank") and THERMATRIX INC. ("Borrower").
RECITALS
--------
Borrower and Bank are parties to a Loan and Security Agreement dated as
of December 15, 1995, as amended by Amendment No. 1 to Loan and Security
Agreement dated August 13, 1996 and Amendment No. 2 to Loan and Security
Agreement dated December 5, 1996. Borrower wishes to continue to obtain credit
from time to time from Bank, and Bank desires to continue to extend credit to
Borrower. This Agreement sets forth the terms on which Bank will advance credit
to Borrower, and Borrower will repay the amounts owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms
-----------
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Acquisition Facility" means the facility under which Borrower
may request Advances pursuant to Section 2.1.
"Advance" or "Advances" means a cash advance under the
Acquisition Facility or the Revolving Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.2
hereof.
1
<PAGE>
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Line" means Four Million Dollars ($4,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendible at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt and deferred income.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date ;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
2
<PAGE>
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower;
(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for Eligible
Foreign Accounts;
(g) Accounts with respect to which the account debtor is the
United States or any department, agency, or instrumentality of the United
States, other than Government Accounts;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed thirty
percent (30%) of all Accounts, to the extent such obligations exceed the
aforementioned percentage, except for Accounts with respect to Fortune 500
companies to which the applicable percentage shall be fifty percent (50%) and as
approved in writing by Bank;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proce eding, or becomes insolvent, or goes out of business;
(k) Accounts with respect to which the account debtor is a
distributor, unless pre-approved by Bank in writing; and
(l) Accounts the collection of which Bank reasonably determines
to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which
the account debtor does not have its principal place of business in the United
States and that Bank approves on a case-by-case basis, and that are not excluded
by any of clauses (a) through (I) under the defined term, "Eligible Accounts."
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Foreign Exchange Reserve" has the meaning set forth in Section
2.2.2 hereof.
"Fortune 500 Company" means those corporations listed in Fortune
Magazine as its "Fortune 500," including the Subsidiaries or Affiliates of such
corporations.
"GAAP'" means generally accepted accounting principles as in
effect from time to time.
3
<PAGE>
"Government Accounts" means Accounts with respect to which the
account debtor is the United States or any department, agency or instrumentality
of the United States that Bank approves on a case-by-case basis and that are not
excluded by any of clauses (a) through (e) or (h) through (1) under the defined
term, "Eligible Accounts."
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or td be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"lnvestment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means the first anniversary of the date hereof,
except that the Maturity Date shall be the second anniversary of the effective
date of an extension of the term of the Acquisition Facility under Section
2.1.1.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
4
<PAGE>
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness in an aggregate principal amount of up to One
Hundred Thousand Dollars ($100,000) for the purpose of leasing or acquiring
new equipment;
(e) Indebtedness to trade creditors incurred in the ordinary
course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State
thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from
either Standard & Poor's Corporation or Moody's Investors Service, Inc.,
(iii) certificates of deposit maturing no more than one (1) year from the
date of investment therein issued by Bank, and (iv) Investments made in
accordance with Borrower's investment policies, as approved from time to
time by Borrower's Board of Directors.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
--------
acquired and improvements thereon, and the proceeds of such equipment;
5
<PAGE>
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership,. limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently published by The Wall Street Journal as the "prime rate," whether
or not such rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.
"Revolving Facility" means the facility under which Borrower may
request Bank to issue cash advances, as specified in Section 2.2 hereof.
"Revolving Maturity Date" means the day before the first
anniversary of the Closing Date.
"Schedule" means the schedule of exceptions attached hereto, if
any. "Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and its
Subsidiaries minus without duplication, (i) the sum of any amounts attributable
to (a) goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt and deferred income.
1.2 Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in
6
<PAGE>
accordance with GAAP. When used herein, the terms "financial statements" shall
include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Acquisition Facility. Subject to the terms and conditions of
--------------------
this Agreement, Bank will make one or more Advances from time to time to
Borrower in an amount not to exceed an aggregate of Two Million Five Hundred
Thousand Dollars ($2,500,000). Borrower may request Advances hereunder in an
aggregate amount not to exceed One Million Dollars ($1,000,000) through the
Revolving Maturity Date, provided Borrower provides Bank with evidence
satisfactory to Bank that, after completing the acquisition for which the
Advance or Advances were requested, Borrower will be in compliance with Sections
6.8, 6.9, 6.10, 6.11 and 6.12. Borrower may request additional Advances
hereunder in an aggregate amount in excess of One Million Dollars ($1,000,000),
upon Bank's approval of the terms of the Acquisition or Acquisitions for which
the Advance or Advances were requested. Each Advance shall be in an amount not
less than Two Hundred Fifty Thousand Dollars ($250,000). Interest shall accrue
from the date of each Advance at the rate specified in Section 2.4(a), and shall
be payable monthly on the fifth day of each month after the date of an Advance
through the Revolving Maturity Date, at which time the principal amount of the
Advances made under this Section 2.1 and all accrued but unpaid interest shall
be due and payable unless the term of -the repayment of the Acquisition Facility
is extended pursuant to Section 2.1.1. When Borrower desires to obtain an
Advance hereunder, Borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission received no later than 3:00 p.m.
California time three (3) Business Days before the day on which the Advance is
to be made. Such notice shall be in substantially the form of Exhibit B. The
notice shall be signed by a Responsible Officer. Borrower's obligations under
the Acquisition Facility shall be evidenced by this Agreement and by a
promissory note in substantially the form of Exhibit C-1 attached hereto.
2.1.1 Acquisition Extension Option. Borrower may request at any
----------------------------
time prior to the Revolving Maturity Date that the repayment term of the
Acquisition Facility be extended to the Maturity Date, provided that an Event of
Default has not occurred prior to such request and Borrower is in compliance
with all of Sections 6.8, 6.9, 6.10 and 6.11 as of such date. The principal
amount outstanding on the date of the extension shall be payable in twenty four
(24) equal monthly installments of principal, plus accrued interest, on the
fifth day of each month, beginning the month following the date that the
repayment term is extended, and continuing through the Maturity Date. The entire
principal balance and all accrued but unpaid interest shall be due and payable
on the Maturity Date.
2.2 Revolving Advances. Subject to and upon the terms and
------------------
conditions of this Agreement, Bank agrees to make Advances to Borrower in an
aggregate amount not to exceed the lesser of (i) the Committed Line, minus the
face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit), minus the Foreign Exchange Reserve or (ii) the
-----
Borrowing Base, minus the face amount of all outstanding Letters of Credit
-----
(including drawn but unreimbursed Letters of Credit), minus the Foreign Exchange
Reserve. For purposes of this Agreement, "Borrowing Base" shall mean an amount
equal to (I) eighty percent (80%) of Eligible Accounts plus (ii) fifty percent
(50%) of Eligible Foreign Accounts plus (iii) fifty percent (50%) of Government
Accounts. Subject to the terms and conditions of this Agreement, amounts
borrowed pursuant to this Section 2.2 may be repaid and reborrowed at any time
prior to the Revolving Maturity Date.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. California time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
- ---------
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and
7
<PAGE>
remain unpaid. Bank whall be entitled to rely on any telephonic notice given by
a person who Bank reasonably believes to be a Responsible Officer, and Borrower
shall indemnify and hold Bank harmless for any damages or loss suffered by Bank
as a result of such reliance. Bank will credit the amount of Advances made under
this Section 2.2 to Borrower's deposit account.
Borrower's obligations under the Revolving Facility shall be evidenced
by this Agreement and by a promissory note in substantially the form of Exhibit
-------
C-2 hereto. The Revolving Facility shall terminate on the Revolving Maturity
- ---
Date, at which time all Advances under this Section 2.2 and other amounts due
under this Agreement shall be immediately due and payable.
2.2.1 Letters of Credit.
-----------------
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters of credit for the
account of Borrower in an aggregate face amount not to exceed the lesser of the
Committed Line or the Borrowing Base minus in each case the then outstanding
-----
principal balance of the Advances made under this Section 2.2.1 and minus the
-----
Foreign Exchange Reserve; provided that the face amount of outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit) shall not in any
case exceed Two Million Dollars ($2,000,000). Each such letter of credit shall
have an expiry date no later than the Revolving Maturity Date; provided that
such letter of credit may have an expiry date up to sixty (60) days after the
Revolving Maturity Date for so long as Borrower secures all reimbursement and
other obligations owing to Bank with cash or cash-equivalents on terms
acceptable to Bank. All such letters of credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank's form of application and letter of credit agreement. All
amounts actually paid by Bank in respect of a letter of credit shall, when paid,
constitute an Advance under this Agreement.
(b) The obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend and hold Bank harmless from any loss, cost,
expense or liability, including, without limitation, reasonable attorneys' fees,
arising out of or in connection with any letters of credit.
(c) Borrower may request that Bank issue a letter of
credit payable in a currency other than United States Dollars. If a demand for
payment is made under any such letter of credit, Bank shall treat such demand as
an advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency. Upon the issuance of any letter of
credit payable in a currency other than United States Dollars, Bank shall create
a reserve under the Committed Line for letters of credit against fluctuations in
currency exchange rates, in an amount equal to twenty percent (20%) of the face
amount of such letter of credit. The amount of such reserve may be amended by
Bank from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Line shall be reduced by the amount of
such reserve for so long as such letter of credit remains outstanding.
2.2.2 Foreign Exchange Contract; Foreign Exchange Settlements.
-------------------------------------------------------
(a) Borrower may utilize up to One Million Dollars
($1,000,000) under the Committed Line for foreign exchange contracts (the
"Exchange Contracts"), pursuant to which Bank shall sell to 9r purchase from
Borrower foreign currency on a spot or future basis. All Exchange Contracts must
provide for delivery or settlement on or before the Revolving Maturity Date;
provided that settlement or delivery may occur up to sixty (60) days after the
Revolving Maturity
8
<PAGE>
Date for so long as Borrower secures all obligations owing to Bank with cash or
cash-equivalents on terms reasonably acceptable to Bank. The limit available at
any time shall be reduced by the following amounts (the "Foreign Exchange
Reserve") on each day (the "Determination Date"): (i) on all outstanding
Exchange Contracts on which delivery is to be effected or settlement allowed
more than two business days from the Determination Date, 10% of the gross amount
of the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on
which delivery is to be effected or settlement allowed within two business days
after the Determination Date, 100% of the gross amount of the Exchange
Contracts. In lieu of the Foreign Exchange Reserve for 100% of the gross amount
of any Exchange Contract, Borrower may request that Bank treat such amount as an
Advance under the Committed Line.
(b) Bank may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs or (b) that there is
no sufficient availability under the Committed Line and Borrower does not have
available funds in its bank account to satisfy the Foreign Exchange Reserve. If
Bank terminates the Exchange Contracts, and without limitation of any applicable
indemnities, Borrower agrees to reimburse Bank for any and all fees, costs and
expenses relating thereto or arising in connection therewith.
(c) Borrower shall execute all standard form
applications and agreements of Bank in connection with the Exchange Contracts
and, without limiting any of the terms of such applications and agreements,
Borrower will pay all standard fees and charges of Bank in connection with the
Exchange Contracts.
2.3 Overadvances. If the amount of Obligations owed by
------------
Borrower to Bank pursuant to Section 2.2 of this Agreement is greater than the
lesser of (i) the Committed Line or (ii) the Borrowing Base, Borrower shall
immediately pay to Bank, in cash, the amount of such excess.
2.4 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) Interest Rate. Except as set forth in Section
-------------
2.4(b), any Advances under Section 2.1 shall bear interest, on the average Daily
Balance, at a rate equal to one (1.0) percentage point above the Prime Rate, and
any Advances under Section 2.2 shall bear interest at a rate equal to one-half
of one (0.5) percentage point above the Prime Rate.
(b) Default Rate. All Obligations shall bear interest,
------------
from and after the occurrence of an Event of Default, at a rate equal to five
(5) percentage points above the interest rate applicable immediately prior to
the occurrence of the Event of Default.
(c) Payments. Interest on Advances under this Agreement
--------
hereunder shall be due and payable on the fifteenth calendar day of each month
during the term hereof. Bank shall, at its option, charge such interest, all
Bank Expenses, and all Periodic Payments against any of Borrower's deposit
accounts or against the Committed Line, in which case those amounts shall
thereafter accrue interest at the rate then applicable hereunder. Any interest
not paid when due shall be compounded by becoming a part of the Obligations, and
such interest shall thereafter accrue interest at the rate then applicable
hereunder.
(d) Computation. In the event the Prime Rate is changed
-----------
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.5 Crediting Payments. Prior to the occurrence of an Event
of Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation
9
<PAGE>
as Borrower specifies. Unless otherwise agreed in writing by 'Bank, after the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.6 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fee; Extension Fee. A Facility Fee equal to
---------------------------
Sixteen Thousand Two Hundred Fifty Dollars ($16,250), which fee shall be
payable, fully earned and nonrefundable as of the date hereof. Borrower shall
also pay Bank a fee of Twelve Thousand Five Hundred Dollars ($12,500) as a
condition to requesting an Advance under Section 2.1.
(b) Financial Examination and Appraisal Fees. Bank's customary
----------------------------------------
fees and 'out-of-pocket expenses for Bank's audits of Borrower's Accounts, and
for each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon the date hereof, all Bank Expenses
-------------
incurred through the Closing Date, including reasonable attorneys' fees and
expenses, which fees shall not exceed Five Thousand 'Dollars ($5,000), and,
after the date hereof, all Bank Expenses, including reasonable attorneys' 'fees
and expenses, as and when they become due.
2.7 Additional Costs. In case any change in any law, regulation,
----------------
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, 6r loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
10
<PAGE>
2.8 Term. This Agreement shall become effective on the Closing Date
----
and, subject to Section 12.7, shall continue in full force and effect for a
term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have
the right to terminate its obligation to make Advances under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Advance. The obligation
---------------------------------------
of Bank to make the initial Advance is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;
(c) a collateral assignment and patent mortgage;
(d) an audit of Borrower's Accounts (condition only as
to an Advance under Section 2.2);
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due
specified in Section 2.6 hereof; and
(g) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank to
------------------------------------
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges
--------------------------
to Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
11
<PAGE>
4.2 Delivery of Additional Documentation Required. Borrower
---------------------------------------------
shall from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
----------------
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each
----------------------------------
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery,
------------------------------
and performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and
---------------------
indefeasible title to the Collateral, free and clear of Liens, except for
Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are
---------------------------
bona fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has not received notice of actual or imminent Insolvency.
Proceeding of any account debtor that is included in any Borrowing Base
Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material
----------------------
respects of good and marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office. Except as
----------------------------------------
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there
----------
are no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
have a Material Adverse Effect or a material adverse effect on Borrower's
interest or Bank's security interest in the Collateral. Borrower does not have
knowledge of any such pending or threatened actions or proceedings.
5.8 No Material Adverse Change in Financial Statements. All
--------------------------------------------------
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not
12
<PAGE>
been a material adverse change in the consolidated financial condition of
Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts
--------
(including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary has
---------------------
met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any
-----------------------
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused
-----
to be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any stock,
------------
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.14 Government Consents. Borrower and each Subsidiary has
-------------------
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.
5.15 Full Disclosure. No representation, warranty or other
---------------
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
13
<PAGE>
6.1 Good Standing. Borrower shall maintain its and each of
-------------
its Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall
---------------------
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall comply,
and shall cause each Subsidiary to comply, with all statutes, laws, ordinances
and government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower
-------------------------------------------
shall deliver to Bank: (a) as soon as available, but in any event within forty
five (45) days after the end of each fiscal quarter, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during such period, certified by a Responsible Officer; (b) as soon
as available, but in any event within ninety (90) days after the end of
Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (c) within five (5) days
upon becoming available, copies of all statements, reports and notices sent or
made available generally by Borrower to its security holders or to any holders
of Subordinated Debt and all reports on Form 10-K and 10-Q filed with the
Securities and Exchange Commission; (d) promptly upon receipt of notice thereof,
a report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of Two Hundred Thousand Dollars ($200,000) or more; and (e) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
Prior to any extension of credit under any of Sections 2.2, 2.2.1 or
2.2.2, within thirty (30) days after the last day of each month, and so long as
any such extension is outstanding, Borrower shall deliver to Bank a Borrowing
Base Certificate signed by a Responsible Officer in substantially the form of
Exhibit D hereto, together with aged listings of accounts receivable and
- ---------
accounts payable.
Borrower shall deliver to Bank a Compliance Certificate signed by a
Responsible Officer in substantially the form of Exhibit E hereto within thirty
---------
(30) days of the last day of each fiscal quarter.
Prior to any extension of credit under any of Sections 2.2, 2.2.1 or
2.2.2, and so long as any such extension is outstanding, Bank shall have a right
from time to time hereafter to audit Borrower's Accounts at Borrower's expense,
provided that such audits will be conducted no more often than every six (6)
months unless an Event of Default has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in
------------------
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each
-----
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Bank, on demand, appropriate certificates attesting
to the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to
14
<PAGE>
make, timely payment or deposit of all material tax payments and withholding
taxes required of it by applicable laws, including, but not limited to, those
laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and
federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of
such policies of insurance and evidence of the payments of all premiums
therefor. All proceeds payable under any such policy shall, at the option of
Bank, be payable to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its
--------------------
principal depository and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day
-----------
of each fiscal quarter, a ratio of Quick Assets to Current Liabilities of at
least 1.0 to 1.0, provided this Section shall not apply after the Revolving
Maturity Date.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the
--------------------
last day of each fiscal quarter, a ratio of Total Liabilities to Tangible Net
Worth of not more than 1.5 to 1.0.
6.10 Tangible Net Worth. Borrower shall maintain, as of the
------------------
last day of each fiscal quarter, a Tangible Net Worth of not less than Thirteen
Million Dollars ($13,000,000).
6.11 Profitability. Borrower shall not suffer a loss in
-------------
excess of $1,500,000 for the fiscal quarter ending December 31, 1996, a loss in
excess of $1,250,000 for the fiscal quarter ending March 31, 1997, a loss in
excess of $750,000 for the fiscal quarter ending June 30, 1997, or a loss in
excess of $350,000 for the fiscal quarter ending September 30, 1997. Borrower
shall be profitable for each fiscal quarter thereafter.
6.12 Minimum Liquidity/Debt Service Coverage. Subject to the
---------------------------------------
remainder of this Section, Borrower shall maintain, as of the last day of each
fiscal quarter, a ratio of (a) the sum of cash and cash equivalents to (b)
outstanding Acquisition Advances, of at least 1.5 to 1.0. Notwithstanding the
foregoing, from and after the time Borrower achieves a Debt Service Coverage of
at least 1.25 to 1.0, and for so long as Borrower maintains as of the last day
of each fiscal quarter thereafter a Debt Service Coverage of at least 1.25 to
1.0, Borrower shall not be subject to the Minimum Liquidity set forth above.
Debt Service Coverage means a ratio of (a) the sum of (i) earnings after tax
plus
- ----
15
<PAGE>
(ii) depreciation for the quarter then ending to (b) the sum of (i) current
portion of long term debt and capitalized leases plus (ii) interest for the
----
upcoming quarter.
6.13 Registration of Intellectual Property Rights. Borrower
--------------------------------------------
shall register or cause to be registered (to the extent not already registered)
with the United States Patent and Trademark Office or the United States
Copyright Office, as applicable, those intellectual property rights listed on
Exhibits A, B and C to the Collateral Assignment, Patent Mortgage and Security
Agreement delivered to Bank by Borrower in connection with this Agreement within
thirty (30) days of the date of this Agreement. Borrower shall register or cause
to be registered with the United States Patent and Trademark Office or the
United States Copyright Office, as applicable, those additional intellectual
property rights developed or acquired by Borrower from time to time in
connection with any product prior to the sale or licensing of such product to
any third party, including without limitation revisions or additions to the
intellectual property rights listed on such Exhibits A, B and C. Borrower shall
execute and deliver such additional instruments and documents from time to time
as Bank shall reasonably request to perfect Bank's security interest in such
additional intellectual property rights.
6.14 Further Assurances. At any time and from time to time
------------------
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following without the prior written consent of
Bank which Bank may grant or withhold in its sole discretion:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
------------
dispose of (collectively, a 'Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit
------------------
any of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership. Borrower will not, without thirty (30) days prior written
notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit
-----------------------
any of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain
------------
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
7.5 Advances to Employees or Shareholders. Advance by way of
-------------------------------------
payment, credit or other manner, any unearned funds to employees or shareholders
of Borrower except that Borrower may make advances to its employees or
shareholders as long as the aggregate amount of all such advances does not
exceed Fifty Thousand Dollars ($50,000).
16
<PAGE>
7.6 Encumbrances. Create, incur, assume or suffer to exist
------------
any Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.7 Distributions. Pay any dividends or make any other
-------------
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock.
7.8 Investments. Directly or indirectly acquire or own, or
-----------
make any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.
7.9 Transactions with Affiliates. Directly or indirectly
----------------------------
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to Borrower
than would be obtained in an arm's length transaction with a nonaffiliated
Person.
7.10 Subordinated Debt. Make any payment in respect of any
-----------------
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.11 Inventory. Store the Inventory with a bailee,
---------
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory only at the location set
forth in Section 10 hereof and such other locations of which Borrower gives Bank
prior written notice and as to which Borrower signs and files a financing
statement where needed to perfect Bank's security interest.
7.12 Compliance. Become an "investment company" controlled by
----------
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 Pavement Default. If Borrower fails to pay the principal
----------------
of, or any interest on, any Advances when due and payable; or fails to pay any
portion of any other Obligations not constituting such principal or interest,
including without limitation Bank Expenses, within thirty (30) days of receipt
by Borrower of an invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any
----------------
obligation under Article 6 or violates any of the covenants contained in Article
7 of this Agreement, or fails or neglects to perform, keep, or observe any other
material term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10)
17
<PAGE>
days after Borrower receives notice thereof or any officer of Borrower becomes
aware thereof (provided that no Advances will be required to be made during such
cure period);
8.3 Material Adverse Change. If there occurs a material
-----------------------
adverse change in Borrower's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's security
interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets
----------
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded within ten (10) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an
----------
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within ten (10)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement
----------------
to which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of Two Hundred Fifty
Thousand Dollars ($250,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on
-----------------
account of Subordinated Debt, except to the extent such payment is allowed under
any subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of
---------
money in an amount, individually or in the aggregate, of at least Two Hundred
Fifty Thousand Dollars ($250,000) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
------------------
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the
-------------------
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the
18
<PAGE>
occurrence of an Event of Default described in Section 8.5 all Obligations shall
become immediately due and payable without any action by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in
an amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(e) Without notice to or demand upon Borrower, make
such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(f) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(h) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(i) Bank may credit bid and purchase at any public
sale; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Borrower hereby irrevocably appoints
-----------------
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into
19
<PAGE>
Bank's possession; (c) sign Borrower's name on any invoice or bill of lading
relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time from the date of this
-------------------
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or
-------------
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. Bank shall not in any
-------------------------------
way or manner be liable or responsible for: (a) the safekeeping of the
Collateral; (b) any loss or damage thereto occurring or arising in any manner or
fashion from any cause; (c) any diminution in the value thereof; or (d) any act
or default of any carrier, warehouseman, bailee, forwarding agency, or other
person whomsoever. All risk of loss, damage or destruction of the Collateral
shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under
-------------------
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on Borrower's part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election, or acquiescence by it. No
waiver by Bank shall be effective unless made in a written document signed on
behalf of Bank and then shall be effective only in the specific instance and for
the specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice
---------------
of protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by
20
<PAGE>
first-class mail, postage prepaid) shall be personally delivered or sent by a
recognized overnight delivery service, certified mail, postage prepaid, return
receipt requested, or by telefacsimile to Borrower or to Bank, as the case may
be, at its addresses set forth below:
If to Borrower: Thermatrix Inc.
101 Metro Drive, Suite 248
San Jose, CA 95110
Attn: Steve Guerrettaz
FAX: (408) 944-0292
If to Bank: Venture Lending
Three Palo Alto Square, Suite 150
Palo Alto, California 94306
Attn: Jon Krogstad
FAX: (415) 843-6969
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and
----------------------
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
-----------------
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and
---------------
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands,. claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
21
<PAGE>
12.3 Time of Essence. Time is of the essence for the
---------------
performance of all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this
--------------------------
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing Integration. This Agreement amends
---------------------------------
and restates the terms of a Loan and Security Agreement existing on the Closing
Date between Borrower and Bank. The security interest granted under the terms of
that agreement continues to secure the Obligations, as defined herein, and the
financing statement and Collateral Assignment Patent Mortgage and Security
Agreement filed in connection with such agreement continue to perfect such
security interest. This Agreement cannot be amended or terminated orally. All
prior agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any
------------
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7 Survival. All covenants, representations and warranties
--------
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential
---------------
information Bank shall exercise the same degree of care that it exercises with
respect to its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and (v)
as Bank may determine in connection with the enforcement of any remedies
hereunder. Confidential information hereunder shall not include information that
either: (a) is in the public domain or in the knowledge or possession of Bank
when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank through no fault of Bank; or (b) is disclosed to Bank by a third party,
provided Bank does not have actual knowledge that such third party is prohibited
from disclosing such information.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
THERMATRIX INC.
/s/ Steven J. Guerrettaz
By: ___________________________________
CFO
Title: ________________________________
VENTURE LENDING, a division of
CUPERTINO NATIONAL BANK & TRUST
/s/ Jon Krogstad
By: ___________________________________
VP
Title: ________________________________
23
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products
including such inventory as is temporarily out of Borrower's custody or
possession or in transit and including any returns upon any accounts or
other proceeds, including insurance proceeds, resulting from the sale or
disposition of any of the foregoing and any documents of title representing
any of the above, and Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or
hereafter acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints, drawings,
purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and
rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing
to Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned
by performance, and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower and Borrower's Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters
of credit, certificates of deposit, instruments and chattel paper now owned
or hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and
derivative work thereof, whether published or unpublished, now owned or
hereafter acquired; all trade secret rights, including all rights to
unpatented inventions, know-how, operating manuals, license rights and
agreements and confidential information, now owned or hereafter acquired;
all mask work or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired; all claims for
damages by way of any past, present and future infringement of any of the
foregoing; and
(g) Any and all claims, rights and interests in any of the
above and all substitutions for, additions and accessions to and proceeds
thereof.
24
<PAGE>
EXHIBIT A
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING 1S 3:00 P.M., P.S.T.
TO: VENTURE LENDING DATE: _____________________________
FAX#: (415) &43-6969 TIME: _____________________________
FROM: _________________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: _________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: _________________________________________________________
PHONE NUMBER: _________________________________________________________________
FROM ACCOUNT # _______________ TO ACCOUNT # ________________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $________________________________________
PRINCIPAL PAYMENT (ONLY) $________________________________________
INTEREST PAYMENT (ONLY) $________________________________________
PRINCIPAL AND INTEREST (PAYMENT) $________________________________________
OTHER INSTRUCTIONS: ___________________________________________________________
_______________________________________________________________________________
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_________________________________ _________________________________________
Authorized Requester Phone #
_________________________________ _________________________________________
Received By (Bank) Phone #
______________________________________
Authorized Signature (Bank)
25
<PAGE>
EXHIBIT C-1
-----------
Acquisition Note
----------------
$2,500,000
Palo Alto, California
February 25, 1997
FOR VALUE RECEIVED, the undersigned, Thermatrix Inc. (the "Borrower"),
promises to pay to the order of Venture Lending, a division of Cupertino
National Bank & Trust ("Bank"), at such place as the holder hereof may
designate, in lawful money of the United States of America, the sum of Two
Million Five Hundred Thousand Dollars ($2,500,000), or such other amount as is
equal to the aggregate amount of the Advances under the Acquisition Facility
made by Bank to Borrower, plus interest at a rate equal to One (1.0) percentage
point above the Prime Rate, as such Prime Rate may change from time to time.
Borrower shall pay Bank interest on the fifteenth day of each month. Borrower
shall pay Bank the entire remaining unpaid principal amount and all accrued
interest on the Revolving Maturity Date; provided that if Borrower elects to
extend the repayment term of the Acquisition Facility, Borrower shall make
twenty-four (24) equal monthly payments of principal in accordance with the Loan
Agreement. In the absence of a specific determination by Bank with respect
thereto, all payments shall be applied in the following order: (a) then due and
payable fees and expenses; (b) then due and payable interest payments and
mandatory prepayments; and (c) then due and payable principal payments and
optional prepayments.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any errors in
notation) shall not affect the obligations of Borrower with respect to Advances
made hereunder, and payments of principal by Borrower shall be credited to
Borrower notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
Borrower promises to pay Bank all costs and expenses of collection of
this Note and to pay all reasonable attorneys' fees incurred in such collection
or in any suit or action to collect this Note or in any appeal thereof. Borrower
waives presentment, demand, protest, notice of protest, notice of dishonor,
notice of nonpayment, and any and all other notices and demands in connection
with the delivery, acceptance, performance, default or enforcement of this Note,
as well as any applicable statute of limitations. No delay by Bank in exercising
any power or right hereunder shall operate as a waiver of any power or right.
Time is of the essence as to all obligations hereunder.
This Note is issued pursuant to the Loan and Security Agreement of even
date herewith, which shall govern the rights and obligations of Borrower with
respect to all obligations hereunder.
This Note shall be deemed to be made under, and shall be construed in
accordance with and governed by, the laws of the State of California, excluding
conflicts of laws principles. Borrower submits to the exclusive jurisdiction of
the state and federal courts located in the County of Santa Clara, State of
California. BORROWER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS.
THERMATRIX INC.
By: _____________________________________________
Title: ___________________________________________
26
<PAGE>
EXHIBIT C-2
-----------
Revolving Promissory Note
-------------------------
$4,000,000
Palo Alto, California
February 25, 1997
FOR VALUE RECEIVED, the undersigned, Thermatrix Inc. (the "Borrower"),
promises to pay to the order of Venture Lending, a division of Cupertino
National Bank & Trust ("Bank")1 at such place as the holder hereof may
designate, in lawful money of the United States of America, the aggregate unpaid
principal amount of all advances ("Advances") made by Bank to Borrower under the
Loan Agreement (as defined below), provided such Advances shall not exceed Four
Million Dollars ($4,000,000). Borrower shall also pay interest on the aggregate
unpaid principal amount of such Advances at a rate equal to the Prime Rate plus
one half of one (0.5) percentage point, all in accordance with the terms of the
Loan and Security Agreement between Borrower and Bank of even date herewith, as
amended from time to time (the "Loan Agreement") on the fifteenth day of each
month. The entire principal amount and all accrued interest shall be due and
payable on the Revolving Maturity Date.
Bank is hereby authorized by Borrower to endorse on Bank's books and
records each Advance made by Bank under this Note and the amount of each payment
or prepayment of principal of each such Advance received by Bank; it being
understood, however, that failure to make any such endorsement (or any errors in
notation) shall not affect the obligations of Borrower with respect to Advances
made hereunder, and payments of principal by Borrower shall be credited to
Borrower notwithstanding the failure to make a notation (or any errors in
notation) thereof on such books and records.
Borrower promises to pay Bank all costs and expenses of collection of
this Note and to pay all reasonable attorneys' fees incurred in such collection
or in any suit or action to collect this Note or in any appeal thereof. Borrower
waives presentment, demand, protest, notice of protest, notice of dishonor,
notice of nonpayment, and any and all other notices and demands in connection
with the delivery, acceptance, performance, default or enforcement of this Note.
No delay by Bank in exercising any power or right hereunder shall operate as a
waiver of any power or right Time is of the essence as to all obligations
hereunder.
This Note is issued pursuant to the Loan Agreement, which shall govern
the rights and obligations of Borrower with respect to all obligations
hereunder.
BORROWER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE, INCLUDING CONTRACT CLAIMS,
TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS. This Note shall be deemed to be made under, and shall be construed in
accordance with and governed by, the laws of the State of California, excluding
conflicts of laws principles.
THERMATRIX INC.
By: _______________________________________
Title:______________________________________
27
<PAGE>
EXHIBIT D
BORROWING BASE CERTIFICATE
- -------------------------------------------------------------------------------
Commitment Amount: $4,000,000
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $______________
2. Additions (please explain on reverse) $______________
3. TOTAL ACCOUNTS RECEIVABLE $______________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $______________
5. Balance of 50% over 90 day accounts $______________
6. Concentration Limits $______________
7. Foreign Accounts $______________
8. Governmental Accounts $______________
9. Contra Accounts $______________
10. Promotion or Demo Accounts $______________
11. Intercompany/Employee Accounts $______________
12. Other (please explain on reverse) $______________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $______________
14. Eligible Accounts (#3 minus #13) $______________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $______________
ELIGIBLE FOREIGN AND GOVERNMENT ACCOUNTS
16. Value as of ______________ $______________
17. LOAN VALUE (50% of #16) $______________
BALANCES
18. Maximum Loan Amount $4,000.000
19. Total Funds Available [Lesser of #18 or (#15 plus #17)] $______________
20. Present balance owing on Line of Credit $______________
21. Outstanding under Sublimits (Letters of Credit and Foreign Exchange) $______________
22. RESERVE POSITION (#19 minus #20 and #21) $______________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Venture Lending.
COMMENTS: BANK USE ONLY
---- --- ----
Rec'd By: ____________
Auth. Signer
Thermatrix Inc.
Date: ________________
By: _________________________________________ Verified: ____________
Authorized Signer Auth. Signer
Date: ________________
_____________________
28
<PAGE>
EXHIBIT E
COMPLIANCE CERTIFICATE
TO: Venture Lending
FROM: Thermatrix Inc.
The undersigned authorized officer of Thermatrix Inc. hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
complete compliance for the period ending _________ with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
Quarterly financial statements Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
Borrowing Base, A/R & A/P Agings Monthly within 30 days Yes No
AIR Audit Initial and Semi-Annual Yes No
10-Q, 10-K . Within 5 days of filing Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
Maintain on a Quarterly Basis
Minimum Quick Ratio 1.0:1.0/1/ ______:1.00 Yes No
Minimum Tangible Net Worth $13,000,000 $_________ Yes No
Maximum Debt/Tangible Net Worth 1.5:1.0 ______:1.0 Yes No
Quarterly Profitability See Agreement $_____ Yes No
Liquidity 1.5:1.0 ______:1.0 Yes No
Debt Service Coverage l.25:1.0/2/ ______:1.0 Yes No
/1/Does not apply after Revolving Maturity Date
/2/Replaces Liquidity covenant -- see Agreement
COMMENTS REGARDING EXCEPTIONS: See Attached BANK USE ONLY
Sincerely, Received By: __________________
AUTHORIZED
_________________________________________ SIGNER
SIGNATURE
Date: ________________________
_________________________________________
TITLE Verified: _____________________
AUTHORIZED
_________________________________________ SIGNER
DATE
Date: ________________________
Compliance Status: Yes No
29
<PAGE>
COLLATERAL ASSIGNMENT, PATENT MORTGAGE
--------------------------------------
AND SECURITY AGREEMENT
----------------------
This Collateral Assignment, Patent Mortgage and Security Agreement is
made as of February 25, 1997, by and between THERMATRIX INC.; a California
corporation ("Assignor"), and VENTURE LENDING, a division of Cupertino National
Bank & Trust, ("Assignee").
RECITALS
--------
A. Assignee has agreed to lend to Assignor certain funds (the "Loan"),
and Assignor desires to borrow such funds from Assignee pursuant to the terms of
an Amended Restated Loan and Security Agreement of even date herewith (the "Loan
Agreement").
B. In order to induce Assignee to make the Loan, Assignor has agreed
to assign certain intangible property to Assignee for purposes of securing the
obligations of Assignor to Assignee.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Assignment Patent Mortgage and Grant of Security Interest. As
---------------------------------------------------------
collateral security for the prompt and complete payment and performance of all
of Assignor's present or future indebtedness, obligations and liabilities to
Assignee, Assignor hereby assigns, transfers, conveys and grants a security
interest and mortgage to Assignee, as security, in and to Assignor's entire
right, title and interest in, to and under the following (all of which shall
collectively be called the "Collateral"):
(a) Any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held, including without limitation those set forth on Exhibit A
---------
attached hereto (collectively, the "Copyrights");
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Assignor
now or hereafter existing, created, acquired or held;
(d) All patents, patent applications and like protections
including without limitation improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same, including without
limitation the patents and patent applications set forth on Exhibit B attached
---------
hereto (collectively, the "Patents");
(e) Any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Assignor connected with
and symbolized by such trademarks, including without limitation those set forth
on Exhibit C attached hereto (collectively, the "Trademarks");
---------
(f) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
1
<PAGE>
(g) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights; and
(h) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(i) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE
CONSTRUED AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE
ASSIGNOR'S OBLIGATIONS TO ASSIGNEE UNDER THE LOAN AGREEMENT.
2. Authorization and Request. Assignor authorizes and requests that
-------------------------
the Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
3. Covenants and Warranties. Assignor represents, warrants, covenants
------------------------
and agrees as follows:
(a) Assignor is now the sole owner of the Collateral, except for
non-exclusive licenses granted by Assignor to its customers in the ordinary
course of business;
(b) Performance of this Assignment does not conflict with or
result in a breach of any agreement to which Assignor is party or by which
Assignor is bound, except to the extent that certain intellectual property
agreements prohibit the assignment of the rights thereunder to a third party
without the licensor's or other party's consent and this Assignment constitutes
an assignment;
(c) During the term 6f this Assignment, Assignor will not transfer
or otherwise encumber any interest in the Collateral, except for non-exclusive
licenses granted by Assignor in the ordinary course of business or as set forth
in this Assignment;
(d) To its knowledge, each of the Patents is valid and
enforceable, and no part of the Collateral has been judged invalid or
unenforceable, in whole or in part, and no claim has been made that any part of
the Collateral violates the rights of any third party;
(e) Assignor shall promptly advise Assignee of any material change
in the composition of the Collateral, including but not limited to any
subsequent ownership right of the Assignor in. or to any Trademark, Patent or
Copyright not specified in this Assignment;
(f) Assignor shall (i) protect, defend and maintain the validity
and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Assignee in writing of material infringements detected and (iii)
not allow any Trademarks, Patents or Copyrights to be abandoned, forfeited or
dedicated to the public without the written consent of Assignee, which shall not
be unreasonably withheld, unless Assignor determines that reasonable business
practices suggest that abandonment is appropriate.
(g) Assignor shall promptly register the most recent version of
any of Assignor's Copyrights, if not so already registered, and shall, from time
to time, execute and file such other instruments, and take such further actions
as Assignee may reasonably request from time to time to perfect or continue the
perfection of Assignee's interest in the Collateral;
2
<PAGE>
(h) This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights in
such alter acquired Collateral, in favor of Assignee a valid and perfected first
priority security interest in the Collateral in the United States securing the
payment and performance of the obligations evidenced by the Note upon making the
filings referred to in clause (i) below;
(i) To its knowledge, except for, and upon, the filing with the
United States Patent and Trademark office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests and assignment created hereunder,
and except as has been already made or obtained, no authorization, approval or
other action by, and no notice to or filing with, any US. governmental authority
or US. regulatory body is required either (i) for the grant by Assignor of the
security interest granted hereby or for the execution, delivery or performance
of this Assignment by Assignor in the US. or (ii) for the perfection in the
United States or the exercise by Assignee of its rights and remedies hereunder;
(j) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects.
(k) Assignor shall not enter into any agreement that would
materially impair or conflict with Assignor's obligations hereunder without
Assignee's prior written consent, which consent shall not be unreasonably
withheld. Assignor shall not permit the inclusion in any material contract to
which it becomes a party of any provisions that could or might in any way
prevent the creation of a security interest in Assignor's rights and interests
in any property included within the definition of the Collateral acquired under
such contracts, except that certain contracts may contain anti-assignment
provisions that could in effect prohibit the creation of a security interest in
such contracts.
(1) Upon any executive officer of Assignor obtaining actual
knowledge thereof, Assignor will promptly notify Assignee in writing of any
event that materially adversely affects the value of any Collateral, the ability
of Assignor to dispose of any Collateral or the rights and remedies of Assignee
in relation thereto, including the levy of any legal process against any of the
Collateral.
4. Assignee's Rights. Assignee shall have the right, but not the
-----------------
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify
Assignee for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this section 4.
5. Inspection Rights. Assignor hereby grants to Assignee and its
-----------------
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Assignor, any of Assignor's plants
and facilities that manufacture, install or store products (or that have done so
during the prior six-month period) that are sold utilizing any of the
Collateral, and to inspect the products and quality control records relating
thereto upon reasonable written notice to Assignor and as often as may be
reasonably requested.
6. Further Assurances: Attorney in Fact.
------------------------------------
(a) On a continuing basis, Assignor will, subject to any prior
licenses, encumbrances and restrictions and prospective licenses, make, execute,
acknowledge and deliver, and file and record in the proper filing and recording
places in the United States, all such instruments, including appropriate
financing and continuation statements and collateral agreements and filings with
the United States Patent and Trademark Office and the Register of Copyrights,
and take all such action as may reasonably be deemed necessary or advisable, or
as requested by Assignee, to perfect Assignee's security interest in all
Copyrights, Patents and Trademarks and otherwise to carry out the
3
<PAGE>
intent and purposes of this Collateral Assignment, or for assuring and
confirming to Assignee the grant or perfection of a security interest in all
Collateral.
(b) Assignor hereby irrevocably appoints Assignee as Assignor's
attorney-in-fact, with full authority in the place and stead of Assignor and in
the name of Assignor, from time to time in Assignee's discretion, to take any
action and to execute any instrument which Assignee may deem necessary or
advisable to accomplish the purposes of this Collateral Assignment, including:
(i) To modify, in its sole discretion, this Collateral
Assignment without first obtaining Assignor's approval of or signature to such
modification by amending Exhibit A, Exhibit B and Exhibit C, thereof, as
appropriate, to include reference to any right, title or interest in any
Copyrights, Patents or Trademarks acquired by Assignor after the execution
hereof or to delete any reference to any right, title or interest in any
Copyrights, Patents or Trademarks in which Assignor no longer has or claims any
right, title or interest; and
(ii) To file, in its sole discretion, one or more financing
or continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Assignor where permitted by law.
7. Events of Default. The occurrence of any of the following shall
-----------------
constitute an Event of Default under the Assignment:
(a) An Event of Default occurs under the Loan Agreement; or
(b) Assignor breaches any warranty or agreement made by Assignor
in this Assignment and, as to any breach that is capable of cure, Assignor fails
to cure such breach within five (5) days of the occurrence of such breach.
8. Remedies. Upon the occurrence and continuance of an Event of
--------
Default, Assignee shall have the right to exercise all the remedies of a secured
party under the California Uniform Commercial Code, including without limitation
the right to require Assignor to assemble the Collateral and any tangible
property in which Assignee has a security interest and to make it available to
Assignee at a place designated by Assignee. Assignee shall have a nonexclusive,
royalty free license to use the Copyrights, Patents and Trademarks to the extent
reasonably necessary to permit Assignee to. exercise its rights and remedies
upon the occurrence of an Event of Default. Assignor will pay any expenses
(including reasonable attorneys' fees) incurred by Assignee in connection with
the exercise of any of Assignee's rights hereunder, including without limitation
any expense incurred in disposing of the Collateral. All of Assignee's rights
and remedies with respect to the Collateral shall be cumulative.
9. Indemnity. Assignor agrees to defend, indemnity and hold harmless
---------
Assignee and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement, and (b) all
losses or expenses in any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including without limitation reasonable attorneys' fees and
reasonable expenses), except for losses arising from or out of Assignee's gross
negligence or willful misconduct.
10. Reassignment. At such time as Assignor shall completely satisfy all
------------
of the obligations secured hereunder, Assignee shall execute and deliver to
Assignor all deeds, assignments and other instruments as may be necessary or
proper to revest in Assignor full title to the property assigned hereunder,
subject to any disposition thereof which may have been made by Assignee pursuant
hereto.
4
<PAGE>
11. Course of Dealing. No course of dealing, nor any failure to
-----------------
exercise, nor any delay in exercising any right, power or privilege hereunder
shall operate as a waiver thereof.
12. Attorneys' Fees. If any action relating to this Assignment is
---------------
brought by either party hereto against the other party, the prevailing party
shall be entitled to recover reasonable attorneys' fees, costs and
disbursements.
13. Amendments. This Assignment may be amended only by a written
----------
instrument signed by both parties hereto.
14. Counterparts. This Assignment may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
15. California Law and Jurisdiction; Jury Waiver. This Assignment shall
--------------------------------------------
be governed by the laws of the State of California, without regard for choice of
law provisions. Assignor and Assignee consent to the exclusive jurisdiction of
any state or federal court located in Santa Clara County, California. ASSIGNOR
AND ASSIGNEE EACH WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE LOAN AGREEMENT, THIS
ASSIGNMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on
the day and year first above written.
Address of Assignor: ASSIGNOR:
101 Metro Drive, Suite 248 THERMATRIX INC.
San Jose, CA 95110
Attn: Steve Guerrettaz By: ____________________________________
Title: _________________________________
Address of Assignee: ASSIGNEE:
Three Palo Alto Square, Suite 150 VENTURE LENDING, a division of Cupertino
Palo Alto, CA 94306 National Bank & Trust
Attn: Jon Krogstad By: ____________________________________
Title: _________________________________
5
<PAGE>
INTELLECTUAL PROPERTY SCHEDULE
REGISTERED COPYRIGHTS
- ---------------------
The Company has no record of registered copyrights or mask works as of
this date. The Company reserves the right to update this schedule to include
registered copyrights or mask works at a later date as if they were included
herein as of the Closing Date.
REGISTERED TRADEMARKS
- ---------------------
a. "Thermatrix"
THER-1
United States Application Serial No. 74/300,986
Filed August 3, 1992
Issued on October 17, 1995
Registration No. 1,928,477
b. "Thermatrix"
THER-241
EPO
Filed April 1, 1996
Application No. 17772
c. "Thermatrix"
THER-242
Japan
d. "Thermatrix"
THER-243
Taiwan
e. "Thermatrix"
THER-244
South Korea
f. "Technology Beyond Compliance"
THER-240
United States Application Serial No. 75/067,648
Filed March 5, 1996
Issued on January 21, 1997
Registration No. 2,032,226
1
<PAGE>
c. "PADRE"
THER-261
Issued August 17, 1993
Expires August 17, 2003
Registration No. 1,788,045
TRADEMARK APPLICATIONS
- ----------------------
a. "TMX"
THER-276
United States Application Serial No. 75/164,887
Filed September 12, 1996
Intent to use trademark application
b. "ADMATRIX"
THER-281
United States Application Serial No. 75/215,791
Filed December 19, 1996
Intent to use trademark application
ISSUED PATENTS
- --------------
A. Hazardous Waste Reactor System
1. THER-8 (formerly IPT-3)
United States Patent No. 4,688,495
Issued August 25, 1987
Inventor: Galloway
Filed July 31, 1985
Expires July 31, 2005
2. THER-9 (formerly IPT-4)
France Patent No. 8611118
Issued August 10, 1990
Expires July 31, 2006
Filed July 31, 1986
3. THER-10 (formerly IPT-5)
Germany Patent No. 3625 782
Grant published for opposition July 23, 1992
Fully valid effective October 23, 1992
2
<PAGE>
Expires July 30, 2006
Filed July 30, 1986
4. THER-l 1 (formerly IPT-6)
United Kingdom Patent No. 2182426
Application published May 13, 1987
Grant Published July 26, 1989
Expires July 30, 2006
Filed July 30, 1986
Application No. 8618549
B. Thermal Decomposition Processor and System
1. THER-13 (formerly IPT-8)
United States patent No. 4,823,711
Issued April 25, 1989
Inventors: Kroneberger and Wilcox
Expires August 21, 2007
Filed August 21, 1987
Application No. 088,094
2. THER-15 (formerly IPT-10)
Canada Patent No. 1,330,251
Issued June 21, 1994
Expires June 21, 2001
Patent Application No. 597,512
Filed April 21, 1989
3. THER-16 (formerly IPT-11)
Taiwan Patent No. 40507
Granted November 14, 1990
Published August 1, 1990
Expires July 31,2005
Filed April 24, 1989
Application No. 78103054
3
<PAGE>
C. Method and Apparatus for Controlled Reaction in a Reaction Matrix
THER-17 (formerly IPT-12)
United States Patent No. 5,165,884
Issued November 24, 1992
Inventors: Martin, Stilger and Holst
Expires July 5,2011
Filed July 5, 1991
Application No. 07/726,060
D. Method and Apparatus for Recuperative Heating of Reactants in a Reaction
Matrix
THER-002
United States Patent No. 5,320,518
Issued June 14, 1994
Inventors: Stilger, Martin and Holst
Expires July 5,2011
Filed September 15, 1992
Application No. 945,218
E. Method and Apparatus for Controlled Reaction in a Reaction Matrix
THER-037
Mexico Patent No. 177902
Issued May 5, 1995
Inventors: Martin, Stilger, Holst
Filed July 3, 1992
Application No. 923946
F. Method and Apparatus for Control of Fugitive VOC Emissions
THER-116
United States Patent No. 5,533,890
Issued July 9, 1996
Expires: July 9, 2013
Inventors: Holst, Martin, Stilger, Yee
Filed December 17, 1992
Application No. 992,405
4
<PAGE>
G. Method and Afterburner Apparatus for Control of Highly Variable Flows
THER-117
United States Patent No. 5,601,790
Issued February 11, 1997
Expires: February 11,2014
Inventors: Hoist, Martin, Stilger, Yee
Filed July 16, 1993
Application No. 08/092,980
H. Method and Afterburner Apparatus for Destruction of Volatile Organic
Compound Flows of Varying Concentration
THER-239 (Based on THER-113)
Taiwan Patent Application No. 84112869
Issued January 20, 1997
Inventors: Holst, Martin
I. System for Increasing Efficiency of Vapor Phased Pollutant Removal With On-
Site Regeneration and Pollutant Recovery
THER-258
Assigned to Thermatrix from Purus Inc. April 18, 1996
US Patent No. 5,281,257
Issued January 25, 1994
Expires: December 11, 2012
Inventor: Harris
PATENT APPLICATIONS
- -------------------
A. Improved Hazardous Waste System
THER-12 (formerly IPT-7)
Japan Application No. 62-115729/1987
Filed May 12, 1987 (as a non-convention case stemming from United States
Patent No. 4,688,495, filed July 31, 1985 and Application No. 681,255,
filed December 13, 1984, now abandoned with additional material added)
Published November 18, 1988
Request for examination made May 11, 1994, with amended claims
5
<PAGE>
B. Method and Apparatus for Controlled Reaction in a Reaction Matrix
1. THER-20 (formerly IPT- 15)
Australia Application No. 19,398/92
Filed July 3, 1992
Based on IPT-12 and IPT-13 (THER-17 and 18) combined
2. THER-21 (formerly IPT-16)
Canada Application No. 2,072,907-4
Filed July 2, 1992
Examination Request due by July 5, 1999
Laid open to public January 6, 1993
Based on IPT-12 and IPT-13 (THER-17 and 18) combined
3. THER-22 (and THER-23 through THER-35) (formerly IPT-17 through IPT-30)
European Patent Office Application No. 92305990.1
Filed June 29, 1992
Designating Austria, Belgium, Denmark, France, Germany, Greece, Italy,
Luxembourg, Netherlands, Spain, Sweden, Switzerland and the United Kingdom
Based on IPT-12 and IPT-13 (THER-17 and 18) combined
Substantive exam requested March 7, 1994
Allowed October, 1996
4. THER-36 (formerly IPT-31)
Israel Application No. 102395
Filed July 2, 1992
Based on IPT-12 and IPT-13 (THER-17 and 18) combined
5. THER-38 (formerly IPT-33)
PCT Application No. U592/05585
Filed July 2, 1992
Based on IPT-12 and IPT-13 (THER-17 and 18) combined
Designating Brazil, Finland, Hungary, Japan, Norway and South Korea
National Phase entered (See below)
6. THER-39 (formerly IPT-34)
Brazil Application No. P19206249-0
Filed January 5, 1994
6
<PAGE>
7. THER-40 (formerly IPT-35)
Finland Application No. 940026
Filed January 4, 1994
8. THER-41 (formerly IPT-36)
Hungary Application No. P9400021
Filed January 4, 1994
9. THER-42 (formerly IPT-37)
Japan Application No. 502330/93
Filed January 5, 1994
Examination requested April 4, 1994
Published July 28, 1994
10. THER-43 (formerly IPT-39)
South Korea Application No. 94-700028
Filed January 5, 1994
11. THER-44 (formerly IPT-38)
Norway Application No. P940024
Filed January 4, 1994
C. Method and Apparatus for Control of Fugitive VOC Emissions
1. THER-51
Israel Application No. 107991
Filed December 10, 1993
Based on THER-5
Allowed: August, 1996
2. THER-52
Mexico Application No. 938116
Filed December 16, 1993
Based on THER-5
7
<PAGE>
3. THER-53 (and THER-54 through THER-78)
PCT Application No. US93/11837
Filed December 6, 1993
Based on THER-5
Designating Australia, Brazil, Canada, EPO (THER-57 & 58-73), Finland,
Hungary, Japan, South Korea and Norway
Exam requested July 17, 1994, and amended claims
Entered National Phase in EPO Countries only (THER 57-73) in June, 1995
D. Method and Afterburner Apparatus for Control of Highly Variable Flows
1. THER-206
United States Application No.
08/468,872
Filed June 6, 1995
Inventors: Stilger, Martin, Holst and Yee
Divisional of THER-1 17
Allowed: December, 1996
2. THER-84
Israel Application No. 110359
Filed July 18, 1994
Based on THER-46
3. THER-85
Mexico Application No. 945472
Filed July 18, 1994
Based on THER-46
4. THER-86 (and THER-87 through THER-1 11)
PCT Application No. U594107936
Filed July 15, 1994
Based on THER-46
Designating Australia, Brazil, Canada, EPO (all countries THER-90 &
91-106), Finland, Hungary, Japan, South Korea, and Norway
National Phases entered for all designated countries in January, 1996
(See below)
5. THER-87
Australia Application No. 73,342/94
Filed July 15, 1994
National Phase entered February 2, 1996
8
<PAGE>
6. THER-88
Brazil Application No. P1 9407068-7
Filed July 15, 1994
National Phase entered January 15, 1996
7. THER-89
Canada Serial No. 2,167,310
Filed July 15, 1994
Registration No. 1,449,358
Filed April 11, 1996
8. THER-90 (and 91-106)
European Patent Office
Serial No. 94923491.8
Filed July 15, 1994
Designating Austria, Belgium, Switzerland and Liechtenstein, Germany, Denmark,
Spain, France, United Kingdom, Greece, Ireland, Italy, Luxembourg, Monaco,
Netherlands, Portugal and Sweden
National Phase entered January 8, 1996
9. THER-107
Finland Serial No. 960179
Filed July 15, 1994
National Phase entered January 15, 1996
10. THER-108
Hungary Application No. P9600082
Filed July 15, 1994
National Phase entered January 16, 1996
11. THER-109
Japan Application No. 504730/95
Filed July 15, 1994
National Phase entered February 7, 1996
12. THER-110
South Korea Application No. 96-700236
Filed July 15, 1994
National Phase entered January 16, 1996
9
<PAGE>
13. THER-111
Norway Application No. P960180
Filed July 15, 1994
National Phase entered January 15, 1996
E. Method and Apparatus for Destruction of Volatile Organic Compound
Flows of Varying Concentration
1A THER-113
United States Application No. 08/347,870
Filed December 1, 1994
Inventors: Holst and Martin
Allowed: September, 1996
lB. THER-208
United States Application No. 08/527,545
Filed September 13, 1995
Inventors: Holst and Martin
Divisional of THER-1 13
Allowed: November, 1996
2. THER-210
PCT Application No. PCT/U595/15430
Filed November 29, 1995
Based on THER- 113 designation all countries.
Must go to National phases by June 1, 1997.
3. THER-238
Israel Application No. 116157
Filed November 26, 1995
Based on THER-1 13
F. Thermal Oxidizers with Improved Preheating Means and Process for Operating
Same
1. THER-248
United States Application No. 081659,479
Filed June 6, 1996
Inventors: Martin, Stilger, Holst
10
<PAGE>
G. Destruction of Diesel Soot
1. THER-249
Application in progress
Inventors: Hoist, Martin, Stilger
H. System for Treatment of Chemical Wastes and Methods for
Treating Chemical Wastes
1. THER-250
United States Application No. 08/729,850
Filed October 15, 1996
Inventors: Martin, Stilger, Heywood, King
I. Methods for Destroying Colliery Methane and Systems for Practicing Same
1. THER-251
United States Application No. 08/641,636
Filed May 1, 1996
Inventor: Martin
J. Simplification and Improvement of the Pulp and Paper Kraft Recovery
System Utilizing a Flameless Thermal Reactor/Oxidizer
1. THER-253
United States Application No.
Provisional Filed June 6, 1996
Inventor: Allen
K. Non-planar Reaction
1. THER-255
Application in progress
Inventors: Martin, Hoist, Stilger
L. Synthesis of Hydrogen Cyanide
1. THER-275
Application in progress
Inventors: Martin, Young
11
<PAGE>
M. Systems for the Treatment of Commingled Wastes
and Methods for Treating Commingled Wastes
1. THER-279
United States Application No. 08/631,708
Filed April 10, 1996
Inventors: Heywood, Hoist, Martin, Schofield
N. Landfill Gas Destruction
1. THER-283
Application in progress
Inventors: Hoist, Martin, Stilger
12
<PAGE>
SCHEDULE OF EXCEPTIONS
4.1 Borrower has granted an exclusive right and license to engineer, apply,
assemble, sell, lease or lease to others the use of; sublicense, erect, install,
service, maintain, and use the patented technology and know-how on a worldwide
basis for Spent Ion Exchange Resins used to remove radioactive materials from
waste water and other effluents from nuclear power plants, nuclear defense
industry plants, and other industrial sources. This exclusive license has been
granted to Formatrix, L.L.C. which is 40% owned by the Borrower.
7.11 Inventory is presently located at the Borrower's facility in Knoxville,
Tennessee.
Collateral Assignment 3 (a) -- See 4.1 above.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included on this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8, File No. 333-4370.
San Jose, California
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 981 4,781
<SECURITIES> 0 11,418
<RECEIVABLES> 2,330 5,164
<ALLOWANCES> 190 265
<INVENTORY> 85 809
<CURRENT-ASSETS> 3,387 22,241
<PP&E> 828 1,236
<DEPRECIATION> 233 423
<TOTAL-ASSETS> 4,228 24,009
<CURRENT-LIABILITIES> 2,252 2,611
<BONDS> 0 0
11,321 0
9,304 0
<COMMON> 0 7
<OTHER-SE> (18,649) 21,391
<TOTAL-LIABILITY-AND-EQUITY> (4,228) 24,009
<SALES> 6,494 13,605
<TOTAL-REVENUES> 6,494 13,605
<CGS> 6,064 12,002
<TOTAL-COSTS> 6,064 12,002
<OTHER-EXPENSES> 5,824 6,916
<LOSS-PROVISION> 229 190
<INTEREST-EXPENSE> 231 500
<INCOME-PRETAX> (5,163) (4,813)
<INCOME-TAX> (31) (63)
<INCOME-CONTINUING> (5,194) (4,876)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,194) (4,876)
<EPS-PRIMARY> (0.91) (0.73)
<EPS-DILUTED> (0.91) (0.73)<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>
