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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 2000.
[_] 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)
308 N. Peters Road, Suite 100
Knoxville, Tennessee 37922
(Address of principal executive offices)
(865) 539-9603
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days:
Yes X No _____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at March 31, 2000
----- -----------------------------
Common stock, $.001 par value 7,821,425
1
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THERMATRIX INC.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Certain Business Considerations" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in, or incorporated by reference into, this report.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
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<S> <C> <C>
Item 1. Financial Statements........................................................ 3-5
Condensed Consolidated Balance Sheets....................................... 3
Condensed Consolidated Statements of Operations............................. 4
Condensed Consolidated Statements of Cash Flows............................. 5
Notes to Condensed Consolidated Financial Statements........................ 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 9-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 11
Item 2. Changes in Securities....................................................... 11
Item 3. Defaults Upon Senior Securities............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders......................... 11
Item 5. Other Information........................................................... 11
Item 6. Exhibits and Reports on Form 8-K............................................ 11-12
SIGNATURE................................................................... 13
</TABLE>
2
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Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 663 $ 922
Accounts receivable, net 4,744 6,528
Unbilled receivables 1,711 -
Costs of uncompleted contracts, net 997 -
Inventories 1,012 1,198
Prepaid professional fees - 468
Other current assets 1,688 364
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Total current assets 10,815 9,480
PROPERTY AND EQUIPMENT, net 2,392 2,495
OTHER ASSETS
Patents and other 920 1,021
Assets of discontinued operations held for disposition 2,229 2,229
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Total other assets 3,149 3,250
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TOTAL ASSETS $ 16,356 $ 15,225
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,802 $ 597
Billings on uncompleted contracts in excess
of costs and revenue recognized 2,535 2,880
Income taxes payable 304 -
Accrued liabilities 1,952 1,679
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Total current liabilities 7,593 5,156
LIABILITIES SUBJECT TO COMPROMISE 16,843 16,789
REDEEMABLE PREFERRED STOCK 4,080 4,020
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Total liabilities and redeemable preferred stock 28,516 25,965
STOCKHOLDERS' EQUITY
Convertible preferred stock, at liquidation preference
value; $0.001 par value; authorized, 5,000,000 shares;
outstanding, 6,000 on both March 31, 2000 and
December 31, 1999 4,080 4,020
Common stock; $0.001 par value authorized,
25,000,000 shares; outstanding, 7,821,425
on both March 31, 2000 and December 31, 1999 8 8
Additional paid-in capital 47,180 47,300
Accumulated other comprehensive income - -
Accumulated deficit (63,428) (62,068)
-------- --------
Total stockholders' equity (12,160) (10,740)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,356 $ 15,225
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the three months ended March 31,
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
REVENUES $ 7,471 $ 5,758
COST OF REVENUES 5,750 4,698
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Gross margin 1,721 1,060
OPERATING EXPENSES:
Research and development 69 209
Selling, general and administrative 1,527 2,306
Impairment loss - -
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Total operating expenses 1,596 2,515
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Income/(loss) from operations 125 (1,455)
OTHER INCOME (EXPENSES):
Interest expense and other financing costs (244) (83)
Other 172 125
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Total interest income (expense) (72) 42
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Earnings before reorganization items and provision for income taxes 53 (1,413)
REORGANIZATION ITEMS 1,402 -
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Loss before provision for income taxes and discontinued operations (1,349) (1,413)
BENEFIT (PROVISION) FOR INCOME TAXES (11) (16)
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Loss from continuing operations (1,360) (1,429)
DISCONTINUED OPERATIONS
Loss from operations - (527)
Loss on disposal - -
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- (527)
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Net loss (1,360) (1,956)
Accretion of redeemable preferred warrants and costs - -
Accretion of Series E Stock liquidation premium
and dividend requirements (120) -
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Net loss attributable to common stock $(1,480) $(1,956)
======= =======
BASIC NET LOSS PER SHARE OF COMMON STOCK
Continuing operations $ (0.19) $ (0.18)
Discontinued operations (0.00) (0.07)
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$ (0.19) $ (0.25)
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BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,821 7,713
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</TABLE>
See notes to condensed consolidated financial statements.
4
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Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the three months ended March 31,
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,360) $(1,906)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 149 312
Provision for doubtful accounts - 579
Changes in assets and liabilities
Accounts receivable 1,784 (5,556)
Costs of uncompleted contracts (997) (4,668)
Unbilled receivables (1,711) -
Inventories 186 -
Prepaid expenses and other (801) (1,725)
Goodwill - (9,985)
Accounts payable 2,205 7,551
Accrued liabilities and other current liabilities 631 19,443
Billings on uncompleted contracts in excess of costs (345) (374)
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Net cash used in operating activities (259) 3,671
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CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments - 1,670
Purchases of property and equipment - (5,441)
Increase in patents and other assets - (644)
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Net cash provided (used) by investing activities - (4,415)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock - 282
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Net cash provided by financing activities - 282
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INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (259) (462)
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CUMULATIVE EFFECT OF FOREIGN EXCHANGE RATES ON CASH - (643)
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD 922 1,544
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CASH & CASH EQUIVALENTS END OF PERIOD $ 663 $ 439
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SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest - 16
Cash paid for income taxes - 40
</TABLE>
See notes to condensed consolidated financial statements.
5
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Thermatrix Inc. and Subsidiaries
(Debtors-in-possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The condensed
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three months ended March 31, 2000 and 1999. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The results for the three months ended March 31, 2000 are not
necessarily indicative of the results expected for the full fiscal year.
On December 29, 1999 (the "petition date"), the Company and its operating
domestic subsidiaries filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy
Court, Central District of California ("Bankruptcy Court"). Since the petition
date, the Company has been operating as a debtor-in-possession. As a debtor-in-
possession, the Company is authorized to operate its business, but may not
engage in transactions outside of the normal course of business without approval
of the Bankruptcy Court. The Company intends to file a plan, or plans, of
reorganization, which must be voted upon by certain classes of interests and
approved by the Bankruptcy Court. An Official Committee of Unsecured Creditors
was formed which has the right to review and object to business transactions
outside the ordinary course and participate in any plan or plans of
reorganization.
2. BASIC NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding. No diluted loss per share information has been
presented in the accompanying statements of operations since potential common
shares from conversion of stock options and warrants are antidilutive.
3. COMPREHENSIVE INCOME
The following table presents comprehensive income under the provisions of SFAS
No. 130, "Reporting Comprehensive Income," for the three months ended March 31,
2000 and 1999.
6
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<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
($000)
--------------------------
2000 1999
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<S> <C> <C>
Net Loss $(1,360) $(1,906)
Other Comprehensive Income(Loss), net of tax
Unrealized Currency Gain (Loss) $ --- $ (624)
Comprehensive Income (Loss) $(1,360) $(2,530)
</TABLE>
4. SIGNIFICANT CONTRACT
During the second fiscal quarter of 2000 the U.S. Bankruptcy Court approved the
Purchase and Service Agreement between Thermatrix Inc. and The Dow Chemical
Company. The Agreement establishes the terms and conditions for designing and
supplying multiple Flameless Thermal Oxidizer Systems to various Dow plant sites
over the next several years. The first two of these projects, which have a
combined contract value of over $20 million for Thermatrix Inc., are already
underway.
As part of the Agreement Dow has advanced to the Company, on June 8, 2000, $6
million, which will be treated as a loan to be repaid based upon the progress on
one of the two projects underway. As long as the loan remains outstanding Dow
has a first-priority lien on the Intellectual Property of Thermatrix Inc. In
the event of a default, as defined by the Agreement (which would include, but is
not limited to, the Chapter 11 case being converted to a Chapter 7 by Court
order, Thermatrix Inc. failing to supply milestone deliverable within 30 days of
the due date, etc.), the ownership of the Intellectual Property may become the
property of Dow.
5. DISCONTINUED OPERATIONS
The Company had operations located in the United States and the United Kingdom
until December 1999, at which time the United Kingdom operations were placed
under control of an administrative receiver and the Company currently only has
operations in the United States. Accordingly, 1999 operating results for the
United Kingdom subsidiaries have been reclassified and reported as discontinued
operations. Summary operating results of the discontinued operations are as
follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
($000)
--------------------------
2000 1999
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<S> <C> <C>
Revenue $ --- $ 5,143
Costs and expenses --- 5,671
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Loss from discontinued operations $ --- $ (528)
======= =======
</TABLE>
Assets and liabilities of the discontinued operations are included in the
consolidated balance sheets as assets and liabilities of discontinued operations
and are made up as follows (in thousands):
<TABLE>
<CAPTION>
As of
March 31,
($000)
--------------------
2000 1999
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<S> <C> <C>
Current assets $ --- $ ---
Current liabilities --- ---
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Net current assets --- ---
Property and equipment --- ---
Assets of discontinued operations held for disposition 2,229 2,229
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Total assets $2,229 $2,229
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</TABLE>
7
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6. SEGMENTS
The Company had operations located in the United States and the United Kingdom
until December 1999, at which time the United Kingdom operations were placed
under control of an administrative receiver. As a result, the United Kingdom
operations are reported as discontinued operations and the Company currently
only has operations in the United States.
The Company's export revenues accounted for 11% and 47% of total revenues for
the three months ended March 31, 2000 and 1999, respectively.
7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market
risks is included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 in Item 1-Description of Business, Item 7-Management's
Discussion and Analysis of Financial Condition and Results of Operations, and in
Note D to the Consolidated Financial Statements. Information regarding
quantitative and qualitative disclosures about market risks is also included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained herein.
8
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Thermatrix Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking information that involves
known and unknown risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from those indicated herein as a
result of certain factors, including those set forth under "Certain Business
Considerations."
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1999, contained in the Company's Annual Report on Form 10-K.
General
-------
Thermatrix Inc. is a global technology company engaged in the development,
design, manufacture, installation, commissioning and sale of industrial process
and utility equipment and systems to industrial manufacturers, electric
utilities, independent power producers and co-generation plants. The core
component of the Company's technology is its proprietary flameless thermal
oxidizer ("FTO") for the destruction of volatile organic compounds and hazardous
air pollutants (collectively "VOCs").
Results of Operations
---------------------
Revenues were $7.5 million and $5.8 million, respectively, for the three months
ended March 31, 2000 and 1999. The increase in revenues of 30% was mainly due to
an increase in revenue at the Company's Wahlco subsidiaries of $1.3 million.
This increase was due to increased bookings and partially due to the 2000 period
reflecting an entire quarter of Wahlco revenue versus a partial quarter (from
the acquisition date of January 13, 1999 forward) in the 1999 period.
Additionally the Company's Thermatrix operation experienced increased revenues
of $270,000.
The Company had a gross margin contribution of $1.7 million and $1.1 million,
respectively, in the three months ended March 31, 2000 and 1999. The increase
in gross margin of 62% was primarily attributable to the Company's increased
focus on bottom line results over top line revenue growth. At the Company's
Thermatrix operation this focus has been driven through a movement to cost plus
fee contracts versus the previous fixed price contracts.
Research and development expenses were $69,000 and $209,000, respectively, in
the three months ended March 31, 2000 and 1999. The decrease in research and
development expense of 67% was primarily attributable to the Company suspending
its research and development efforts while concentrating on restructuring and
successfully emerging from Chapter 11.
Selling, general and administrative expenses decreased to $1.5 million for the
three months ended March 31, 2000 compared to $2.3 million for the three months
ended March 31, 1999. The decrease of 34% was due mainly to reductions in the
Company's Thermatrix operation recruitment/relocation expenses of $140,000 due
to less recruitment activity occurring, $123,000 in goodwill amortization due to
the goodwill having been written off in December 1999, and $106,000 in
professional fees along with $104,000 in legal fees both due mainly to the
acquisition of Wahlco in the year earlier period. These reductions were
partially offset by an increase in accounting fees of $60,000 due to the
acquisition of the Wahlco companies. Additionally the Company's Thermatrix
operation experienced a reduction in selling expense of approximately $126,000
due to the restructuring of that operations sales department.
9
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Earnings before reorganization items and provision for income taxes for the
quarter ended March 31, 2000 were $53,000 which compared favorably to the loss
in the March 31, 1999 quarter of $1.4 million. This was mainly due to the
previously discussed increased gross margin and reduced operating expenses,
which were partially offset by increased interest expense due to interest
accruing on the Wexford debt. During the March 31, 2000 quarter the Company
experienced $1.4 million in costs related to the Chapter 11 filing.
Reorganization items represent costs and losses incurred in connection with the
chapter 11 proceedings initiated in December 1999.
Liquidity and Capital Resources
-------------------------------
Total cash and cash equivalents was $663,000 at March 31, 2000, a decrease of
28% from $922,000 at December 31, 1999. Net cash used in operating activities
was $259,000 in the three months ended March 31, 2000, compared to the $3.7
million generated during the three months ended March 31, 1999 which was
primarily due to the acquisition of Wahlco in January 1999. There can be no
guarantee that sufficient funds will be generated to cover the negative cash
flow position. Failure to correct the situation will directly impact the ability
to secure new orders, the ability to attract and retain quality staff and the
ability to meet all existing obligations, all of which will have serious
negative consequences for the Company's business, results of operations and
financial condition.
Certain Business Considerations
-------------------------------
The Company's business is subject to the following risks and uncertainties, in
addition to those described elsewhere.
Outcome of Chapter 11 Process. Plans are currently being developed to
restructure the operations and capitalization of the Company. Additionally,
management is evaluating other alternatives to fund its cash requirements.
These plans must be voted upon by certain classes of interests and approved by
the Bankruptcy Court. There can be no assurances as to the timing, approval and
eventual outcome of such plans. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Performance under the Dow Agreement. As part of the Agreement Dow has advanced
to the Company, on June 8, 2000, $6 million, which will be treated as a loan to
be repaid based upon the progress on one of the two projects underway. As long
as the loan remains outstanding Dow has a first-priority lien on the
Intellectual Property of Thermatrix Inc. In the event of a default, as defined
by the Agreement (which would include, but is not limited to; the Chapter 11
case being converted to a Chapter 7 by Court order, Thermatrix Inc. failing to
supply milestone deliverable within 30 days of the due date, etc.), the
ownership of the Intellectual Property may become the property of Dow. If the
Intellectual Property, which includes the FTO technology, were to become the
property of Dow there would be a material adverse effect on the Company's
business, results of operations and financial condition.
10
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company has been, or may become, involved in litigation
proceedings incidental to the conduct of its business. As a result of the
acquisition and restructuring of Wahlco Environmental Systems, Inc., a number of
claims have been filed. The Company does not believe that any single proceeding
presently pending will have a material adverse effect on the Company's financial
position or its results of operations.
On December 29, 1999 (the "petition date"), the Company and its operating
domestic subsidiaries filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy
Court, Central District of California ("Bankruptcy Court"). Since the petition
date, the Company has been operating as a debtor-in-possession. As a debtor-in-
possession, the Company is authorized to operate its business, but may not
engage in transactions outside of the normal course of business without approval
of the Bankruptcy Court. The Company intends to file a plan, or plans, of
reorganization, which must be voted upon by certain classes of interests and
approved by the Bankruptcy Court. An Official Committee of Unsecured Creditors
was formed which has the right to review and object to business transactions
outside the ordinary course and participate in any plan or plans of
reorganization. There can be no assurances as to the timing, approval and
eventual outcome of such plans. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable..
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Purchase and Service Agreement between The Dow Chemical Company and
Thermatrix Inc. approved by the bankruptcy court on May 6, 2000.
10.2 Form 8K filed July 12, 2000 regarding the resignation on February 7,
2000 of John T. Schofield, Chairman, President and Chief Executive
Officer of the Registrant, and the resignation on May 1, 2000 of
James M. Strock, Director of the Registrant.
(b) Reports on Form 8-K
11
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(Incorporated into exhibit list detailed above)
Trademark Acknowledgments
Thermatrix and PADRE(R) are registered trademarks of the Company.
12
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMATRIX INC.
Date: August 17, 2000 By: /s/ Daniel S. Tedone
------------------------------
Daniel S. Tedone
President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
13
