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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, 1999.
[_] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
308 N. Peters Road, Suite 100
Knoxville, TN 37922
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (865) 539-9603
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
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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. [X]
On May 1, 2000 there were issued and outstanding 7,821,425 shares of Common
Stock. The approximate aggregate market value of Common Stock held by non-
affiliates of the Registrant on that date was approximately $3,095,082 based on
the closing sale price of the Common Stock ($0.9375), as reported by the OTC
Bulletin Board.
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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 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 the Company
Thermatrix is an industrial company primarily serving the global market of
continuously operating facilities for a broad range of industries that include
refining, chemical, steel, pharmaceutical, pulp and paper, electric utility, co-
generation, and industrial manufacturing. Thermatrix provides a wide variety of
air pollution control solutions, including its unique flameless thermal
oxidation technology, as well as a wide range of engineered products and
services to meet the needs of its clients.
Petition for Reorganization Under Chapter 11
On January 13, 1999, the Company acquired all of the outstanding common shares
of Wahlco Environmental Systems, Inc. (Wahlco). In addition to cash payments,
the Company agreed at the time to guarantee certain Wahlco debts owed to, or
guaranteed by, Wexford Management LLC (Wexford) and several lenders affiliated
with Wexford and granted a security interest in all existing and future assets
to Wexford and the lenders.
On February 25, 1999 the Company entered into the Second Amended and Restated
Credit Agreement among Wahlco and the Company, as Borrowers, and the Lenders and
Wexford as Agent for the Lenders (the "1999 Credit Agreement"). As a condition
of the 1999 Credit Agreement, the Company agreed to confirm its grant to the
Lenders of a security interest in all existing and future assets and to cause
all its significant subsidiaries to enter into guarantees and grant to the
Lenders additional security interests and mortgages in all existing and future
assets of the Borrowers and significant subsidiaries. The Company engaged an
investment advisory firm to assist with the structure and placement of an equity
offering and term and revolving credit facilities to finance its ongoing
operations and finance the Wahlco acquisition. The 1999 Credit Agreement matured
on August 24, 1999 and, under the Terms of the Agreement, was extended until
November 22, 1999 with the payment of an additional fee of $100,000.
The Company continued its efforts to arrange new financing but was unable to
make scheduled payments under the 1999 Credit Agreement. On December 15, 1999,
Wexford appointed an administrative receiver in the United Kingdom for all
assets of the Company's United Kingdom subsidiaries and the Company expects the
receiver to dispose of all of those assets as discussed further in Note F to the
financial statements. 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. As of the petition date, actions to
collect prepetition indebtedness are stayed and other contractual obligations
may not be enforced against the Company. In addition, under the Bankruptcy
Code, the Company may reject executory contracts. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization
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process. Substantially all liabilities as of the petition date are subject to
settlement under a plan of reorganization to be voted upon by the creditors and
equity security holders 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.
The case filing information is as follows:
Thermatrix Inc. SA99-22776-JR
Wahlco Engineered Products, Inc. SA99-22775-JR
Wahlco Environmental Systems, Inc. SA99-22773-JR
The Bachman Companies. Inc. SA99-22778-JR
Wahlco, Inc. SA99-22772-JR
The Company continues to operate as debtors-in-possession.
Recent Events
On June 30, 1999 the Company closed the private placement of $6 Million in
convertible redeemable Series E preferred shares. The proceeds of the placement
were used as part of the general operating funds of the business.
The Wahlco acquisition related debt matured on August 24, 1999 and, under the
Terms of the Agreement, was extended until November 22, 1999 with the payment of
an additional fee of $100,000.
On September 17, 1999 the Company was notified that, as a result of its
failure to meet the Nasdaq National Market continued listing requirements, its
securities had been delisted from the National Market. The securities now trade
under the symbol TMXIE on the OTC Bulletin Board.
On September 30, 1999 Arthur Andersen LLC resigned as the Company's
Independent Public Accountants. After an extensive search, on December 27, 1999
the Company selected Grant Thornton LLC as its Independent Public Accountants.
This appointment has been approved by the Bankruptcy Court.
On December 15, 1999 the Company was informed that Wexford had appointed
representatives of Deloitte & Touche as Administrative Receivers for
Thermatrix Limited, Wahlco Engineered Products Group Limited, Pentney
Engineering Limited, Wahlco Engineered Products Limited, Treste Plant Hire
Limited, Teddington Bellows Limited, WES Property Limited and Teddington Bellows
(Holdings) Limited.
As of December 31, 1999, the principal amount of the Note to Wexford amounted
to $5.7 million and bears interest at the Overdue rate of 16% per annum, payable
monthly in advance.
The Board of Directors of Thermatrix authorized management to seek protection
under the provisions of Chapter 11 of the US Bankruptcy Code. On December 29,
1999 Thermatrix Inc., Wahlco Environmental Systems, Inc., Wahlco, Inc., Wahlco
Engineered Products, Inc., and the Bachmann Companies, Inc. each filed a
voluntary petition in the Central District of California (Santa Ana).
The Company is currently restructuring its operations and is operating the
Company as debtors-in-possession as of the date of this filing. As a part of
this restructuring, on February 7, 2000 Mr. Frank R. Pope was elected Chairman
of the Board of Directors and Chief Executive Officer of the Company and Mr.
Daniel S. Tedone was appointed both President of the Company and a member of
Board of Directors.
On March 29, 2000,the Company announced that it had executed a Purchase and
Service Agreement with The Dow Chemical Company that establishes the terms and
conditions for designing and supplying multiple Thermatrix
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Flameless Thermal Oxidizer (FTO) Systems to various Dow plant sites over the
next several years. The Agreement has been submitted to the Bankruptcy Court for
approval and the protection afforded a post-petition contract while the Company
is in Chapter 11 status.
Dow selected the FTO technology as an alternative to incineration in
connection with a major capital investment program involving a new proprietary
recovery process and design has commenced on two separate projects for Dow,
representing the two largest projects ever undertaken by Thermatrix.
TMXI: Description of the Business
Thermatrix Inc. (TMXI), was formed as a Delaware Corporation in 1992 and is a
global industrial technology company engaged in the development, manufacture and
sale of industrial process equipment for the destruction of volatile organic
compounds and hazardous air pollutants (collectively, "VOCs"). The core
component of the TMXI 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 oxides of nitrogen ("NO\x\"), carbon
monoxide ("CO") and products of incomplete combustion ("PICs").
The air pollution control industry is structured into three discrete market
segments: stationary sources, mobile sources and indoor air quality. In the
stationary and mobile sources segments, the pollutants of concern are
particulate matter ("PM"), VOCs, No\x\ and sulfur dioxide ("SO2"). The primary
global sources of the foregoing emissions are industrial facilities, utilities
and engines. 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 core component of the TMXI system is its proprietary FTO, a highly
engineered, insulated vessel packed with ceramic material. Due to its flameless
design and consistent temperature profile, the TMXI FTO system achieves high
destruction with very low energy usage and with de minimis formation of NO\x\
and CO. In February 1998, TMXI successfully completed full-scale testing of a
new FTO design. The new development produced the following business advantages
and design features:
. A greater than 60% reduction in the size of a typical non-recuperative
flameless thermal oxidizer
. The ability to process chlorinated, sulfonated and fluorinated waste streams
without the need for expensive, exotic materials of construction to prevent
corrosion.
. The incorporation of electric-assisted preheat, which will enable offering
flameless startup and operation.
. The ability to offer an FTO for the destruction of hazardous liquids.
. The ability to offer an FTO using liquid fuels such as diesel, kerosene or
waste solvents.
During 1999, TMXI received one order totaling approximately $800,000 for the
supply of the new FTO design and is in the process of completing the delivery of
this order.
TMXI is a system supplier and has a particular focus on VOCs and NO\x\ from
industrial facilities. While the current business is 100% from the industrial
sector, opportunities involving the destruction of emissions from diesel engines
have the potential to diversify the company into a larger segment of the air
pollution control marketplace. Presently, the Company has suspended its Research
and Development effort while concentrating on restructuring and successfully
emerging from Chapter 11.
On January 13, 1999, pursuant to an Agreement and Plan of Merger dated
November 9, 1998 (the "Merger Agreement"), TMXI acquired all of the outstanding
common shares of Wahlco Environmental Systems, Inc. ("Wahlco"), a Delaware
corporation.
Wahlco, Inc., one of the two domestic operating subsidiaries of Wahlco, is
primarily an OEM directed at handling flue gas and treating the emission of PM
and NO\x\. Wahlco, Inc.'s market is approximately 70% from the utilities and
energy sector and 30% from the industrial sector. Wahlco Engineered Products,
Inc., the second domestic operating
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subsidiary of Wahlco, designs, manufactures, installs and services gas flow
isolation devices including diverters and industrial dampers of various types
and engineered expansion joints.
TMXI paid approximately $1.9 million in cash to acquire all of the common
shares and warrants of Wahlco. The Wahlco shareholders are also entitled to
receive certain Contingent Payments as defined in the Merger Agreement. The
Contingent Payments are dependent upon the resolution of certain contingencies
not relating to future operating results of the Company. The Company believes,
but can provide no assurances, that the Contingent Payments will not exceed
$2,000,000 in total and may be substantially less.
In connection with the Merger, the Company agreed to guaranty to Wexford
Management LLC ("Wexford"), as Agent for certain lenders which are affiliates of
Wexford (the "Lenders"), the obligations of Wahlco to the Lenders under an
amended and restated credit agreement dated January 30, 1998 (the "1998 Credit
Agreement") and to The Chase Manhattan Bank under a non-committed line of credit
(the "Chase Facility") and to grant to the Lenders a security interest in all
existing and future assets of the Company. On February 25, 1999 the Company
entered into the Second Amended and Restated Credit Agreement among Wahlco and
the Company, as Borrowers, and the Lenders and Wexford as Agent for the Lenders
(the "1999 Credit Agreement"). Under the Second Amended and Restated Credit
Agreement, the Company confirmed its grant to the Lenders of a security interest
in all existing and future assets of itself and its significant subsidiaries.
TMXI: Competitive Environment
The industrial VOC control equipment market is mature and highly fragmented
among a large number of competitors, primarily with suppliers of flame-based
thermal oxidation systems, carbon absorption systems and scrubbing systems, none
of whom have a significant industry-wide market share. Many of these
technologies have been in use for over thirty years, are familiar and
predictable to companies requiring VOC controls and to regulators, and are
available from and promoted by a large number of suppliers. In addition, some of
the TMXI competitors have substantially greater financial resources, operating
experience and market presence than TMXI. In addition, increased competition
could result in price reductions and reduced gross margins and could limit
TMXI's market share. TMXI believes that the major considerations in selecting
industrial VOC control systems are safety; capital, operating and maintenance
costs; high DRE; ease of permitting; process stream characteristics; unit
location; and on-line reliability and that TMXI competes favorably with respect
to these factors.
TMXI: Industrial VOC Customers
To date, TMXI has sold over 100 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 target markets, representative customers and the types of VOCs
treated by its systems:
<TABLE>
<CAPTION>
Target Markets Representative Customer VOCs Treated
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<S> <C> <C>
Petroleum/Refining............................... Chevron, Marathon Oil Hydrocarbons
Chemical/Petrochemical........................... Dow Chemical, Bayer Corporation, Chlorinated and
Manufacturing................................... Mobil Chemical Company, Formosa Fluorinated Compounds
Petrochemical Corporation, BASF,
PPG Industries, Inc., B.F. Goodrich
Pharmaceuticals Manufacturing.................... Zeneca, Warner Lambert, Pfizer Chlorinated Compounds
Chesebrough-Pond's USA Co.
Pulp and Paper Manufacturing..................... Georgia Pacific, Simpson Paper Sulfonated Compounds
Soil and Groundwater Remediation................. DOD, DOE, Thermo Remediation Chlorinated Compounds
and Hydrocarbons
</TABLE>
In 1999 one customer accounted for 80% of TMXI FTO revenue.
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TMXI: Sales and Marketing
TMXI restructured its FTO sales organization in 1997 to one of direct selling
by the process and application engineers in order to increase focus on marketing
and account management. Worldwide FTO sales are managed from Knoxville,
Tennessee.
Where cost effective, TMXI has retained some independent commissioned sales
representatives in the United States and Canada. In Asia, the Company has
agreements with Cinchem Enterprise Limited for sales representation in Taiwan
and the Peoples' Republic of China, with Toray Engineering Co. Limited and
Nittetu Chemical Engineering Limited in Japan, and with Miju Plant Companies
Limited in South Korea. All independent representatives are paid solely on
commission, which is calculated on a sliding scale as a percentage of sales
revenues. TMXI retains responsibility for pricing and terms and conditions. As
of May 1, 2000 none of these agreements had been assumed under the Chapter 11
process.
In April 1997, TMXI entered into an Exclusive Sales and Marketing Agreement
(the "White Horse Agreement") with White Horse Technologies Inc. ("White Horse")
to facilitate penetration of the air pollution control market by offering
potential customers a wider array of products. In July 1998, TMXI declared
White Horse to be in default of the White Horse Agreement and on August 25, 1998
suspended any further commercial dealings with the firm. In October 1998, TMXI
filed a claim against White Horse for damages related to the default and White
Horse filed a bankruptcy petition in November 1998. A settlement was reached in
this case after Thermatrix filed for Chapter 11 protection. The Company has
provided in full against all White Horse investments and receivables.
TMXI: Engineering and Manufacturing
The Engineering and Project Management groups for the FTO business are located
in Knoxville, Tennessee. These engineers utilize state-of-the-art, PC-based,
computer-aided engineering and database management tools, including three-
dimensional design tools.
The Company manufactures its FTO systems to customer order. Qualified
subcontractors specializing in the manufacture of the particular component carry
out component fabrication, adhering to and carrying formal certification with
national and international codes and standards for electrical and mechanical
construction. The Company's FTO 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 internal
fabrication capabilities or qualified subcontractors throughout the United
States and overseas and is not dependent on any one or subset of these
subcontractors. Throughout the delivery cycle, the manufacturing process is
managed to conform to ISO 9001.
TMXI: Research and Development
The Company believes that its continued commitment to developing new
applications and refining its FTO technology is critical to remaining
competitive in the industry. During 1999, the Company focused its technical FTO
resources on product development in the diesel emissions area while continuing
to make product improvements in its core business of industrial air pollution
control. The successful construction and testing of four diesel prototypes in
1998 led the Company to conclude that its FTO technology could efficiently
destroy diesel particulate and odors. The Company has suspended its Research and
Development effort while concentrating on restructuring and successfully
emerging from Chapter 11.
Wahlco, Inc.: Description of the Business
Wahlco, Inc. designs, manufactures, and sells combined cycle gas turbine
products, air pollution control equipment, and related products and services to
electric utilities, independent power producers, co-generation plants, and
industrial manufacturers worldwide to reduce and control air pollution. Wahlco,
Inc.'s products and
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services include flue gas conditioning systems, NO\x\ reduction systems and
industrial electric heaters and thermocouples.
Wahlco, Inc.: Competitive Environment
Continued pressure on utilities to use lower cost fuel presents
opportunities for flue gas conditioning sales in lieu of customers increasing
the size of existing precipitator particulate collectors. Domestic utilities
are expected to purchase between 200-400 Flue Gas Conditioning (FGC) units over
the next 5-10 years. At an average of $500,000 per unit, the market size is as
much as $100-200 million, or approximately $10 million per year. The EPA and
many states have increased requirements for control of nitrogen of oxide
emissions from all combustion sources. Selective Catalytic (SCR) and Selective
Non Catalytic Reduction Systems (SNCR) systems which use ammonia or urea to
control NOx are in increasing demand as utilities modify sites to meet the
rules. Wahlco has positioned itself technically to provide both types of
systems. In addition, Wahlco, Inc. offers a urea to ammonia conversion (U2A)
system for clients in metropolitan areas needing to avoid the use of anhydrous
ammonia for safety reasons. This U2A technology is licensed through EC&C in
California and is protected through patent filings in the U.S and Europe.
Wahlco, Inc. competes primarily on its engineering, scientific and
technological expertise. Since 1990, the domestic FGC business of Wahlco Inc.
has experienced increased price competition as domestic utilities attempted to
reduce the overall costs of compliance with state and federal regulations.
Several other domestic manufacturers have been successful in securing some FGC
contracts.
As a result of price competition, Wahlco, Inc. has experienced a decline in
market share and in overall FGC margins. Wahlco, Inc. has confronted competitive
pricing pressures by reducing certain engineering and manufacturing costs and by
reconfiguring various products to better meet customer demand. Based upon
internal market information, Wahlco, Inc. believes that it still continues to be
the leading provider for FGC systems in the United States and maintains a strong
market position internationally.
Since there are several alternatives to FGC systems, Wahlco, Inc. faces
substantial competition from companies providing devices that reduce particulate
emissions generally without the need for FGC systems. Examples of such devices
are scrubbers, certain Electrostatic Precipitators, and baghouses. Numerous
factors may be considered by an electric utility in determining whether to
install FGC systems or an alternative technology to achieve compliance. These
include the amount of initial capital expenditures, issues and policies related
to fuel sources, related on-going operating and maintenance costs, availability
and associated costs of low and/or high sulfur coal, the particular emission
standards applicable to the public utility, and the value of any credits or
allowances which may be available.
One of the largest factors affecting the market and its competitive nature has
been the electric utilities' strategy to postpone adding FGC and other
compliance equipment by blending coals. Electric utilities have mixed high and
low sulfur coal or burned low sulfur coal containing enough sulfur content to
reduce sulfur emissions without impairing the effectiveness of the particulate
control devices.
Wahlco, Inc. faces substantial competition with respect to its thermocouple
and electrical heater products (HTC) and serves a relatively small portion of
the total market. In addition to a few large companies that market such products
nationally, there are also several regional suppliers that compete with Wahlco,
Inc. In establishing a market niche, Wahlco, Inc. targets customers requiring
specially engineered and customized products.
Wahlco, Inc.: Customers
Wahlco, Inc. markets primarily to utilities that comprise almost 80% of its
business. Engineering firms account for almost 10% percent and air pollution
control vendors and other contractors comprise the remaining customers.
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<TABLE>
<CAPTION>
Target Markets Representative Customer Product/Application
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<S> <C> <C>
Domestic Utility American Electric Power FGC, Coal Fired Power Boiler
EME Homer City, PA FGC, Coal Fired Power Boiler
Hitachi FGC, Coal Fired Power Boiler
International Utility Edison Mission Energy FGC, Coal Fired Power Boiler
Baltec (for Wallerawang) FGC, Coal Fired Power Boiler
Industrial Equipment Solar Turbines Thermocouples
Industrial Power ERI for St Agnes DeNOx System
Combined Cycle Gas Turbines Research-Cottrell for Vogt NeM Ammonia System for DeNOx
Commercial California Aquarium Immersion Heaters
</TABLE>
In 1999, three customers accounted for 9%, 15% and 18% respectively of Wahlco
revenue.
Wahlco, Inc.: Sales and Marketing
Wahlco, Inc. utilizes both direct sales employees as well as a nationwide
system of 23 commissioned manufacturer's representatives who sell primarily to
utilities and municipal power plants in the United States and Canada. Wahlco,
Inc. works with 18 foreign representatives for international sales. Larger
customer accounts are usually managed directly by Wahlco, Inc. senior sales
staff. As of the date of this filing none of the sales representative
agreements have been assumed by Wahlco, Inc. under the Chapter 11 process.
Wahlco, Inc.: Engineering and Manufacturing
Wahlco, Inc. utilizes project engineers from the time of sale through all
phases of execution and final acceptance by the customer. Project schedule,
budget, engineering and manufacturing execution are all managed by the project
engineer to assure highest quality and shortest turnaround time in project
execution. The process equipment is purchased from outside vendors and typically
mounted on skids. Fabrication and assembly is performed in our facilities in
Santa Ana, CA and Lewiston, Maine, as well as outside bids solicited for certain
portions of the work to assure lowest cost execution and fastest execution.
Wahlco, Inc. engineers travel to the customer's site on a per diem basis to
provide technical support and commissioning services after the equipment is
installed.
Wahlco, Inc.: Research and Development
Wahlco, Inc. has focused its recent R&D efforts to continuing monitoring of
its sulfur prill feed system for FGC systems. Wahlco, Inc. is successfully
testing a screw feed system of its own design for customers requiring an
alternative to liquid sulfur feed flue gas conditioning.
The recent introduction of the U2A product line has been made possible through
an alliance agreement with EC&C, who completed most of the preliminary research
and development work; and Hamon Research-Cottrell, who is providing sales
support. Wahlco, Inc. provides process engineering and fabrication. At the
present time, Wahlco, Inc. is jointly proposing with Hamon Research-Cottrell for
the installation of a full-scale demonstration plant to several U.S. customers.
Wahlco Engineered Products, Inc.: Description of Business
Wahlco Engineered Products, Inc. (WEP) designs, manufactures, installs and
services gas flow isolation devices including diverter and industrial dampers of
various types and engineered expansion joints. WEP markets and sells on a global
basis with the engineering and manufacturing facilities located in Lewiston,
Maine.
Wahlco Engineered Products, Inc.: Competitive Environment
WEP faces significant competition in the sale of its dampers, diverters, and
expansion joints from manufacturers located in the US and Europe. Although these
products are differentiated by design, sophistication, reliability, and
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customer service, many purchasing decisions are made primarily on the basis of
price and delivery. WEP competes on the basis of the benefits of its products
robustness of design and "know how" as a result of extensive experience with
units proven in operation and believes it competes favorably on delivery and
price.
Wahlco Engineered Products, Inc.: Customers
WEP sells its products to a broad range of industrial markets including
petrochemical, metallurgical, paper, and power generation. The Company sells to
both the final user (owner) and to engineering contractors. In 1999, one
customer accounted for 13.5% of revenue and another accounted for 10.6% of
revenue.
Wahlco Engineered Products, Inc.: Sales and Marketing
WEP markets on a world-wide basis using commissioned independent sales
representative organizations. At the end of 1999, WEP was represented by
independent representative organizations with offices in Asia (9 locations),
Europe and the Middle East (11 locations), South America (3 locations), and
North America (24 locations). As of May 1, 2000, no sales representative
agreements have been assumed under the Chapter 11 process. The independent sales
representatives are managed by area sales managers located in Europe and the US.
Proposals are prepared by sales engineers located in Lewiston, Maine making
extensive use of software based design and estimating tools.
Wahlco Engineered Products, Inc.: Engineering and Manufacturing
WEP maintains an ISO9001 and ASME certified manufacturing facility and
engineering center in Lewiston Maine. While the Lewiston facility is fully
capable of manufacturing the entire product range, at certain times, for reasons
of capacity limitation or logistical advantage, fabrication is outsourced. An
engineering and sales staff fully capable of designing the entire product line
is located in Lewiston with a comprehensive range of engineering capabilities
including computational fluid dynamics and finite element analysis. WEP is
represented on the technical board of the Expansion Joint Manufacturers
Association.
Intellectual Property
As of May 1, 2000, TMXI owned 17 United States and 34 international patents
and had a further 8 United States and 21 international patent applications
pending relating to its thermal treatment technology. All issued United States
patents relating to its thermal treatment expire during the period between July,
2005 and January, 2018.
Although enhanced by its patent rights Wahlco, Inc. believes its ability to
compete effectively in the FGC market depends primarily upon its engineering,
scientific and technological expertise and its reputation for successful
installations. This includes a database of information relating to coal and ash
analysis and precipitator size and operating conditions. In addition, Wahlco,
Inc. has competed successfully in the sale of its sulfur dioxide-based and
ammonia conditioning systems, which are not protected by patents, and in the
sale of its sulfur-burning FGC systems in foreign countries in which it does not
have significant patent protection.
WEP does not view its business as dependent upon any single or group of
patents. WEP seeks to protect its know how and trade secrets through the use of
confidentiality and proprietary information agreements. WEP markets its products
under the trade names of Wahlco Engineered Products and Wahlco-Metroflex.
The Company's 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.
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
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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.
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 FTO 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. The Company is continuing to expand this
database as new systems are installed.
TMXI has 4 issued United States trademarks and 9 issued international
trademarks. The Company also has an additional 1 United States and 4
international trademark applications pending for certain of the Company's
tradenames.
Employees
As of May 1, 2000 the Company had 173 full-time employees. 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 are covered by collective bargaining agreements.
Customers
One customer accounted for approximately 17% of the Company's consolidated
revenues in 1999.
Raw Materials
The materials used in the production of the Company's product lines are
generally available through a number of sources, and the Company does not
anticipate difficulty in obtaining the materials and components used in its
operations.
Risk Factors
Outcome of Chapter 11 Process. The U.S. Trustee has filed a motion to appoint
a Chapter 11 Trustee. In the event that such a Trustee is appointed the company
would cease to be a debtor-in-possession and it is uncertain whether current
management would continue to participate in the business and financial affairs
of the company. 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 the creditors and equity security holders 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.
Operating Losses and Accumulated Deficit; Uncertainty of Future Profitability.
The Company had a net loss of approximately $17.5 million in 1999 and an
accumulated equity deficit of approximately $6.7 million at December 31, 1999.
Since TMXI restructured its operations in 1992, it has financed its operations
primarily through private placements of equity securities totaling approximately
$26.3 million, an initial public offering of its common stock with net proceeds
totaling approximately $22.1 million, and an issuance of Series E redeemable
preferred stock, with net proceeds totaling approximately $5.6 million. The
Company does not expect to be profitable unless and until sales of its systems
generate sufficient revenues with an appropriate gross margin to fund its
operations. There can be no assurance that the Company will achieve such
revenues or margins.
10
<PAGE>
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 the size and timing of
individual orders, the timing and amount of project change orders, customer
delays, order cancellations, general economic and industry conditions, the
amount of first-time engineering needed, the introduction of new products or
services by the Company or its competitors or the introduction of the Company's
products to new markets, changes in the levels of operating expenses, including
development costs, and the amount and timing of other costs relating to the
expansion of the Company's operations.
Furthermore, the purchase of the Company's products, particularly for major
projects, may involve a significant commitment of capital, with the attendant
delays frequently associated with large capital expenditures and authorization
procedures within its customers' organization. For these and other reasons, the
sales cycle for the Company's products can be lengthy (up to two years) and
subject to a number of significant risks over which the Company has little or no
control, including customer budgetary constraints. The Company historically has
operated with little backlog because most customer orders are placed with
relatively short lead times, usually from four to thirty 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. 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.
Ability to Compete Against Lower Cost Technologies. To date, FTO systems have
been installed in an increasing 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. The
Company's ability to compete will depend upon the Company's ability to persuade
potential customers to adopt its FTO technology in place of certain, more
established, competing technologies, including flame-based destruction and
carbon adsorption systems. The failure of the Company to persuade a significant
number of potential customers to adopt its FTO technology would have a material
adverse effect on the growth of the Company's business, results of operations
and financial condition.
Sensitivity to Major Projects. In 1999, 48 orders for four customers accounted
for 37% of the Company's total revenues. In 1998, three projects for two
companies accounted for 62% of the Company's FTO revenues and in 1997 two
projects accounted for 38% of the Company's FTO revenues, Although the Company
is expanding its customers and installations, the average size and dollar volume
of each FTO installation has been increasing. The Company anticipates the size
of turnkey projects in 2000 will continue to range from $1 million to $4
million. 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.
Risks Associated with International Operations and Sales. In 1999, sales to
international customers increased to 19%, up from 2% in 1998. These percentages
do not include the impact of sales that occurred thorough the now discontinued
UK operations. The Company's overseas growth has placed, and could continue to
place, a significant strain on its managerial, operational and financial
resources.
Additionally, the Company's business, results of operations and financial
condition may be materially adversely affected by fluctuations in currency
exchange rates and duty rates, and therefore its ability to maintain or increase
prices due to competition. The Company denominates international sales either in
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.
11
<PAGE>
Risks Associated with Fixed Price Contracts. In the past, a majority of the
Company's FTO contracts were performed using "fixed-price" rather than "cost-
plus" terms. Under fixed-price terms, the Company bears the full risk of cost
overruns. 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, in some cases 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. While the Company is moving
away from fixed price contracts there can be no assurance that all new customers
will be willing to enter cost plus contracts.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon its executive officers 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 are
subject to a term employment contract. The Company also believes that its future
success will depend in large part upon its ability to attract and retain
additional highly skilled personnel. The availability of such personnel is
limited, and the fact the Company is in Chapter 11 will make recruitment and
rentention after recruiting a difficult proposition.
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 quality, 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.
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 or the customer operates the facility outside its
design parameters, 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. The Company might then be held liable
for damages resulting from such malfunction or delay beyond its control. Any of
these factors could have a material adverse effect on the Company's business,
results of operations and financial condition.
Uncertain Regulatory Environment. 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. The level of
enforcement activities by environmental protection agencies and changes in laws
and regulations will affect demand for the Company's systems. To the extent that
the burden of complying with such environmental laws and regulations may be
eased, the demand for the Company's systems could be materially adversely
affected.
Although the Company believes that its FTO technology does not come under the
U.S. EPA's current definitions of incineration, there can be no assurance that
the U.S. EPA will not classify the Company's FTO technology as an incineration
technology in the future. 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. 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. The California Department of Toxic
Substances Control has certified the Company's FTO technology. This
certification is not available to incineration-based technologies.
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
12
<PAGE>
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.
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 that 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.
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 customers'
employees in the operation of the systems, it could be exposed to possible
liability for investigation and clean-up costs under such environmental laws.
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 directly 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 the Diesel Engine Emission Control Development Program.
The engineering challenges involved in treating diesel emissions are different
in a number of respects from the conditions in which the Company's system has
been used in the past, and there can be no assurance that the Company's
technology will prove successful in this development area. Moreover, the
Company's extensive database of test results that it uses to design systems for
industrial installations may not be relevant to diesel engine emission control.
Although pilot test results to date have been positive, the Company will 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.
Performance Bonds. Wahlco has experienced operating losses for each of the
past six years, and losses continued in 1999. For 1998, losses totaled
approximately $6.4 million. In 1996 and 1997, the independent public accountants
of Wahlco qualified their report on the company's financial statements
expressing the substantial doubt as to the company's ability to continue as a
going concern. One result of these continued operating losses and the going
concern opinion is that customers have required letters of credit or performance
bonds prior to placing orders. There can be no guarantee that the Company will
be able to secure such credit instruments sufficient to meet customer
requirements and this can have a serious impact on winning new orders.
Potential Puerto Rican Tax Liability. The Company has determined that there
may be a tax liability associated with Wahlco's past repatriation of capital
from the Commonwealth of Puerto Rico. Wahlco has accrued $1.3 million for this
potential liability. The Company is attempting to resolve this potential tax
liability and believes it will be able to settle this matter without additional
commitment above what is currently accrued.
13
<PAGE>
Item 2. Properties
The Company leases approximately 15,000 square feet of office space in
Knoxville, TN, under a lease that expires July 31, 2004. This site houses the
Corporate offices and the FTO business operations.
The Company leases an approximately 46,000 square foot manufacturing and
office facility in Santa Ana, California under a ten-year lease expiring on July
31, 2001. This site houses the Wahlco, Inc. operations.
The Company sub-leases approximately 4,464 square feet of office space in San
Jose, California under a 27-month sublease terminating on October 31, 2000.
This space is currently sublet for the remaining life of the sub-lease.
The Company leases approximately 5,000 square feet of office space in Hull,
England under a six-year lease expiring January 27, 2003.
The Company had leased approximately 1,000 square feet of office space in
London, England under a five-year lease that expired March 24, 1999.
The Company owns a 13.27 acre site with a 50,864 square foot manufacturing
plant and offices in Lewiston Maine. This site houses the operations of Wahlco
Engineered Products, Inc.
The Company also owns a 32,000 square foot site with a 5,233 square foot
office and storage building in Thornton, Illinois. This property is excess to
the Company's needs and the Company has accepted and the Bankruptcy Court has
approved, an offer to purchase this site for $225,000, net. The sale is
anticipated to be completed by the end of May 2000.
As of May 1, 2000 the Company had not assumed any of the existing leases.
Item 3. Legal Proceedings
In addition to the Chapter 11 process, 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
During the fourth quarter of the Company's fiscal year, ending December 31,
1999 the following matters were submitted to and approved by a vote of the
shareholders:
. The election of two (2) Class III Directors (Mr. Pope and Mr. Strock) to
serve for a three year term or until their successors are elected and qualified.
. The amendment of the Company's 1996 Stock Plan to increase the number of
shares of Common Stock reserved thereunder by 300,000 shares.
. The amendment of the Company's 1996 Directors Option Plan to increase the
number of shares of Common Stock reserved thereunder by 20,000 shares.
. The amendment of the Company's Employee Stock Purchase Plan to increase the
number of shares of Common Stock reserved thereunder by 60,000 shares.
A fifth proposal was presented to the stockholders regarding the appointment
of Arthur Andersen LLC as the independent public accountants of the Company but
the resignation of Arthur Andersen LLC on September 30, 1999 forced the Company
to withdraw the Proposal at the Annual Shareholders meeting.
14
<PAGE>
- --------------------------------------------------------------------------------
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of the Company is traded on the OTC Bulletin Board under the
symbol "TMXIE." The following table sets forth the high and low sales prices, in
U.S. dollars, of the common stock:
Period High Low
- ------ --------- ---------
First Quarter 1997................................. $9.375 $3.375
Second Quarter 1997................................ 5.750 3.000
Third Quarter 1997................................. 3.250 1.875
Fourth Quarter 1997................................ 3.250 1.125
First Quarter 1998................................. 3.062 1.000
Second Quarter 1998................................ 6.000 2.500
Third Quarter 1998................................. 5.250 2.313
Fourth Quarter 1998................................ 4.500 2.375
First Quarter 1999................................. 3.937 2.750
Second Quarter 1999................................ 4.375 2.750
Third Quarter 1999................................. 4.625 1.625
Fourth Quarter 1999................................ 2.625 1.000
As of May 1, 2000 there were over 1,000 holders of record of the Company's
Common Stock. The Company has never declared or paid dividends on its stock. The
Company intends to utilize any retained earnings to finance the growth and
development of its business and does not anticipate paying dividends in the
foreseeable future.
15
<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 five years in the period
ended December 31, 1999 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 and the balance sheet data for the years ended December 31, 1995,
1996, 1997 and 1998 are derived from audited financial statements not included
in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues.................................................... $ 21,700 $ 5,882 $ 6,723 $11,611 $ 6,160
Cost of revenues............................................ 17,758 5,272 7,583 10,009 5,743
-------- ------- ------- ------- -------
Gross margin.............................................. 3,942 610 (860) 1,602 417
Research and development.................................... 949 1,658 1,130 748 1,084
Selling, general and administrative......................... 9,356 5,904 6,372 5,144 4,233
Impairment Loss............................................. 5,766 - - - -
-------- ------- ------- ------- -------
Loss from operations........................................ (12,129) (6,952) (8,362) (4,290) (4,900)
Interest income............................................. 72 382 693 543 231
Interest expense and other financing costs.................. (2,279) (12) (23) (48) -
Provision for income taxes.................................. 66 66 66 63 31
Discontinued operations..................................... (3,090) (1,225) (1,882) (1,018) (494)
-------- ------- ------- ------- -------
Net Loss..................................................... (17,492) (7,873) (9,640) (4,876) (5,194)
-------- ------- ------- ------- -------
Accretion of redeemable preferred warrants, costs, and
beneficial conversion feature.............................. (1,033) - - - -
Accretion of Series E Stock liquidation premium and
dividend requirements...................................... (2,040) - - - -
Net loss attributable to common stock........................ $(20,565) $(7,873) $(9,640) $(4,876) $(5,194)
======== ======= ======= ======= =======
Basic net loss per share(1).................................. $ (2.65) $ (1.03) $ (1.28) $ (1.22) $(65.75)
======== ======= ======= ------- =======
Basic weighted average common shares......................... 7,764 7,677 7,548 3,994 79
======== ======= ======= ======= =======
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments............ $ 922 $ 1,804 $ 7,450 $16,191 $ 910
Total assets................................................. 15,225 6,780 13,445 22,714 3,971
Redeemable convertible preferred stock....................... - - - - 11,321
Stockholders' equity (deficit)............................... (10,740) 4,246 11,949 21,398 (9,345)
</TABLE>
(1) See Note D of the Notes to Consolidated Financial Statements--Summary of
Significant Accounting Policies Basic Net Loss Per Share.
16
<PAGE>
THERMATRIX INC.
SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1999
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales ........................................................... $ 5,758 $ 4,266 $ 5,491 $ 6,185
Gross Margin ........................................................ 1,060 1,010 567 1,305
Net Loss ............................................................ (1,956) (1,272) (1,173) (16,164)
Basic Net Loss Per Share ............................................ $ (0.25) $ (0.16) $ (0.15) $ (2.09)
Year ended December 31, 1998
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Net Sales ........................................................... $ 1,362 $ 1,335 $ 1,393 $ 1,792
Gross Margin ........................................................ 70 356 211 (27)
Net Loss ............................................................ (1,241) (1,537) (1,306) (3,789)
Basic Net Loss Per Share ............................................ $ (0.16) $ (0.20) $ (0.17) $ (0.50)
Year ended December 31, 1997
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Net Sales ........................................................... $ 1,056 $ 2,213 $ 2,291 $ 1,163
Gross Margin ........................................................ (216) (104) 13 (553)
Net Loss ............................................................ (1,952) (2,291) (2,050) (3,347)
Basic Net Loss Per Share ............................................ $ (0.26) $ (0.30) $ (0.27) $ (0.45)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Thermatrix is an industrial company primarily serving the global market of
continuously operating facilities for a broad range of industries that include
refining, chemical, steel, pharmaceutical, pulp and paper, electric utility, co-
generation, and industrial manufacturing. Thermatrix provides a wide variety of
air pollution control solutions, including its unique flameless thermal
oxidation technology, as well as a wide range of engineered products and
services to meet the needs of its clients.
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
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
17
<PAGE>
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. 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. Orders for large systems often have tight delivery schedules
and the customer will often attempt to negotiate penalties for late delivery
and/or the ability to assess liquidated damages for lost production if the
delivery schedule is not met. 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.
Results of Operations
Fiscal years Ended December 31, 1999 and 1998
Revenues. Revenues increased 269% to $21.7 million in 1999 from $5.9 million
in 1998. Revenues associated with the purchase of Wahlco account for a
substantial portion of this increase. Revenues and related costs of revenues
associated with the discontinued UK operations have been removed from 1998
amounts and are now shown as Discontinued operations in the Consolidated
Statements of Operations. A decrease in FTO revenues of $1.3 million, partially
offset the increase from the addition of the Wahlco companies.
Gross Margin. The Company had a gross margin of $3.9 million in 1999 versus a
gross margin of $610,000 in 1998. As with the increase in revenues the purchase
of Wahlco accounted for a substantial portion of this increase. The increase was
also attributable to lower cost of revenues due mainly to lower warranty
expenses in 1999 vs. 1998.
The Company anticipates that gross margins will continue to be adversely
affected by numerous factors including initial systems addressing new industries
or new applications, larger, more complex systems and the extent and timing of
change orders. New industry and/or fume characteristics require the Company to
expend significantly greater engineering resources in process and system design.
Also such new applications are usually sold at lower initial gross margins as
the customer and the Company make investments in the development effort. As
systems become 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 customer accepts the implemented change order
or acceptance is probable. Depending upon the magnitude of the change order,
gross margins can also be affected.
Research and Development. Research and development expenses include
applications engineering expenses not chargeable to specific customer projects,
personnel costs related to patent activities, and the expenses incurred in
connection with the Company's development programs to evaluate the feasibility
of applying the Company's technology to markets other than industrial VOC
emissions control. Research and development expenses during 1999 and 1998 were
$949,000 and $1.7 million, respectively. During 1999 the Company received Funds
on a government grant related to research and development of $469,000 which
caused a reduction in 1999 costs. This grant was offset by the settlement of a
lawsuit which resulted in additional research and development expense of
$185,000.
18
<PAGE>
During 2000 the Company suspended its Research and Development efforts while
concentrating on restructuring and successfully emerging from Chapter 11.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately 58% to $9.4 million in 1999 as compared with
$5.9 million in 1998. This increase was substantially due to the additional
selling, general and administrative expenses of the acquired Wahlco companies
which was partially offset by a reduction of $802,000 in TMXI selling, general
and administrative costs. This $802,000 reduction was mainly caused by a
reduction of bad debt expense in 1999, versus 1998, of $1.6 million (see the
selling, general and administrative 1998 versus 1997 comparison for details) and
reductions in selling expenses of $443,000 being partially offset by increases
of $391,000 in professional fees and $446,000 in liability insurance. The
increased professional fees and liability insurance were mainly due to the
acquisition of the Wahlco companies.
Interest Expense. Net interest expense increased by $2.6 million with $2.2
million of net interest expense in 1999 as compared to net interest income in
1998 of $370,000. The addition of interest on the note to Wexford, related to
the acquisition of Wahlco accounted for the substantial majority of this
increase. Additionally, interest income decreased by $285,000 primarily
resulting from a decrease in the amount available for investment as investments
were liquidated during 1998 for working capital purposes.
Income Taxes. As a result of recurring losses, the only income taxes provided
for relate to certain state taxes not fully offset by net operating losses
Fiscal years Ended December 31, 1998 and 1997
Revenues. Revenues decreased $841,000 or 12.5% from $6.7 million in 1997 to
$5.9 million in 1998. The decrease in revenues were attributed to managements'
efforts being expended on international operations through the UK operations
that were discontinued in 1999 and are no longer reported as revenues in the
Consolidated Statements of Operations.
Gross Margin. The Company had a gross margin contribution of $610,000 in
1998 versus a gross margin loss of $860,000 in 1997. The increase in gross
margin was primarily attributable to higher revenues, which were sufficient to
absorb the fixed and semi-fixed costs of engineering and operations, and to a
lesser extent, reduction in costs from repeat sales of systems for established
applications.
Research and Development. Research and development expenses include
applications engineering expenses not chargeable to specific customer projects,
personnel costs related to patent activities, and the expenses incurred in
connection with the Company's development programs to evaluate the feasibility
of applying the Company's technology to markets other than industrial VOC
emissions control. Research and development expenses during 1998 and 1997 were
$1.7 million and $1.1 million, respectively. The increase in research and
development expenses in 1998 is primarily attributable to expenditures for the
development and testing of a prototype system utilizing the Company's patented
FTO technology for the treatment of diesel engine emissions from mobile sources,
the development of a prototype of a new FTO configuration, and PADRE(R) product
development.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 7% to $5.9 million in 1998 as compared with $6.4 million in
1997. The 1998 total selling, general and administrative expenses reflected $1.6
million recorded to write off accounts receivable amounts incurred in connection
with certain project change orders and contracts, the majority of which relate
to prior years, that had not been settled as of December 31, 1998, including
amounts due from White Horse pursuant to the Exclusive Sales and Marketing
Agreement. The Company is in various stages of negotiations and litigation with
the parties to the respective contracts and will continue to pursue collection
of such balances, including further legal action when necessary. Historically,
the Company has been successful in recovering substantial portions of the
charges incurred with respect to change orders. However, given the time from the
when the cost is incurred, the Company felt it was prudent to write off the
amounts during 1998. The Company also included an amount in the write-off
related to a reasonable estimate of the legal costs to be incurred to collect
the amounts in dispute. Reductions of selling and administrative staff caused a
decrease of approximately $779,000 in 1998 versus 1997 selling, general and
administrative expenses. Additionally there was a reduction of $147,000 in sales
commissions during 1998. Selling, general and administrative expenses in 1997
included non-recurring charges of $891,000 of which $472,000 were related to
restructuring charges and $391,000 were related to the write-off of the
Company's minority interest in the Formatrix, LLC joint venture with Thermo-
Chem.
19
<PAGE>
Interest Income. Net Interest income decreased to $370,000 in 1998 from
$670,000 in 1997. The decrease primarily resulted from a decrease in the amount
available for investment as investments were liquidated and used throughout 1998
for working capital purposes.
Income Taxes. As a result of recurring losses, the only income taxes
provided for relate to certain state taxes not fully offset by net operating
losses.
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. In June 1999 the Company completed a private
placement of $6 million of Series E convertible, redeemable preferred shares at
$1,000 per share. In 1999, 1998, 1997 and 1996, the Company used the proceeds
of these prior equity issues to finance its cash used in operating activities of
$4.5 million, $4.1 million, $7.7 million and $7.9 million, respectively.
At December 31, 1999, the Company had an accumulated deficit in equity of $6.7
million and cash and cash equivalents aggregating $922,000. In addition, the
Company incurred a net loss during 1999 of $17.5 million.
On January 13, 1999, the Company paid approximately $1.9 million to acquire
all of the common shares and warrants of Wahlco. In addition to the cash
payments, the Company agreed at the time to guarantee certain Wahlco debts owed
to, or guaranteed by, Wexford and several lenders affiliated with Wexford and
granted a security interest in all existing and future assets to Wexford and the
lenders. In addition, under certain conditions, the Company may be required to
make an additional payment of up to $2 million to Wahlco's former shareholders.
On February 25, 1999 the Company entered into the Second Amended and Restated
Credit Agreement among Wahlco and the Company, as Borrowers, and certain Wexford
affiliates as Lenders and Wexford as Agent for the Lenders (the "1999 Credit
Agreement"). As of December 31, 1999, the principal due on the Note was $5.7
million and bears interest at the Overdue rate of 16% per annum, payable monthly
in advance.
On June 30, 1999 the Company closed a private placement of 6,000 shares of
Series E 8% Convertible Preferred Stock, (the "Series E Stock") at a purchase
price of $1,000 per share in the aggregate amount of $6,000,000. The two largest
existing shareholders of the Company's Common Stock ("Common Stock") combined to
purchase $3 million of the Series E Stock and a single new investor purchased
the remainder (the "Investors"). The Series E Stock is convertible into Common
Stock on certain terms and at a conversion price to be determined at the time of
conversion in accordance with the Company's Certificate of Designation. The
issuance of the Series E Stock was made pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, provided by
Section 4(2) thereof. On July 9, 1999, the Nasdaq National Market required 10-
day notification period to shareholders was completed and the Company received
net proceeds of approximately $5.6 million after costs of issuance totaling
approximately $400,000.
Pursuant to the provisions of the Certificate of Designation of the Series E
Stock, if the Company's common stock is delisted from the Nasdaq Stock Market
and remains delisted for 45 consecutive days, unconverted shares of Series E
Stock may be converted at the sole option of the holder at a conversion price
per share equal to 65% of the Market Price (as defined in the Certificate of
Designation) of the common stock.
Pursuant to a Letter Agreement dated June 30, 1999, between the Shaar Fund
Ltd. and the Company, the Shaar Fund currently has the option to require the
Company to redeem for cash all of the shares of Series E Stock held by the Shaar
Fund at the Optional Redemption Price, as defined in the Certificate of
Designation.
The Company is authorized to issue up to 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. As of December 31, 1999 12,000 shares of Series E stock had been
authorized as described in Note J-2 to the Consolidated Financial Statements.
20
<PAGE>
In February 1997, the Company entered into an Amended and Restated Loan and
Security Agreement (the "1997 Agreement") which provided for a $4,000,000
accounts receivable line of credit and a $2,500,000 acquisition facility. In
January 1998, the Company entered into an Amended and Restated Loan and Security
Agreement (the "1998 Agreement") which replaced the 1997 Agreement and which
provided for a $4,000,000 accounts receivable line of credit with a $2,000,000
letter of credit sub-limit. The 1998 Agreement was renegotiated in March 1998
when certain financial covenants were amended. No cash advances were ever made
under either the 1997 Agreement or the 1998 Agreement. The 1998 Agreement was
terminated on January 20, 1999 and the stand-by letter of credit in the amount
of $280,000 that had been issued under the sub-facility was collateralized with
cash at that time.
Management is currently evaluating the Company's alternatives to fund its
fiscal 2000 cash requirements. Such alternatives include, among other things,
consideration of (i) increased revenues and positive gross margins, (ii)
reduction of general and administrative costs, (iii) timely collection of
accounts receivable (iv) consolidation of facilities and operations, and, (v)
divesting a portion or portions of the Company's business. These strategies are
dependent upon the Company's ability to meet its forecasts, to develop increased
sales and generate positive gross margins, to achieve the timely collection of
amounts due to the Company and to identify parties willing and able to purchase
a portion or portions of the Company's business. There can be no assurances as
to the timing or ultimate outcome of any of these alternatives. Additionally,
any alternative selected will require the approval of the Bankruptcy Court.
Year 2000 Compliance
The Year 2000 issue arises from computer programs that use two digits rather
than four to define the applicable year. Such computer programs may cause
computer systems to recognize a date using "00" as the calendar year 1900 rather
than the calendar year 2000. Systems that do not properly recognize such
information could generate erroneous dates or cause a system to fail.
The Company conducted a review of its products and internal computer
systems to identify the systems that could be affected by the Year 2000 issue.
Remedial actions were taken to upgrade those systems identified as potentially
affected, and expenditures to complete these actions were not material. One
accounting system was not upgraded due to the cost involved; however, a
satisfactory solution to this difficulty has been implemented. No significant
Year 2000 problems have been encountered either internally or with key vendors.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information regarding quantitative and qualitative disclosures about market
risks is included 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.
Item 8. Consolidated Financial Statements and Supplementary Data
See pages 29 through 57.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On September 30, 1999 Arthur Andersen LLP resigned as the Company's
Independent Public Accountants. Arthur Andersen LLP had qualified the Company's
1998 financial results with a "going concern" opinion. Additionally, Arthur
Andersen had been the independent Public Accountants of Wahlco and had so
qualified their 1996 and 1997 financial results. The resignation was not the
result of a disagreement of any sort between the Company and Arthur Andersen
LLP.
On December 27, 1999 Grant Thornton LLP agreed to become the Company's
Independent Public Accountants and the motion for their employment was approved
by the Bankruptcy Court on April 24, 2000.
21
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
As of December 31, 1999, 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 ................. 62 Chairman, President and Chief Executive Officer
Daniel S. Tedone .................. 51 Executive Vice President and Chief Financial Officer
Edward E. Greene .................. 51 Vice President, Administration and Secretary
James M. Clark...................... 50 Executive VP and General Manager, Wahlco Air Systems
John Delk ......................... 51 Executive VP and General Manager, Diesel Systems
</TABLE>
John T. Schofield. On February 7, 2000 Mr. Schofield resigned as a Director,
Chairman of the Board, President and Chief Executive Officer of the Company and
on February 29, 2000 he left the Company's employment. Prior to his
resignation, Mr. Schofield had been President and Chief Executive Officer of the
Company since April 1992, and Chairman of the Board since December 1993.
Daniel S. Tedone. On February 7, 2000 Mr. Tedone was appointed to be
President of the Company and a member of the Board of Directors. Mr. Tedone
joined the Company in April 1998 as Executive Vice President and assumed
responsibility for the operation of the Company's core VOC business. In June
1998 Mr. Tedone assumed the additional responsibilities of Chief Financial
Officer. From 1992, Mr. Tedone was CEO of Pollution Control Technologies Inc.,
which was acquired by TRC Companies, Inc. in 1995 and where he served as
President and CEO of TRC Process Engineering, Inc. from 1995 until joining
Thermatrix. Previously, Mr. Tedone served as President of Vericon Corporation
and held positions at Connecticut Resources Recovery Authority and Hartford
National Bank & Trust Company. Mr. Tedone holds a BA and an MBA in Finance from
the University of Connecticut.
Edward E. Greene. Mr. Greene has been Vice President, Administration of
Thermatrix Inc. since December 1998. He was appointed Secretary of the Company
in July 1998 and has been Director of Administrative Services since June 1996.
From October 1970 through April 1996 Mr. Greene was a career Regular Army
Officer and is a graduate of the Command and General Staff College and the US
Army War College. Mr. Greene also holds a BS from Gannon College and a MA
(Economics) from the University of Oklahoma.
James M. Clark. Mr. Clark joined the Company as Executive Vice President and
General Manager, Wahlco Air Systems, in Santa Ana, CA. Mr. Clark brings over 26
years experience with environmental firms supplying software and hardware
products and services to the utility and industrial air pollution control
sectors. His most recent position was Vice President and General Manager of
KVB. Mr. Clark holds an MBA from Loyola Marymount University, and a BSE from
California State University at Long Beach.
John C. Delk, Mr. Delk left the Company's employment on March 17, 2000. Mr.
Delk joined the Company as Executive Vice President and General Manager,
Thermatrix Diesel Systems, in June 1999.
On February 7, 2000 Mr. Frank R. Pope was appointed Chairman of the Board of
Directors and Chief Executive Officer of the Company. Mr. Pope has been a
Director of the Company since 1994. Mr. Pope has been the Managing Director of
Verdigris Capital, an environmental investment banking firm since October 1996.
From 1981 until October 1996, Mr. Pope was a general partner of Technology
Funding, a professional venture capital firm. Mr. Pope currently serves on the
board of directors of Medstone International, Inc. and Advanced BioCatalytics
Corp. where he also serves as Vice President, Corporate Development. Mr. Pope
holds a BA from Stanford University, an MBA from the University of Santa Clara
Graduate School of Business and a JD from the University of Santa Clara School
of Law.
22
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on its review of copies of filings under Section 16(a) of the
Securities Exchange Act of 1934, as amended, received by it, or written
representations from certain reporting persons, the Company believes that during
fiscal 1999, all Section 16 filing requirements were met.
Board of Directors
The members of the Board of Directors of the Company and their ages as of
December 31, 1999, are as listed below.
<TABLE>
<CAPTION>
Name of Director Age Principal Occupation
- ---------------- --- --------------------
<S> <C> <C>
John T. Schofield ........................... 62 President, CEO and Chairman of the Board
Charles R. Kokesh ........................... 52 Managing General Partner, Technology Funding
Frank R. Pope ............................... 50 Managing Director, Verdigris Capital
James M. Strock ............................. 43 Principal, Strock Enterprises Inc.
John M. Toups ............................... 74 Retired
</TABLE>
John T. Schofield. On February 7, 2000 Mr. Schofield resigned as a Director,
Chairman of the Board, President and Chief Executive Officer of the Company and
left the Company's employment effective February 29, 2000. Prior to his
resignation, Mr. Schofield had been President and Chief Executive Officer of the
Company since April 1992, and Chairman of the Board since December 1993.
Charles R. Kokesh. Mr. Kokesh has been a Director of the Company since March
1998. Mr. Kokesh is the founder and managing general partner of Technology
Funding, a professional venture capital firm headquartered in Silicon Valley. He
has served in this capacity since 1979. Mr. Kokesh also serves on the board of
directors of Adesso Specialty Services Inc. Mr. Kokesh received an AB from
Harvard College, an MBA from Harvard Business School, and a JD from Boalt Hall
School of Law, University of California at Berkeley.
Frank R. Pope. Mr. Pope has been a Director of the Company since 1994. Mr.
Pope has been the Managing Director of Verdigris Capital, an environmental
investment banking firm since October 1996. From 1981 until October 1996, Mr.
Pope was a general partner of Technology Funding, a professional venture capital
firm. Mr. Pope currently serves on the board of directors of Medstone
International, Inc. and Advanced BioCatalytics Corp. where Mr. Pope also serves
as Vice President, Corporate Development. Mr. Pope holds a BA from Stanford
University, an MBA. from the University of Santa Clara Graduate School of
Business and a JD from the University of Santa Clara School of Law. On February
7, 2000 Mr. Frank R. Pope was appointed Chairman of the Board of Directors and
Chief Executive Officer of the Company.
James M. Strock. On May 1, 2000 Mr. Strock resigned as a member of the Board
of Directors in order to devote additional time to his own business. Mr. Strock
had been a Director of the Company since October 1997.
John M. Toups. Mr. Toups has been a Director of the Company since November
1994. From January 1978 until his retirement in February 1987, Mr. Toups was the
Chief Executive Officer of Planning Research Corporation (PRC), an information
technology services company. Mr. Toups currently serves on the board of
directors of CACI International Inc., NVR, Inc., Halifax Corporation, Government
Technology Services, Inc., and Telepad Corporation. Mr. Toups earned a BS in
Civil Engineering from the University of California at Berkeley.
On February 7, 2000 Mr. Daniel S. Tedone was appointed to be President of the
Company and a member of the Board of Directors. Mr. Tedone joined the Company
in April 1998 as Executive Vice President and assumed responsibility for the
operation of the Company's core VOC business. In June 1998 Mr. Tedone assumed
the additional responsibilities of Chief Financial Officer. From 1992, Mr.
Tedone was CEO of Pollution Control Technologies Inc., which was acquired by TRC
Companies, Inc. in 1995 and where he served as President and CEO of TRC Process
Engineering, Inc. from 1995 until joining Thermatrix. Previously, Mr. Tedone
served as President
23
<PAGE>
of Vericon Corporation and held positions at Connecticut Resources Recovery
Authority and Hartford National Bank & Trust Company. Mr. Tedone holds a BA and
an MBA in Finance from the University of Connecticut.
Item 11. Executive Compensation
Summary Compensation
The following table shows information relating to the compensation awarded to,
earned by or paid for services to the Company in all capacities by the Chief
Executive Officer and each of the other five most highly compensated executive
officers of the Company, as of December 31, 1999, for each of the three years
ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------------- Securities
All Other Underlying
Name and Principal Position Year Compensation(2) Options(#)(3) Salary Bonus(1)
- ----------------------------------------------- ---- --------------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
John T. Schofield............................. 1999 $238,333 -- $29,637 --
Chairman, President and 1998 220,000 -- 5,280 150,000
Chief Executive Officer 1997 220,000 -- 1,636 --
Daniel S. Tedone(4)........................... 1999 186,667 -- 8,865 50,000
Executive Vice President, 1998 137,890 -- 24,909 50,000
Chief Financial Officer 1997 -- -- -- --
James M. Clark(5)............................. 1999 102,968 -- 3,581 10,000
Executive Vice President and 1998 -- -- -- --
General Manager (Wahlco, Inc.) 1997 -- -- -- --
John C. Delk(6)............................... 1999 98,233 -- 4,427 10,000
Executive Vice President and General 1998 -- -- -- --
Manager (Thermatrix Diesel Systems 1997 -- -- -- --
Div.)
Alexander G. Baldwin(7)....................... 1999 122,000 -- 8,703
Executive Vice President and 1998 121,250 -- 2,910 2,500
General Manager (WEP, Inc.) 1997 125,000 -- 952 --
Edward E. Greene(8)........................... 1999 138,750 -- 6,794 40,000
Vice President, Administration 1998 95,000 -- 2,280 10,000
and Secretary 1997 -- -- -- --
Frank R. Pope (9)............................. 1999 -- -- -- 1,667
Chief Executive Officer 1998 -- -- -- 1,667
1997 -- -- -- 1,667
</TABLE>
- ----------------
(1) No Bonuses were granted.
(2) "Compensation" includes premiums for life insurance policies for Mr.
Schofield, a non-qualified relocation payment to Mr. Tedone in 1998 and Mr.
Delk in 1999. It also includes the pre-payment of the January 2000 salary
for Schofield, Tedone, Greene, Delk, and Clark.
(3) These shares are subject to exercise under stock options granted under the
Company's stock option plans.
(4) Mr. Tedone joined the Company April 13, 1998 therefore his salary from
April 13, 1998 to December 31, 1998 reflects employment for less than a
full year.
24
<PAGE>
(5) Mr. Clark joined the Company on April 14,1999 therefore his salary from
April 14, 1999 to December 31, 1999 reflects employment for less than a
full year.
(6) Mr. Delk joined the Company on June 7, 1999 therefore, his salary from June
7, 1999 to December 31, 1999 reflects employment for less than a full year.
(7) Mr. Baldwin was appointed Executive Vice President and General Manager of
Wahlco Engineered Products, Inc. on February 22, 2000.
(8) Mr. Greene was appointed Secretary of the Corporation on September 15, 1998
and became Vice President, Administration on December 1, 1998.
(9) Mr. Pope was appointed Chief Executive Officer of the Company of February
7, 2000 and receives no compensation for his services as CEO other than
reimbursement of reasonable business expenses. Options grants made to Mr.
Pope in each of the last three years were for his service as a director.
Stock Option Grants and Exercises
The following table shows, as to the Named Executive Officers, information
concerning stock options granted during the fiscal year ended December 31, 1999.
Option Grants in Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Number of % of Total Potential Realizable
Securities Options Value at Assumed
Underlying Granted to Exercise Annual Rates of Stock
Options Employees Price Per Expiration Price Appreciation
Granted(#)(2) in Fiscal Year Share($) Date(3) for Option Term($)(1)
-------------- --------------- --------- ------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Name 5% 10%
- ---- -------- --------
John T. Schofield ......................... -- -- -- -- -- --
Daniel S. Tedone .......................... 50,000 30% $ 1.75 10/12/09 $0 $42,187
James M. Clark ............................ 10,000 6% 1.75 10/12/09 0 8,437
John C. Delk .............................. 10,000 6% 1.75 10/12/09 0 8,437
Edward E. Greene .......................... 40,000 24% 1.75 10/12/09 0 33,748
Frank R. Pope(4) .......................... 1,667 N/A 3.625 10/12/09 0 0
</TABLE>
- ----------------
(1) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the ten-year option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission. Actual gains, if any, on option
exercises are dependent on the future performance of the Company's Common
Stock and overall market conditions.
(2) Option grants generally vest over a 48-month period. Initial grants vest
and become exercisable as to 1/48/th/ of the shares subject to the grant
twelve months after the vesting commencement date and as to an additional
1/48/th/ of the shares at the end of each month thereafter provided the
employment continues on such date. Subsequent grants vest and become
exercisable as to 1/48/th/ of the shares subject to the subsequent grant one
month after the vesting commencement date and as to an additional 1/48/th/
of the shares at the end of each month thereafter, provided the employment
continues on such date.
(3) Options may terminate before their expiration date if the employment is
terminated.
(4) Mr. Pope received the standard annual grant of 1,667 options to purchase
common shares under the 1996 Directors Option Plan in January 1999 for his
services as a director of the Company. He has received no option grants
for his service as Chief Executive Officer.
25
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table shows, as to the Named Executive Officers, information
concerning stock options exercised during the fiscal year ended December 31,
1999 and the value of unexercised options at such date.
<TABLE>
<CAPTION>
Number of Securities
Underlying
Unexercised Value of Unexercised
Options/SARs at in-the-Money Options
December 31, 1999 December 31, 1999 (1)
--------------------- ---------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable (#) Unexercisable
- ---- --------------- ----------- --------------------- ---------------------
<S> <C> <C> <C> <C>
John T. Schofield .......................... -- -- 346,061/ 77,778 $42,777/ $0
Daniel S. Tedone ........................... -- -- 22,916/ 77,084 $0
James M. Clark ............................. -- -- 0/ 10,000 $0
John C. Delk ............................... -- -- 0/ 10,000 $0
Edward E. Greene ........................... -- -- 6,618/ 43,832 $0
Frank R. Pope .............................. -- -- 10,002/ 1,667 $0
</TABLE>
- ----------------
(1) Based on the market value of the Company's Common Stock at December 31, 1999
of $1.00 per share, less the exercise price to be paid for such shares.
Employment Agreements
The Company has no employment contracts with any of its officers and has no
compensatory plan or arrangement which is activated upon resignation,
termination or retirement of any such officer upon a change in control of the
Company other than required by law. Under certain circumstances both the 1996
Stock Plan and the Director Plan provide for the accelerated vesting of all
outstanding options upon a change in control.
Other Employee Benefit Plans
1987 Incentive Stock Plan
The Company's 1987 Incentive Stock Plan, as amended (the "1987 Stock Plan")
was adopted by the Board of Directors in August 1987 and approved by the
stockholders in February 1988. The 1987 Stock Plan provided for grants of
incentive stock options to employees (including officers and employee directors)
and non-statutory stock options to non-employees (including non-employee
directors) and consultants of the Company. A total of 907,651 shares of Common
Stock were reserved for issuance under the 1987 Stock Plan. As of December 31,
1999, 538,445 shares of Common Stock had been issued upon the exercise of
options granted under the 1987 Stock Plan and options to purchase 369,206 shares
of Common Stock at a weighted average exercise price of $1.47 per share were
outstanding. The Plan terminated in 1997 and no further options will be granted
under the 1987 Stock Plan. Options under the 1987 Stock Plan become exercisable
at varying rates over vesting periods determined by the Board of Directors
(generally one to ten years), and as of December 31, 1999, 349,702 options were
exercisable.
1996 Stock Plan
The Company's 1996 Stock Plan (the "1996 Plan") was adopted by the Board of
Directors in March 1996 and approved by the stockholders in April 1996. The
Board of Directors adopted a sub-plan of the 1996 Plan for the purpose of
qualifying for preferred tax treatment under UK tax laws. The UK Inland Revenue
approved the sub-plan effective January 30, 1998. A total of 333,334 shares of
Common Stock has been reserved for issuance under the 1996 Plan. On October 12,
1999 the shareholders approved a proposal adding an additional 300,000 shares to
this option pool. As of December 31, 1999, 15,250 shares of Common Stock had
been issued upon the exercise of options granted under the 1996 Plan, options to
purchase 396,830 shares of Common Stock at a weighted average
26
<PAGE>
exercise price of $3.47 per share were outstanding, 52,635 options were
exercisable and 221,254 shares were available for issuance.
401(k) Savings Plan
The Company maintains the Thermatrix Inc. 401(k) Plan, a defined contribution
retirement plan with a cash or deferred arrangement as described in Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan is
intended to be qualified under Section 401(a) of the Code. All employees of the
Company are eligible to participate in the 401(k) Plan. The 401(k) Plan provides
that each participant make elective contributions of a percentage of his or her
compensation, subject to statutory limits.
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Exchange Act of 1933, as amended, or the
Securities Act of 1934, as amended, that might incorporate future filings, the
following report shall not be incorporated by reference into any such filings.
General
The Compensation Committee (the "Committee") of the Board of Directors
establishes the overall executive compensation strategies of the Company and
approves compensation elements for the chief executive officer, other executive
officers, and employees earning in excess of $100,000 per year. The Committee
also recommends stock option awards for employees to the Board. The Committee is
comprised of three of the independent, non-employee members of the Board of
Directors, none of whom have interlocking relationships as defined by the
Securities and Exchange Commission. The Committee has available to it such
external compensation advice and data as the Committee deems appropriate to
obtain.
The compensation philosophy of the Committee is to provide a comprehensive
compensation package for each executive officer that is tailored to the
Company's accomplishment of business strategies, objectives and initiatives.
Accordingly, the Committee follows a compensation strategy that utilizes vesting
terms to incentivize and reward executives as the Company addresses the
challenges associated with growth. As the Committee applies this compensation
philosophy in determining appropriate executive compensation levels and other
compensation factors, the Committee reaches its decisions with a view towards
the Company's overall financial performance. The Committee strives to structure
each officer's overall compensation package to enable the Company to attract,
retain and reward personnel who contribute to the success of the Company.
Executive Officer Compensation
The Committee's executive compensation policies are designed to enhance the
financial performance of the Company and thus stockholder value, by aligning the
financial interests of the key executives with those of the stockholders. The
executive compensation program is viewed in total considering all of its
component parts: an annual compensation component, which consists of base
salaries that are generally competitive with those offered by other companies in
the industry at similar phases of growth, and a long-term incentive component,
which consists of stock options and stock ownership. In determining individual
salaries, the Committee considers the individual experience, performance and
breadth of responsibilities of each executive officer within the Company in
light of the accomplishment of business strategies, objectives and initiatives
set forth by the Board periodically. These factors are reviewed for each
executive officer annually.
The Company's 1996 Stock Plan and the ESPP are long-term incentive plans for
all employees. These plans are intended to align stockholder and employee
interest by creating a direct link between long-term rewards and the value of
the Company's shares. The Committee believes that long-term stock ownership by
executive officers and all employees is an important factor in achieving both
above average growth in share value and retaining valued employees. Since the
value of an option bears a direct relationship to the Company's stock price, the
Committee
27
<PAGE>
believes that options motivate executive officers to manage the Company in a
manner that will benefit all stockholders.
The Option Plans authorize the Committee to award available stock options to
employees at any time. Options for executive officers are generally granted at
the time of initial employment with the Company, and at later dates at the
discretion of the Committee. The size of the initial and later grants are
determined by a number of factors including comparable grants to executive
officers and employees by other companies which compete in the Company's
industry. The exercise price per share of the stock options is normally equal to
the prevailing market value of a share of the Company's Common Stock on the date
the options are granted.
The Company has adopted certain broad-based employee benefit plans in which
all employees, including the executive officers, are permitted to participate on
the same terms and conditions relating to eligibility and generally subject to
the same limitations on the amounts that may be contributed or the benefits
payable under those plans. See "Other Employee Benefit Plans--401(k) Savings
Plan."
CEO Compensation
Compensation for the Chief Executive Officer aligns with the philosophies and
practices described above for executive officers in general. Mr. Schofield's
base salary was increased to $220,000 from $205,000 in April 1996. Mr. Schofield
received no salary increase in 1998 or 1999. Mr. Schofield received no option
grants in 1999. Mr. Schofield resigned as a director, Chairman of the Board of
Directors, President and Chief Executive Officer of the Company on February 7,
2000. The Company currently does not have a bonus plan for its Chief Executive
Officer or any of its other executive officers.
COMPENSATION COMMITTEE
Charles R. Kokesh
Frank R. Pope
Recent Events
On February 7, 2000 Mr. John T. Schofield resigned as a Director and Chairman
of the Board of Directors, President and Chief Executive Officer of the Company.
Mr Frank R. Pope was elected Chairman of the Board of Directors and appointed
Chief Executive Officer of the Company. Mr. Pope receives no compensation,
other that the reimbursement of normal business expenses, for his services as
Chief Executive Officer. Mr. Daniel S. Tedone was appointed to the Board of
Directors and also appointed President of the Company on February 7, 2000. Mr.
Tedone receives no compensation for his service as a Director and his salary
remains at $200,000 per year.
Based upon the estimates in the Second Report of the administrative receiver,
received by the Company on April 14, 2000, the Company expects net proceeds from
the disposition of the U.K. assets of approximately $2.5 million to be available
to reduce net amounts due to Wexford. There can be no assurances as to the
timing or ultimate outcome of the disposition of the discontinued operations.
Item 13. Security Ownership of Certain Beneficial Owners and Management will be
included in the Company's Proxy Statement.
28
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THERMATRIX INC. AND SUBSIDIARIES
(Debtors-in-Possession)
December 31, 1999 and 1998
29
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Thermatrix Inc.
We have audited the accompanying consolidated balance sheet of Thermatrix Inc.
(a Delaware corporation) and Subsidiaries as of December 31, 1999, and the
related consolidated statement of operations, stockholders' equity (deficit) and
cash flows for the year then ended. 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 based on
our audit.
We conducted our audit 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 also 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Thermatrix Inc.
and Subsidiaries as of December 31, 1999, and the consolidated results of their
operations and their consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company acquired Wahlco Environmental Systems, Inc.,
in January, 1999, and was unable to arrange permanent financing before the
interim credit agreement was declared in default. In December, 1999, the
Company's United Kingdom subsidiaries were placed under control of an
administrative receiver and the Company and its domestic subsidiaries filed for
protection under Chapter 11 of the United States Bankruptcy Code. The Company
continued to incur significant operating losses during 1999, and has a deficit
in equity of $10.7 million at December 31, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
As discussed in Note C, management is developing plans to restructure the
operations and capitalization of the Company and is evaluating other
alternatives to fund its cash requirements. There can be no assurances as to
the timing or ultimate outcome of those plans. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed under
Item 14(a) 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, as of and for the year ended December 31, 1999.
GRANT THORNTON LLP
Atlanta, Georgia
April 7, 2000
30
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 922 $ 134
Short-term investments - 1,670
Accounts receivable, net 6,528 2,134
Inventories 1,198 -
Prepaid professional fees 468 -
Other current assets 364 160
Net current assets of discontinued operations - 704
------- -------
Total current assets 9,480 4,802
PROPERTY AND EQUIPMENT
Buildings and improvements 1,695 -
Machinery and equipment 764 678
Furniture and fixtures 1,270 321
Demonstration equipment 449 449
------- -------
4,178 1,448
Less accumulated depreciation (1,953) (1,046)
------- -------
2,225 402
Land 270 -
Net property and equipment of discontinued operations - 170
------- -------
2,495 572
OTHER ASSETS
Patents and other 1,021 1,406
Assets of discontinued operations held for disposition 2,229 -
------- -------
3,250 1,406
------- -------
$15,225 $ 6,780
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 597 $2,151
Billings on uncompleted contracts in excess
of costs and revenue recognized 2,880 21
Accrued liabilities 1,679 362
-------- --------
Total current liabilities 5,156 2,534
LIABILITIES SUBJECT TO COMPROMISE 16,789 -
REDEEMABLE PREFERRED STOCK 4,020 -
-------- --------
Total liabilities and redeemable preferred stock 25,965 2,534
STOCKHOLDERS' EQUITY
Convertible preferred stock; $0.001 par value
authorized, 5,000,000 shares; 6,000 shares
outstanding in 1999 4,020 -
Common stock; $0.001 par value authorized,
50,000,000 shares; outstanding, 7,821,425 and
7,711,401 shares in 1999 and 1998, respectively 8 8
Additional paid-in-capital 47,300 48,795
Accumulated other comprehensive income - 19
Accumulated deficit (62,068) (44,576)
-------- --------
Total stockholders' equity (10,740) 4,246
-------- --------
$ 15,225 $ 6,780
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Revenues $ 21,700 $ 5,882 $ 6,723
Cost of revenues 17,758 5,272 7,583
-------- ------- -------
Gross margin 3,942 610 (860)
Operating expense
Research and development 949 1,658 1,130
Selling, general and administrative 9,356 5,904 6,372
Impairment loss 5,766 - -
-------- ------- -------
Total operating expenses 16,071 7,562 7,502
-------- ------- -------
Loss from operations (12,129) (6,952) (8,362)
Other income (expense)
Interest expense and other financing costs (2,279) (12) (23)
Other 72 382 693
-------- ------- -------
Total interest income (expense) (2,207) 370 670
-------- ------- -------
Loss before provision for income taxes
and discontinued operations (14,336) (6,582) (7,692)
Provision for income taxes 66 66 66
-------- ------- -------
Loss before discontinued operations (14,402) (6,648) (7,758)
Discontinued operations
Loss from operations (108) (1,225) (1,882)
Loss on disposal (2,982) - -
-------- ------- -------
(3,090) (1,225) (1,882)
-------- ------- -------
Net loss (17,492) (7,873) (9,640)
Accretion of redeemable preferred warrants,
costs and beneficial conversion feature (1,033) - -
Accretion of Series E Stock liquidation
premium and dividend requirements (2,040) - -
-------- ------- -------
Net loss attributable to common stock $(20,565) $(7,873) $(9,640)
======== ======= =======
Basic net loss per share
Continuing operations $ (2.25) $ (0.87) $ (1.03)
Discontinued operations (0.40) (0.16) (0.25)
-------- ------- -------
$ (2.65) $ (1.03) $ (1.28)
======== ======= =======
Basic weighted average common shares 7,764 7,677 7,548
======== ======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
33
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Preferred Accumulated Total Cumulative
Stock Common Stock Additional Other Stockholders' Comprehensive
-------------- ---------------- Paid-in Accumulated Comprehensive Equity Income
Shares Amount Shares Amount Capital Deficit Income (Deficit) (Loss)
------ ------ --------- ------ ---------- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - $ - 7,466,683 $7 $48,454 $(27,063) $ - $ 21,398 $(27,063)
Exercise of stock options
at $0.30
to $3.00 per share - - 109,613 1 72 - - 73 -
Common stock issued for
cash
at $2.76 per share - - 19,695 - 54 - - 54 -
Common stock issued for
cash
at $2.02 per share - - 31,683 - 64 - - 64 -
Net loss - - - - - (9,640) - (9,640) (9,640)
------ ------ --------- ------ ------- ----------- ----------- -------- -------------
Balance, December 31, 1997 - - 7,627,674 8 48,644 (36,703) - 11,949 (36,703)
Exercise of stock options
at $0.75
to $4.125 per share - - 35,995 - 41 - - 41 -
Common stock issued for
cash
at $2.18 per share - - 32,203 - 70 - - 70 -
Common stock issued for
cash
at $2.55 per share - - 15,529 - 40 - - 40 -
Equity adjustment from
foreign
currency translation - - - - - - 19 19 19
Net loss - - - - - (7,873) - (7,873) (7,873)
------ ------ --------- ------ ------- ----------- ----------- -------- -------------
Balance, December 31, 1998 - - 7,711,401 8 48,795 (44,576) 19 4,246 (44,557)
</TABLE>
34
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Accumulated Total Cumulative
Preferred Stock Common Stock Additional Other Stockholders' Comprehensive
--------------- ----------------- Paid-in Accumulated Comprehensive Equity Income
Shares Amount Shares Amount Capital Deficit Income (Deficit) (Loss)
------- ------ --------- ------ ---------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 - $ - 7,711,401 $8 $48,795 $(44,576) $ 19 $ 4,246 $(44,557)
Exercise of stock options
and employee stock purchase
plan - - 110,024 - 192 - - 192 -
Issuance of warrants in
connection with credit
agreement - - - - 782 - - 782 -
Preferred stock issued, net
of issuance costs
(excluding $2,786 for
redeemable shares) 6,000 - - - 2,785 - - 2,785 -
Warrants issued in connection
with redeemable shares - - - - 288 - - 288 -
Beneficial conversion
feature of Series E
preferred stock - - - - (1,059) - - (1,059) -
Accretion of preferred
stock beneficial
conversion feature - - - - 1,059 - - 1,059 -
Accretion of redeemable
preferred warrants,
issue costs, liquidation
premium and dividends - - - - (1,522) - - (1,522) -
Liquidation preference
value for non-redeemable
preferred stock - 4,020 - - (4,020) - - - -
Equity adjustment from
foreign currency translation - - - - - - (19) (19) (19)
Net loss (17,492) (17,492) (17,492)
---------
Comprehensive income - - - - - - - - (17,511)
------- ------ --------- ------ ------- --------- --------- --------- -----------
Balance, December 31, 1999 6,000 $4,020 7,821,425 $8 $47,300 $(62,068) $ - $ 10,740 $ (62,068)
======= ====== ========= ====== ======= ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of this statement.
35
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
For the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(17,492) $(7,873) $ (9,640)
Adjustments to reconcile net loss to net cash
in operating activities:
Depreciation and amortization 2,247 505 453
Impairment loss 5,766 - -
Loss on disposal of discontinued operations 2,982 - -
Amortization of fair value of warrants 782
Write-off of investment in joint venture - - 390
Write-off receivables from discontinued operations (5,259) - -
Provision for doubtful accounts 387 1,813 220
Provision for uncollectible costs of uncompleted
contracts in excess of billings - - 500
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 2,522 (2,961) 1,160
(Increase) decrease in costs of uncompleted
contracts in excess of billings 1,518 547 (238)
Decrease in inventories 1,304 - -
(Increase) decrease in prepaid expenses and
other current assets (259) 18 84
Increase (decrease) in accounts payable (6,503) 3,826 (724)
Increase in billings on uncompleted contracts
in costs and revenue recognized 1,723 228 173
Increase (decrease) in accrued liabilities 886 (246) (90)
Decrease in accrued restructure costs (2,594) - -
Decrease in net current assets of discontinued operations 7,509 - -
-------- ------- --------
Net cash used in operating activities (4,481) (4,143) (7,712)
Cash flows from investing activities:
Purchase of subsidiary, net of cash acquired (1,742) - -
Purchases of property and equipment (108) (64) (465)
Purchase of short-term investments - (2,702) (27,887)
Proceeds from sale of short-term investments 1,670 4,619 35,718
(Increase) decrease in patents and other assets 176 (326) (636)
-------- ------- --------
Net cash (used in) provided by investing activities (4) 1,527 6,730
Cash flows from financing activities:
Repayment on debt obligations (464) - -
Proceeds from issuance of Series E redeemable
preferred stock, net of costs 5,564 - -
Net proceeds from issuance of common stock 192 151 191
-------- ------- --------
Net cash provided by financing activities 5,292 151 191
</TABLE>
36
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands, except share data)
For the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------ -------- -------
<S> <C> <C> <C>
Cumulative effect of foreign exchange rates on cash (19) 19 -
Cash and cash equivalents included in current assets
of discontinued operations - (1,410) -
----- ------- ------
Increase (decrease) in cash and cash equivalents 788 (3,856) (791)
Cash and cash equivalents at beginning of period 134 3,990 4,781
----- ------- ------
Cash and cash equivalents at end of period $ 922 $ 134 $3,990
===== ======= ======
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid for interest $1,004 $10 $ 23
====== === ====
Cash paid for income taxes $ 1 $51 $104
====== === ====
The accompanying notes are an integral part of these statements.
</TABLE>
37
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - ORGANIZATION AND OPERATIONS OF THE COMPANY
Thermatrix, Inc. is an industrial technology company primarily engaged in
the development, manufacture and sale of industrial process equipment for the
distribution of volatile organic compounds and hazardous air pollutants
(collectively, VOCs). Thermatrix and its wholly-owned subsidiaries
(collectively "the Company") had operating units in the United States and the
United Kingdom. The Company also manufactures products employing other
proprietary technologies used to capture and recover low concentrations of VOCs
from low-to-medium vapor streams. 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.
NOTE B - PETITION FOR REORGANIZATION UNDER CHAPTER 11
On January 13, 1999, the Company acquired all of the outstanding common
shares of Wahlco Environmental Systems, Inc. (Wahlco). In addition to cash
payments, the Company agreed at the time to guarantee certain Wahlco debts owed
to, or guaranteed by, Wexford Management LLC (Wexford) and several lenders
affiliated with Wexford and granted a security interest in all existing and
future assets to Wexford and the lenders.
On February 25, 1999 the Company entered into the Second Amended and
Restated Credit Agreement among Wahlco and the Company, as Borrowers, and the
Lenders and Wexford as Agent for the Lenders (the "Credit Agreement"). As a
condition of the Credit Agreement, the Company agreed to confirm its grant to
the Lenders of a security interest in all existing and future assets and to
cause all its significant subsidiaries to enter into guarantees and grant to the
Lenders additional security interests and mortgages in all existing and future
assets of the Borrowers and significant subsidiaries. The Company engaged an
investment advisory firm to assist with the structure and placement of an equity
offering and term and revolving credit facilities to finance its ongoing
operations and finance the Wahlco acquisition. The Credit Agreement matured on
August 24, 1999 and, under the terms of the Credit Agreement, was extended until
November 22, 1999 with the payment of an additional fee of $100,000.
The Company continued its efforts to arrange new financing but was unable
to make scheduled payments under the Credit Agreement. On December 15, 1999,
Wexford obtained the appointment of an administrative receiver in the United
Kingdom for all assets of the Company's United Kingdom subsidiaries and the
Company expects the receiver to dispose of all of those assets, as discussed in
Note F. 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.
38
<PAGE>
Thermatrix, Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE B - PETITION FOR REORGANIZATION UNDER CHAPTER 11 - Continued
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. As of the petition date,
actions to collect prepetition indebtedness are stayed and other contractual
obligations may not be enforced against the Company. In addition, under the
Bankruptcy Code, the Company may reject executory contracts. Parties affected
by these rejections may file claims with the Bankruptcy Court in accordance with
the reorganization process. Substantially all liabilities as of the petition
date are subject to settlement under a plan of reorganization to be voted upon
by the creditors and equity security holders 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.
NOTE C - LIQUIDITY AND CONTINUING OPERATIONS
The accompanying consolidated financial statements of the Company have been
prepared on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. However, as a result of the Chapter 11 filing and circumstances
relating to this event, including the Company's recurring losses from operations
and inability to service its debt, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. Further, the Company's
ability to continue as a going concern is dependent upon the confirmation of a
plan of reorganization by the Bankruptcy Court, achievement of profitable
operations and the ability to generate sufficient cash from operations and
financing sources to meet the restructured obligations. Except as otherwise
disclosed, the consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the possible inability of the Company to continue as a going concern except as
otherwise disclosed.
Through a reorganization under Chapter 11, management intends to implement a
program to restructure the operations and capitalization of the Company in order
to strengthen the Company's financial position and operating performance.
The Company is subject to certain risks that include, but are not limited
to, the history of operating losses and uncertainty of future profitability,
sensitivity to major projects, fixed price contracts, and dependence on a
limited set of customers and key employees. At December 31, 1999, the Company
had a deficit in equity of $10.7 million. A return to profitability requires
that the Company's sales produce sufficient margins 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.
39
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE C - LIQUIDITY AND CONTINUING OPERATIONS - Continued
Management is also currently evaluating other Company alternatives to fund
its cash requirements. Such alternatives include, among other things, (i)
increased revenues and improved gross margins, (ii) reduction of general and
administrative costs, (iii) the timely collection of accounts receivable and,
(iv) consolidation of facilities and operations, and (v) divesting a portion or
portions of the Company's business. These strategies are dependent upon the
Company's ability to meet its forecasts, to develop increased sales and generate
positive gross margins, to achieve the timely collection of amounts due to the
Company and to identify parties willing and able to purchase a portion or
portions of the Company's business. There can be no assurances as to the timing
or ultimate outcome of any of these alternatives.
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Reporting
------------------
The financial statements for the year ended December 31, 1999, reflect
accounting principles and practices set forth in AICPA Statement of Position 90-
7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.
Substantially all liabilities outstanding as of the date of filing of the
petition for reorganization will be subject to settlement under the plan of
reorganization and those amounts are reported as Liabilities Subject to
Compromise in the consolidated balance sheet. Professional fees and
expenditures directly related to the Chapter 11 filing and reorganization of the
Company have been segregated from normal operations and are disclosed
separately; there were no such expenses in 1999.
2. 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 become available. The estimates are subject to change and actual
results could be materially different from these estimates.
40
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Principles of Consolidation and Foreign Currency Translation
------------------------------------------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The functional currency of the foreign
subsidiaries is the British Pound Sterling. Accordingly, all translation gains
and losses resulting from transactions denominated to currencies other than the
U.S. dollar are included in shareholders' equity. To date, the translation
gains and losses have not been material. All intercompany accounts and
transactions have been eliminated.
4. Cash and Cash Equivalents and Short-Term Investments
----------------------------------------------------
The cash balance at December 31, 1999 includes $280,000 that is held as
collateral for a stand-by letter of credit.
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.
Under Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities, the Company classified
its short-term investments as held to maturity. Therefore these investments,
consisting primarily of certificates of deposit, are carried at amortized cost
of $1.7 million in 1998. Unrealized holding gains or losses as of December 31,
1998 were not material. All investments held at December 31, 1998, matured in
1999.
5. 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 short-term contracts, primarily for made-to-order items in the
manufacturing operations. Estimated losses on contracts are charged in full
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 generally 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. Accrued warranty costs
were $479,000 and $29,000 as of December 31, 1999 and 1998, respectively,
and are included in other accrued liabilities in the accompanying balance
sheets.
41
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Accounts Receivable
-------------------
Accounts receivable consisted of the following (in thousands):
1999 1998
------- -------
Billed $6,594 $1,190
Unbilled, including unpriced change orders 421 1,044
------ ------
Total receivables 7,015 2,234
Less: allowance for doubtful accounts (487) (100)
------ ------
$6,528 $2,134
====== ======
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, 1999, 26% of accounts receivable was concentrated with two
customers. As of December 31, 1998, 76% of accounts receivable was concentrated
with three customers.
7. 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.
8. Inventories
-----------
Inventories are valued at the lower of cost of market, cost being determined
using the first-in, first-out method, and consist of the following (in
thousands):
1999 1998
------ -----
Raw materials $ 584 $ -
Work in process 538
Finished goods 76 -
------ -----
$1,198 $ -
====== =====
42
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method based on useful lives of twenty years for buildings and
three to five years for furniture, fixtures and equipment. 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.
10. 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). Net book
value of capitalized patent costs as of December 31, 1999 and 1998, was
approximately $807,000 and $626,000, respectively.
11. Goodwill
--------
Cost in excess of fair value of the net assets of entities acquired in
purchase transactions is classified as goodwill and is amortized on the
straight-line method over 20 years. As discussed in Note D-12, unamortized
goodwill was expensed during 1999 based on management's determination in
accordance with SFAS No. 121 that its continuing value was impaired.
43
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. Impairment of Long-Lived Assets
-------------------------------
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting For The
Impairment Of Long-Lived Assets and For Long-Lived Assets To Be Disposed Of,
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount. In 1999, the Company recorded an impairment charge of $5.8 million
related to the write down of goodwill which arose from the acquisition of Wahlco
Environmental Services, Inc. (see Note E). Management determined that the
remaining goodwill was impaired as a result of filing for Chapter 11 protection
and the loss of Wahlco's United Kingdom operations. In accordance with SFAS No.
121, the impairment charge was taken in conjunction with the bankruptcy filing
which was in December, 1999. No impairment charge was recorded in 1998 and
1997.
13. Significant Customers
---------------------
In 1999, revenues from 1 customer accounted for 17% of total revenue; in 1998,
revenues from 2 customers accounted for 62% of total revenue; and in 1997,
revenues from 2 customers accounted for 38% of total revenues.
14. 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 convertible preferred stock, stock opinions and
warrants are antidilutive.
44
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
15. Comprehensive Income
--------------------
In accordance with SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. The Company has integrated the presentation of
comprehensive income (loss) with the consolidated statement of stockholders'
equity (deficit).
16. Accounting for Stock Plans
--------------------------
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Effective in 1995, the Company adopted the disclosure option of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 required that companies that do not choose to
account for stock-based compensation as prescribed by the statement, shall
disclose the pro forma effects on earnings and earnings per share as if SFAS No.
123 had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS No. 123 (see Note L).
17. Effect of Recent Accounting Pronouncements
------------------------------------------
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheets as either an asset or liability
measured at its fair value and defines how hedge gains or losses should be
reported. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. The Company does not expect the adoption of this Statement to have a
material effect on the financial statements.
NOTE E - ACQUISITIONS
1. Wahlco Environmental Systems, Inc.
----------------------------------
On January 13, 1999, Thermatrix, Inc. completed the acquisition of Wahlco
Environmental Systems, Inc. ("Wahlco). Wahlco designs, manufactures, and sells
combined cycle gas turbine products, metallic and fabric bellows, air pollution
control equipment, and related products and services to electric utilities,
independent power producers, co-generation plants, and industrial manufacturers
worldwide. Thermatrix acquired all of the outstanding common shares and
warrants of Wahlco for the payment of approximately $1.9 million in cash. If
certain other conditions are met, the Company will be required to make
additional payments of up to approximately $2.0 million to the sellers. As of
December 31, 1999, the conditions related to the additional payments have not
been met. Also in conjunction with the acquisition, the Company agreed to
guarantee repayment by Wahlco of approximately $4.6 million of debt owed to
affiliates of Wexford Management, LLC ("Wexford"), Wahlco's largest shareholder
at the time of the acquisition, or guaranteed by Wexford to other parties. The
Company subsequently entered into a new credit agreement with Wexford (see Note
N). The acquisition was accounted for as a purchase and the results of Wahlco
have been included in the consolidated financial statements from the date of
acquisition.
45
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE E - ACQUISITIONS - Continued
After the acquisition, the Company initiated a plan to close duplicate and/or
inefficient Wahlco facilities and is reducing personnel and other costs
accordingly. The costs involved to close facilities and terminate employees
have been recognized as liabilities assumed at the time of the acquisition. The
types and amounts of exit liabilities included in the purchase price recorded in
connection with the acquisition are (in thousands):
Personnel terminations and relocations $1,668
Facility related costs and relocations 1,966
Company closures 406
------
Total restructure costs $4,040
======
As of December 31, 1999, a total of $2.6 million has been charged against the
restructure costs. The remaining portion of the restructure costs is
substantially related to facility lease costs for excess space which is being
charged over the remaining life of the lease. Amounts related to obligations
incurred but not paid are included in Liabilities Subject to Compromise.
The total purchase price for Wahlco was $2.2 million including costs and fees
related to the acquisition. The Company assumed liabilities totaling $25.9
million in connection with the purchase. The purchase price was allocated to
the acquired assets and liabilities as follows (in thousands):
Current assets (including $490 of cash) $12,226
Property, plant and equipment 9,315
Other assets 440
Goodwill 6,110
-------
28,091
Current liabilities 14,461
Long-term liabilities 7,358
Accrued restructure costs 4,040
-------
25,859
-------
Purchase price $ 2,232
=======
2. Ferguson International, Inc.
----------------------------
On April 30, 1999, the Company acquired the assets of Ferguson International,
Inc., a supplier of ammonia storage and handling systems used by power companies
to reduce emissions of Nox, a major contributor to smog formation. The Company
accounted for the acquisition of the Ferguson business as a purchase and the
results of the Ferguson business are included in the accompanying consolidated
financial statements from the date of acquisition. The Ferguson business was
combined with and is operating as part of the Wahlco Air Systems Division in
Santa Ana, California. In full consideration for the transfer of the assets,
the Company will pay the seller a royalty of 4% of the aggregate net invoice
value of gross sales until the earlier of (i) 5 years from the closing date, or
(ii) the seller has received $5.0 million aggregate royalty payments. No
consideration was exchanged or liabilities assumed in connection with this
acquisition. The Company will account for the contingent royalty payments as
additional purchase price when they are generated. As of December 31, 1999, no
royalty payments have been generated.
46
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE E - ACQUISITIONS - Continued
3. Genflex Product Line
--------------------
On September 24, 1999, the Company acquired the assets related to the Genflex
product line of bellows expansion joints. The purchase price was approximately
$100,000, financed by the seller, for certain equipment, inventory, customer
contracts and records; (ii) contingent deferred compensation of 5% net revenue
from work-in-progress or new order for a period of 18 months from the closing
date; and (iii) contingent deferred compensation of 10% net revenue from the
sale of spare parts for a period of 24 months from the closing date. The
contingent deferred compensation will be accounted for as additional purchase
price when generated. During 1999, no contingent deferred compensation was
generated. The Genflex product line was combined with and operated as part of
the Teddington Bellows Division in the United Kingdom. As discussed in Note B,
all assets of the Company located in the United Kingdom were assigned to an
administrative receiver as of December 15, 1999.
NOTE F - DISCONTINUED OPERATIONS
On December 15, 1999, the Company's principal secured creditor ("Wexford"),
obtained the appointment of an administrative receiver in the United Kingdom for
all assets of the Company's United Kingdom subsidiaries. The administrative
receiver took control of the subsidiaries and initiated steps to sell or
liquidate those entities. The Company does not expect to retain any of the
United Kingdom operations, although the Company's domestic operations may
continue to perform services for some of the United Kingdom customers.
Accordingly, operating results for the United Kingdom subsidiaries have been
reclassified and reported as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30 for the years ended December 31,
1999, 1998 and 1997. Summary operating results of the discontinued operations
are as follows (in thousands):
1999 1998 1997
-------- ------- --------
Revenue $19,678 $7,732 $ 288
Costs and expenses 19,786 8,957 2,170
------- ------ -------
Loss from discontinued operations $ (108) $(1,225) $(1,882)
======= ====== =======
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):
1999 1998
------ ------
Current assets $ - $4,015
Current liabilities - 3,311
------ ------
Net current deficit - 704
Property and equipment - 170
------ ------
Assets of discontinued
operations held for disposition 2,229 -
------ ------
Total assets $2,229 $ 874
====== ======
47
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE F - DISCONTINUED OPERATIONS - Continued
Based on a preliminary estimate by the administrative receiver, the Company
expects net proceeds from the disposition of the U.K. assets of approximately
$2.2 million to be available to reduce amounts due to Wexford. Based on this
estimate, the Company has recorded a loss of $3.0 million from the disposal of
the discontinued operations. The amount of the loss is dependent on the
ultimate proceeds available for repayment of the Wexford debt and there can be
no assurances as to the timing or ultimate outcome of the disposition of the
discontinued operations.
NOTE G - LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under the reorganization proceedings have
been separately classified and represent management's best estimate of amounts
owed at the petition date. The Bankruptcy Court established May 14, 2000 as the
last date for creditors to file proof of claims under the Bankruptcy Code.
Generally, claims not filed by that date will be disallowed. There may be
differences between the amounts at which any such liabilities are recorded in
the financial statements and the amounts claimed by the Company's creditors.
Such claims remain subject to future adjustments depending on negotiations and
actions of the Bankruptcy Court.
Liabilities subject to compromise at December 31, 1999 consist of the following
(in thousands):
Secured debt and accrued interest (see Note N-1) $ 5,821
Trade accounts payable 5,808
State income and sales taxes payable 189
Puerto Rico tollgate tax 1,376
Employee severance and vacation 1,387
Accrued sales commission 150
Accrued lease costs 1,125
Other 933
-------
$16,789
=======
NOTE H - ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
1999 1998
------ ----
Accrued restructuring costs $ 358 $ 77
Commissions payable 127 45
Accrued employee compensation costs 179 120
Income taxes 289 49
Accrued warranty costs 479 29
Other 247 236
------ ----
$1,679 $556
====== ====
48
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases facilities and certain equipment under operating leases
that expire through January 2003. Rent expense was approximately $980,000,
$428,000 and $492,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. As of December 31, 1999, future minimum payments are as follows
(in thousands):
Year ending December 31,
2000 $1,054
2001 328
2002 256
2003 251
2004 and thereafter 147
------
$2,036
======
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. Royalties paid by the Company under
the License totaled approximately $0, $34,000, and $80,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
Effective as of the close of business on September 17, 1999, the Company's
securities were delisted from the Nasdaq National Market as a result of a
determination made by a Nasdaq Listing Qualifications Panel. The Company's
securities are currently traded under the symbol TMXIE on the Over The Counter
Bulletin Board.
NOTE J - PREFERRED STOCK
1. Convertible Preferred Stock
---------------------------
The Company is authorized to issue 5,000,000 shares of $.001 par value in
designated preferred stock. Upon issuance, the Board of Directors will have the
authority to fix the rights, preferences, privileges and restrictions thereof.
As of December 31, 1999, 12,000 shares of Series E stock had been authorized as
described in Note J-2.
49
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE J - PREFERRED STOCK - Continued
2. Issuance of Convertible Preferred Stock, Series E
-------------------------------------------------
On June 30, 1999, the Company authorized 12,000 shares of 8% Convertible
Preferred Stock, Series E (the "Series E Stock") and closed a private placement
of 6,000 shares at a price of $1,000 per share in the aggregate amount of $6.0
million. The two largest existing shareholders of the Company's common stock
combined to purchase 3,000 shares of the Series E Stock and a single new
investor purchased the remainder (the "Investors"). The Series E Stock is
convertible into common stock in accordance with the Certificate of Designation.
The issuance of the Series E Stock was made pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, provided by
Section 4(2) thereof. On July 9, 1999, the 10-day notification period to
shareholders was completed and the Company received net proceeds of
approximately $5.6 million after costs of issuance.
Under the Certificate of Designation, at the option of each holder, the
Series E Stock is convertible into shares of the common stock of the Company
based upon a conversion price of the lower of (i) $5.00 per share, or (ii) 85%
of the arithmetic mean of the 15 lowest closing bid prices during the 30 trading
days preceding such date of conversion. Fifty percent of the Series E stock may
be converted after November 27, 1999, and remaining shares may be converted
after January 26, 2000. On June 30, 2002, the Series E Stock will automatically
convert into shares of common stock based upon a conversion price of the lesser
of $5.00 or 85% of market price, as defined. The Company has the right to redeem
the Series E Stock at any time for 130% of the original purchase price together
with any accrued and unpaid dividends. The Series E stock bears a dividend of 8%
payable in cash or stock at the option of the Company. Under the Common Stock
Purchase Warrant dated June 30, 1999, between the Company and each of the
Investors, the Company issued warrants to purchase common stock equivalent to
35,000 shares of common stock per $1.0 million of Series E Stock purchased (the
"Warrants"). The Warrants may be exercised at $5.31 per share prior to June 30,
2002. If the Company's securities remain delisted from the Nasdaq National
Market for 45 consecutive days, the conversion price of the Series E Stock will
be reduced to the lesser of $5.00 or 65% of the market price, as defined. The
restrictions on the dates of conversion remain in effect. Holders of the
Series E Stock are entitled to receive, as, when and if declared by the Board of
Directors, cumulative preferred dividends at the rate of 8% per annum, payable
quarterly.
In accordance with EITF 98-5, Accounting For Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion, the
Company recognized a beneficial conversion feature in the amount of $1,059,000
related to the issuance of the preferred stock. This entire amount was charged
to Additional Paid-in Capital during 1999 over the period from the date of
issuance to the date of first available conversion.
The single new investor referred to above holds 3,000 shares of the Series E
Stock ("Redeemable Shares") and was granted the option to require the Company to
redeem all or part of the Redeemable Shares at 130% of the original purchase
price plus accrued and unpaid dividends if, at any time, the Company's
securities are not listed on either the Nasdaq National Market or the Nasdaq
SmallCap Market. These shares have been classified as Redeemable Preferred Stock
on the balance sheet. The issuance costs, value of warrants, value of beneficial
conversion feature, liquidation premium and unpaid dividends related to the
Redeemable Shares have been charged to Additional Paid-in Capital and accreted
to the Redeemable Preferred Stock value in order to reflect total liquidation
value at December 31, 1999.
50
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE J - PREFERRED STOCK - Continued
2. Issuance of Convertible Preferred Stock, Series E - Continued
-------------------------------------------------------------
In the event of a Liquidation Event as defined in the Certificate of
Designation, including commencement of a voluntary case under Federal bankruptcy
laws, the Series E stockholders shall be entitled to the Liquidation Preference
equal to the stated value of the shares plus an amount equal to 30% of the
stated value plus accrued and unpaid dividends before any distributions are made
to the common stockholders. At December 31, 1999, the Liquidation Preference
amount of $4,020,000 related to the non-redeemable Series E Stock has been
charged to Additional Paid-in Capital and is included in Stockholders' Equity as
Preferred Stock.
The amounts related to all of the Series E Stock for liquidation premium and
unpaid dividends of $1,800,000 and $240,000, respectively, are shown as an
additional deduction to determine net loss per common share. Dividends for all
of the Series E Stock accrue at $120,000 per quarter.
NOTE K - COMMON STOCK
As of December 31, 1999, the Company had remaining for issuance the following
number of reserved shares of its common stock:
Warrants to purchase common stock 720,000
Stock options under 1987 Stock Option Plan 329,206
Stock options under 1996 Stock Plan 618,084
Stock options under 1996 Director Option Plan 103,334
Employee Stock Purchase Plan 149,939
Conversion of Series E convertible redeemable preferred (*) 9,230,770*
----------
Total shares reserved 11,151,333
==========
* Based on a market price of $1.00 on December 31, 1999 and a conversion ratio
of 65%.
NOTE L - STOCK OPTION PLANS
1. 1987 Stock Option Plan (1987 Plan)
-----------------------------------
Under the 1987 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 1987 Plan generally expire
ten (10) years from the date of grant. During 1996, the Company adopted new
stock plans (see below); accordingly, the Company does not plan to issue further
options to purchase common stock under the 1987 Plan.
2. 1996 Stock Plan (1996 Plan)
---------------------------
A total of 633,334 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 non-statutory 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.
The Board of Directors adopted a sub-plan of the 1996 Plan for the purpose of
qualifying for preferred tax treatment under UK tax laws. The UK Inland Revenue
approved the sub-plan effective January 30, 1998.
51
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE L - STOCK OPTION PLANS - Continued
3. 1996 Director Option Plan (Directors Plan)
-------------------------------------------
A total of 103,334 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.
52
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE L - STOCK OPTION PLANS - Continued
The following option activity occurred in all stock option plans during the
three years ended December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Outstanding Exercise
Options Price
----------- --------
<S> <C> <C>
Balance, December 31, 1996 778,181 $2.66
Granted 57,469 5.24
Exercised (109,613) 0.66
Expired - -
Canceled (106,978) 4.23
-------- -----
Balance, December 31, 1997 619,059 2.98
Granted 318,469 3.95
Exercised (35,995) 1.17
Expired - -
Canceled (83,921) 7.42
-------- -----
Balance, December 31, 1998 817,612 2.98
Granted 177,169 1.87
Exercised (82,406) 1.72
Expired - -
Canceled (93,832) 3.72
-------- -----
Balance December 31, 1999 818,543 $2.79
======== =====
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
------------------------ ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$0.30 - $0.75 119,671 3.51 $0.53 103,560 $ 0.49
$1.50 205,286 5.67 1.50 197,839 1.50
$1.625-$3.00 271,789 8.35 2.04 39,607 2.38
$3.625-$7.50 197,628 7.63 3.99 138,971 3.86
$9.00-$12.50 24,169 6.74 7.21 27,324 10.91
------- ---- ----- ------- ------
818,543 6.96 $2.79 507,301 $ 2.52
======= ==== ===== ======= ======
</TABLE>
As of December 31, 1998, the number of options exercisable and the weighted
average exercise price were 459,052 and $2.15, respectively. As of December 31,
1997, the number of options exercisable and the weighted average exercise price
were 377,835 and $2.10, respectively.
53
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE L - STOCK OPTION PLANS - Continued
4. Employee Stock Purchase Plan (Purchase Plan)
--------------------------------------------
A total of 276,667 shares of common stock are currently reserved for issuance
under this program, with 116,667 shares being initially reserved and an
additional 100,000 being added as a result votes at the 1998 and 60,000 shares
being added at the 1999 Annual Shareholders Meetings. 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 began on June 19, 1996. The
Purchase Plan will terminate in 2006. As of December 31, 1999, 126,726 shares
of common stock had been issued under the Purchase Plan.
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
option 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):
1999 1998 1997
--------- -------- --------
Net loss
As reported $(20,565) $(7,873) $(9,640)
Pro forma (21,110) (8,344) (9,978)
Basic net loss per share as reported (2.65) (1.03) (1.28)
Pro forma (2.72) (1.09) (1.32)
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 1999,
1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------------- --------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 101% 152%-256% 125% prior to the initial public
Offering and 85% thereafter
Risk-free interest rate 4.75-5.88% 5.38-5.67% 5.59-6.50%
Expected lives of each grant 5 years 3.5 to 7 years 2.5 to 3 years
</TABLE>
54
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE M - INCOME TAXES
The Company follows SFAS No. 109 which prescribes an asset and 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 United States
Federal income tax rate due to the following:
1999 1998 1997
------ ------ ------
Benefit at U.S. statutory rate (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal benefit (5.8) (5.8) (5.8)
Increase in valuation allowance 39.8 39.8 39.8
Other - - -
----- ----- -----
- % - % - %
===== ===== =====
The provision for income taxes for the years ended December 31, 1999, 1998,
and 1997 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):
1999 1998
--------- ---------
Deferred income tax assets:
Net operating loss carryforwards $ 18,600 $ 15,645
Tax credit carryforwards 150 303
Cumulative temporary differences 350 493
-------- --------
19,100 16,441
Valuation allowance (19,100) (16,441)
-------- --------
Net deferred income tax asset $ - $ -
======== ========
As of December 31, 1999, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $46.0 million and $26.0
million, respectively. The net operating loss carryforwards and tax credit
carryforwards expire on various dates through 2019. The Internal Revenue 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 would be limited to possible ownership changes. Cumulative
temporary differences consist of reserves and accruals currently deductible due
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.
55
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE N - LOAN AND SECURITY AGREEMENTS
1. Wexford Credit Agreement
------------------------
On February 25, 1999 the Company entered into the Second Amended and Restated
Credit Agreement among the Company and its subsidiaries, as Borrowers, and
Wexford Management, LLC and certain affiliates, as Lenders, with a maturity date
of August 24, 1999. As a condition of the Credit Agreement, the Company agreed
to confirm its grant to the Lenders of a security interest in all existing and
future assets and to cause all its significant subsidiaries to enter into
guarantees and grant to the Lenders additional security interests and mortgages
in all existing and future assets of the Borrowers and significant subsidiaries.
The maturity date was subsequently extended to November 22, 1999, in exchange
for a payment of $100,000. As a further condition to the Credit Agreement, the
Company issued to Wexford a warrant to acquire 450,000 shares of common stock.
The warrants can be exercised at any time on or before February 25, 2004 at an
exercise price equal to the lesser of (i) $3.875 per share and (ii) the average
closing price of the Company's common stock for the ten trading days immediately
following the issuing date. Using the Black Scholes pricing model, the Company
calculated the fair value of these warrants to be $782,000 with the following
assumptions used: Dividend yield of 0%; expected volatility of 101%; risk free
interest rate of 5.88% and expected term of 3 years. This entire value was
amortized to interest expense during 1999.
As described in Note B, Wexford declared the amounts under the Credit
Agreement due and payable on December 15, 1999, and appointed an administrative
receiver in the United Kingdom for all assets of the Company's United Kingdom
subsidiaries. At December 31, 1999, the balance due under the Credit Agreement
was $5.7 million plus $100,000 accrued interest, all of which is included under
the caption of Liabilities Subject to Compromise.
2. Bank Credit Agreement
---------------------
In January 1998, the Company entered into an Amended and Restated Loan and
Security Agreement with a bank, which replaced a previous agreement with the
same bank. The bank agreement provided for a $4,000,000 accounts receivable
line of credit with a $2,000,000 letter of credit sub-limit, with interest at
the prime interest rate plus 0.50%. No amounts were outstanding under this
agreement as of December 31, 1998. This agreement matured on January 20, 1999
and was not replaced.
56
<PAGE>
Thermatrix Inc. and Subsidiaries
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE O - SEGMENTS
During 1998, the Company adopted Statement of Financial Accounting Standards
SFAS No. 131. Disclosures About Segments of an Enterprise and Related
Information. SFAS 131 requires a new basis of determining reportable business
segments, i.e., the management approach. This approach requires that business
segment information used by management to assess performance and manage Company
resources be the source for information disclosure. On this basis, the Company
is organized and operates as one business segment, the development, manufacture
and sale of proprietary industrial process equipment for the destruction of
volatile organic compounds and hazardous air pollutants. As a result, the
adoption of SFAS 131 had no impact on the Company's disclosures or financial
statements.
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 19%, 2% and 35% of total revenues
for the years ended December 31, 1999, 1998 and 1997, respectively. In 1999,
revenues in Canada and Australia each accounted for 5% of total revenue. In 1998
and 1997, the majority of export revenue was generated in Asia.
57
<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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Page
------
<S> <C>
Report of Independent Public Accountants............................................................. 30
Consolidated Balance Sheets--As of December 31, 1999 and 1998........................................ 31-32
Consolidated Statements of Operations--For the Three Years Ended December 31, 1999................... 33
Consolidated Statements of Stockholders' Equity (Deficit)--For the Three Years Ended
December 31, 1999.................................................................................. 34-35
Consolidated Statements of Cash Flows--For the Three Years Ended December 31, 1999................... 36-37
Notes to Consolidated Financial Statements........................................................... 38-57
2. Financial Statement Schedules. For years ended December 31, 1999, 1998 and 1997:
Schedule II. Valuation and Qualifying Accounts and Reserves.......................................... 65
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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 Spieker
Properties, L.P., as amended.(*)
58
<PAGE>
10.8 Lease dated June 24, 1995 between the Registrant and American General
Life Insurance Company.(*)
10.11 Amended and Restated Loan and Security Agreement between the Registrant
and Venture Banking Group, a Division of Cupertino National Bank, dated
January 21, 1998.
10.12 1996 Stock Plan: UK Rules for Employees.(***)
10.13 First Amendment to the Amended and Restated Loan and Security Agreement
between the Registrant and Venture Banking Group, a Division of
Cupertino National Bank.(***)
10.14 Sublease dated May 7, 1998 between Registrant and Clinimetrics Research
Associates, Inc.
10.15 Form 8K with exhibits filed January 27, 1999 regarding the acquisition
of Wahlco Environmental Systems, Inc.
The following Exhibits to the Form 8K filed January 27, 1999 are incorporated
by reference.
2.1 Agreement and Plan of Merger dated November 9, 1998 by and among
Thermatrix Inc., TMX Acquisition Sub I, Inc. and Wahlco Environmental
Systems, Inc.
2.2 Security Agreement dated January 13, 1999 by and among Thermatrix,
Inc., Wexford Capital Partners II, L.P., Wexford Overseas Partners I,
L.P., Wexford Special Situations 1996, L.P., Wexford Special Situations
1996 Institutional, L.P., Wexford Special Situations 1996 Limited,
Wexford-Euris Special Situations 1996, L.P. and Wexford Management LLC.
2.3 Guaranty dated January 13, 1999 by and among Thermatrix Inc., Wexford
Capital Partners II, L.P., Wexford Overseas Partners I, L.P., Wexford
Special Situations 1996, L.P., Wexford Special Situations 1996
Institutional, L.P., Wexford Special Situations 1996 Limited, Wexford
Special Situations 1996, L.P. and Wexford Management LLC.
10.16 Form 8K with exhibits filed March 12, 1999 regarding the Second
Amended and Restated Credit Agreement related to interim debt financing
arrangements with Wexford.
The following Exhibits to the Form 8K filed March 12, 1999 are incorporated by
reference:
10.1 Second Amended and Restated Credit Agreement dated February 25, 1999 by
and among Wahlco Environmental Systems, Inc., Thermatrix Inc., Wexford
Capital Partners II, L.P., Wexford Overseas Partners I, L.P., Wexford
Special Situations 1996, L.P., Wexford Special Situations 1996
Institutional, L.P., Wexford Special Situations 1996 Limited, Wexford-
Euris Special Situations 1996, L.P. and Wexford Management LLC, as
Agent.
10.2 General Release dated February 25, 1999 by and among Wahlco
Environmental Systems, Inc., Thermatrix Inc., Wexford Capital Partners
II, L.P., Wexford Overseas Partners I, L.P., Wexford Special Situations
1996, L.P., Wexford Special Situations 1996 Institutional, L.P.,
Wexford Special Situations 1996 Limited, Wexford-Euris Special
Situations 1996, L.P. and Wexford Management LLC, as Agent.
10.3 Amended and Restated Guaranty dated February 25, 1999 by and among
Bachmann Companies, Inc., Wahlco Engineered Products Group, LTD.,
Wahlco, Inc., WES Property, LTD., Wahlco Engineered Products, Inc.,
Wahlco Engineered Products, Ltd., Pentney Engineering, LTD., Teddington
Bellows (Holdings), LTD., Teddington Bellows, Ltd., Treste Plant Hire,
LTD., Thermatrix, LTD. and Wexford Management LLC, as Agent.
10.4 Mortgage, Security Agreement Assignment of Rents and Leases and Fixture
Filing dated February 25, 1999 by and between Wahlco Engineered
Products, Inc. and Wexford Management LLC, as Agent.
59
<PAGE>
10.5 Mortgage, Security Agreement Assignment of Rents and Leases and Fixture
Filing dated February 25, 1999 by and between Wahlco, Inc. and Wexford
Management LLC, as Agent.
10.6 Promissory Note dated February 25, 1999 in the principal amount of
$5,720,585.64, delivered by Thermatrix Inc. and Wahlco Environmental
Systems, Inc. to Wexford Management LLC, as Agent.
10.7 Registration Rights Agreement dated February 25, 1999 by and between
Thermatrix Inc. and Wexford Management LLC
10.8 Amended and Restated Security Agreement dated February 25, 1999 by and
among Wahlco Environmental Systems, Inc., Bachmann Companies, Inc.,
Wahlco, Inc., Wahlco Engineered Products, Inc. and Wexford Management
LLC as Agent.
10.9 Amended and Restated Security Agreement dated February 25, 1999 by and
between Thermatrix Inc., Wexford Capital Partners II, L.P., Wexford
Overseas Partners I, L.P., Wexford Special Situations 1996
Institutional, L.P., Wexford Special Situations 1996 Limited, Wexford-
Euris Special Situations 1996, L.P. and Wexford Management LLC, as
Agent.
10.10 Form of U.K. Debenture entered into by and between Wexford Management
LLC and each of Pentney Engineering Limited, Teddington Bellows
(Holdings) LTD., Teddington Bellows Ltd., Thermatrix, LTD., Treste
Plant Hire, LTD., WES Property, LTD., Wahlco Engineered Products Group,
LTD. and Wahlco Engineered Products LTD., respectively.
10.11 Stock Pledge Agreement dated February 25, 1999 by and among Thermatrix
Inc., Wahlco Environmental Systems, Inc., Bachmann Companies, Inc.,
Wahlco Engineered Products Group LTD., Wahlco Engineered Products LTD.,
Teddington Bellows (Holdings), LTD., and Wexford Management LLC, as
Agent.
10.12 Warrant to purchase up to 450,000 shares of Common Stock of Thermatrix
Inc. issued to Wexford Management LLC on February 25, 1999.
10.17 Form 10K with exhibits filed March 30, 1998 by Wahlco Environmental
Systems, Inc.
The following exhibits to the Wahlco Environmental Systems, Inc. Form 10-K for
the year ended December 31, 1998 filed March 30, 1998 are incorporated by
reference:
3.1 Certificate of Incorporation of the Company. (Filed as an exhibit to
the Company's Registration Statement No. 33-33698, as amended.)
3.2 Bylaws of the Company. (Filed as an exhibit to the Company's
Registration Statement No. 33-33698, as amended.)
10.1 Grant of Industrial Tax Exemption by the Commonwealth of Puerto Rico to
Wahlco International, Inc., a Delaware corporation, dated as of March
10, 1982. (Filed as an exhibit to the Company's Registration Statement
No. 33-33698, as amended.)
10.2 Order of Conversion of Grant of Puerto Rico Industrial Tax Exemption to
Wahlco International, Inc. dated as of October 29, 1987, and as amended
on March 8, 1989. (Filed as an exhibit to the Company's Registration
Statement No. 33-33698, as amended.)
10.3 Redemption and Indemnification Agreement, dated as of October 28, 1987,
by and among Pacific Diversified Capital Company, Wahlco, Inc., Robert
R. Wahler, as Trustee of the Wahler Family Trust, Triple R, John H.
McDonald, Westfore, a California limited partnership and Corona
Properties, a California limited partnership. (Filed as an exhibit to
the Company's Registration Statement No. 33-33698, as amended.)
60
<PAGE>
10.4 Form of Indemnity Agreement between the Company and each of its
directors and officers. (Filed as an exhibit to the Company's
Registration Statement No. 33-33698, as amended.)
10.5 Standard Industrial Lease, dated as of September 3, 1991, by and
between Triple R, a California general partnership and Wahlco Inc., a
California corporation. (Filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.)
10.6 First Addendum to Standard Industrial Lease, dated as of September 3,
1991 between Triple R and Wahlco, Inc. (Filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.7 Second amendment to Office Lease, dated as of December 16, 1991, by and
between BCG and the Company. (Filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991.)
10.8 Installment Note, dated as of July 20, 1992, by and between Wahlco,
Inc. and Sanwa business Credit Corporation, a Delaware corporation.
(Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the Quarter ended September 30, 1992.)
10.9 Guaranty Agreement, dated as of July 20, 1992, by and between the
Company and Sanwa. (Filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 1992.)
10.10 Security Agreement, dated as of July 20, 1992, by and between Wahlco,
Inc. and Sanwa, with accompanying Consent and Acknowledgement of the
Company, as Guarantor. (Filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 1992.)
10.11 First Amended and Restated 1990 Incentive Award Plan. (Filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1992.)
10.12 Letter Agreement dated August 31, 1993, by and between the Company,
Wahlco, Inc., Wahlco Power Products, Inc., a Delaware corporation,
Bachmann Companies, Inc., and Sanwa. (Filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the Quarter ended September
30, 1993.)
10.13 Settlement Agreement, dated as of October 7, 1994, by and between
Wahlco Power Products, Inc. and ABB Air Preheater, Inc. (Filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1994.)
10.14 Mutual Release, dated as of October 6, 1994, between Wahlco Poer
Products, Inc. and ABB Air Preheater, Inc. (Filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the Quarter ended September
30, 1994.)
10.15 Assignment of Note, Loan Agreement and collateral Documents. (Filed as
an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.)
10.16 Promissory Note, dated as of May 15, 1995, between the Company and WES
Acquisition Corp. (Filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.)
10.17 Commitment letter, dated as of May 15, 1995, from WES Acquisition
Corp. to the Company for a secured term loan in the principal amount of
$2 million. (Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.)
10.18 Employment Agreement between the Company and C. Stephen Beal dated as
of May 5, 1995. (Filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
61
<PAGE>
10.19 Employment Agreement between the Company and A. Noel DeWinter dated as
of May 16, 1995. (Filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
10.20 Employment Agreement between the Company and Barry J. Southam dated
June 1, 1995. (Filed as an exhibit to the Company's Annual Report on
Form 10--K for the year ended December 31, 1995.)
10.21 Loan and Security Agreement between Wahlco, Inc. and Silicon Valley
Bank. (Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.22 Amendment and Forbearance Agreement, dated as of May 9, 1996, by and
between Silicon Valley Bank and Wahlco, Inc. (Filed as an exhibit to
the Company's quarterly Report on Form 10-Q for the Quarter ended June
30, 1996.)
10.23 Term Loan Agreement and Warrant Agreement and Form of Warrant between
the Company and WES Acquisition Corp. dated August 28, 1996. (Filed as
an exhibit to the Company's quarterly Report on Form 10-Q for the
Quarter ended September 30, 1996.)
10.24 Letter Agreement dated March 12, 1997 between the Company and WES
Acquisition Corp. (Filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.)
10.25 Letter Agreement dated April 12, 1996 made by the Company and WES
Acquisition Corp. (Filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.)
10.26 Promissory Note dated as of May 9, 1996 made by the Company's to WES
Acquisition Corp. (Filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.)
10.27 Promissory Note dated as of November 15, 1996 made by the Company to
WES Acquisition Corp. (Filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.)
10.28 Warrant dated as of November 15, 1996 issued by the Company to Wexford
Special Situations 1996, L.P. (Filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.)
10.29 Warrant dated as of November 15, 1996 issued by the Company to Wexford
Special Situations 1996 Institutional, L.P. (Filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.)
10.30 Warrant dated as of November 15, 1996 issued by the Company to Wexford
Special Situations 1996 Limited. (Filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.)
10.31 Warrant dated as of November 15, 1996 issued by the Company to
Wexford-Euris Special Situations 1996, L.P. (Filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.)
10.32 Term Loan Agreement, dated as of July 28, 1995, between WES
Acquisition Corp. and the Company for a secured term loan in the
principal amount of $2.0 million. (Filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.)
10.33 Restructuring Agreement dated as of January 30, 1998 among the
company, WES Acquisition Corp., the other parties named therein and
Wexford Management LLC, as Agent. (Filed as an exhibit to the Company's
Registration Statement No. 333-42805.)
62
<PAGE>
10.34 Amended and Restated Credit Agreement dated as of January 30, 1998
among the Company, as Borrower, the Lenders and the Individual Parties
thereto and Wexford Management LLC, as agent. (Filed as an exhibit to
the Company's Registration Statement No. 333-42805.)
10.35 Agreement between the Company and ChaseMellon Shareholder Services,
Inc. re Subscription Agency. (Filed as an exhibit to the Company's
Registration Statement No. 333-42805.)
10.36 $750,000 Promissory Note dated as of July 2, 1997 between the Company
and the Chase Manhattan Bank. (Filed as an exhibit to the Company's
Registration Statement No. 333-42805.)
10.37 $1,000,000 Promissory Note dated as of October 13, 1997 between the
Company and the Chase Manhattan Bank. (Filed as an exhibit to the
Company's Registration Statement No. 333-42805.)
10.38 $400,000 Promissory Note dated as of November 17, 1997 between the
Company and The Chase Manhattan Bank. (Filed as an exhibit to the
Company's Registration Statement No. 333-42805.)
10.39 Waiver letter of Silicon Valley Bank dated as of December 19, 1997 re:
extension of maturity and waiver of covenants. (Filed as an exhibit to
the company's Registration Statement No. 333-42805.)
10.40 Wahlco Environmental Systems, Inc. 1996 Employee Stock Option Plan.
(Filed as an exhibit to the Company's Registration Statement No. 333-
42805.)
21 Subsidiaries of the Company. (Filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.)
27 Financial Data Schedule (EDGAR filing only)
10.18 Form 8K/A filed March 27, 1999 regarding the acquisition of Wahlco
Environmental Systems, Inc.
The following Exhibits to Form 8K/A, filed March 27, 1999 are incorporated by
reference:
2.1 Agreement and Plan of Merger dated November 9, 1998 by and among
Thermatrix Inc., TMX Acquisition Sub I, Inc. and Wahlco Environmental
Systems, Inc. (Incorporated by reference herein to Registrant's Current
Report on Form 8-K filed on January 28, 1999, File No. 000-20819.
2.2 Security Agreement dated January 13, 1999 by and among Thermatrix,
Inc., Wexford Capital Partners II L.P., Wexford Overseas Partners I,
L.P., Wexford Special Situations 1996, L.P., Wexford Special Situations
1996 Institutional L.P., Wexford Special Situations 1996 Limited,
Wexford-Euris Special Situations 1996, L.P. and Wexford Management LLC.
(Incorporated herein by reference to Registrant's Current Report on
Form 8-K filed on January 28, 1999, File No. 000-20819.)
2.3 Guaranty dated January 13, 1999 by and among Thermatrix Inc., Wexford
Capital Partners II, L.P., Wexford Overseas Partners I, L.P., Wexford
Special Situations 1996, L.P., Wexford Special Situations 1996
Institutional, L.P., Wexford Special Situations 1996 Limited, Wexford
Special Situations 1996, L.P. and Wexford Management LLC. (Incorporated
herein by reference to Registrant's Current Report on Form 8-K filed on
January 28, 1999, File No. 000-20819.)
10.19 Employment Agreement with Ms. Krimsky dated March 9, 1998.
10.20 Form 8K filed August 31, 1999 regarding the Issuance of $6 million of
Series E, Convertible, Redeemable Preferred Shares.
10.21 Form 8K filed October 7, 1999 regarding a change of the Registrants
Certifying Accountants.
10.22 Form 8K/A filed October 15, 1999 regarding a change of the Registrants
Certifying Accountants.
10.23 Form 8K Filed December 20, 1999 regarding the appointment of an
Administrative Receiver for certain of the registrant's UK based
assets.
63
<PAGE>
10.24 Form 8K filed January 13, 2000 Regarding the filing of a voluntary
petition for protection under Chapter 11 of the US Bankruptcy Code by
the Registrant for itself and four of its wholly-owned subsidiaries and
the appointment of Grant Thornton LLP as the Registrants Certifying
Accountants.
10.25 Form 8K filed February 22, 2000 regarding the resignation on December
20, 1999 of two of the Registrants Directors.
10.26 Form 8K filed may 5, 2000 regarding Operational Reports filed with the
Office of the US Trustee for March 2000.
(*) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-4370) which became effective
June 19, 1996.
(**) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ending September 30, 1997.
(***) Incorporated by reference to exhibits filed with the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
(b) Reports on Form 8-K
(Incorporated into exhibit list detailed above)
Trademark Acknowledgments
Thermatrix and PADRE(R) are registered trademarks of the Company.
64
<PAGE>
Schedule II
THERMATRIX INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance Charged to Balance
at Beginning Costs and at End
Description of Period Expense Deductions(1) of Period
- ----------- -------------- ---------- ------------------ ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts................................. $265 $220 $ (142) $343
Reserve for costs of uncompleted contracts in
excess of billings............................................ -- $500 -- $500
Year ended December 31, 1998
Allowance for doubtful accounts................................. $343 $249 $ 492 $100
Reserve for costs of uncompleted contracts in
excess of billings............................................ $500 $ -- $( 500) $ --
Year ended December 31, 1999
Allowance for doubtful accounts................................. $100 $694 $ (307) $487
Inventory obsolescence allowance................................ $ -- $577 $ -- $577
</TABLE>
- --------------
(1) Deductions represent accounts receivable and inventory amounts that were
considered doubtful and previously reserved for that became uncollectible
and were written off in the year.
65
<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.
Date: May 16, 2000 By: /s/ Frank R. Pope
----------------------------------
Frank R. Pope
Chairman of the Board
and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Frank R. Pope and Daniel S. Tedone, jointly and
severally, their attorney-in-fact, each with full power of substitution, for him
in any and all capacities, to sign on behalf of the undersigned any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, and each of the undersigned does hereby ratifying and confirming all
that each of said attorneys-in-fact, of his substitutes, may do or cause to be
done by virtue hereof.
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.
May 16, 2000 By: /s/ Frank R. Pope
------------------------------
Frank R. Pope
Chairman and
Chief Executive Officer
(Principal Executive Officer)
May 16, 2000 By: /s/ Daniel S. Tedone
------------------------------
Daniel S. Tedone
President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
May 16, 2000 By: /s/ Charles R. Kokesh
------------------------------
Charles R. Kokesh
Director
May 16, 2000 By: /s/ John M. Toups
------------------------------
John M. Toups
Director
66
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 134 922
<SECURITIES> 1,670 0
<RECEIVABLES> 2,234 7,015
<ALLOWANCES> 100 487
<INVENTORY> 0 1,198
<CURRENT-ASSETS> 4,802 9,480
<PP&E> 1,618 4,448
<DEPRECIATION> 1,046 1,953
<TOTAL-ASSETS> 6,780 15,225
<CURRENT-LIABILITIES> 2,534 5,156
<BONDS> 0 0
0 4,020
0 4,020
<COMMON> 8 8
<OTHER-SE> 4,238 (14,768)
<TOTAL-LIABILITY-AND-EQUITY> 6,780 15,225
<SALES> 5,882 21,700
<TOTAL-REVENUES> 5,882 21,700
<CGS> 5,272 17,758
<TOTAL-COSTS> 7,805 15,684<F1>
<OTHER-EXPENSES> (382) (72)
<LOSS-PROVISION> (243) 387
<INTEREST-EXPENSE> 12 2,279
<INCOME-PRETAX> (6,582) (14,336)
<INCOME-TAX> 66 66
<INCOME-CONTINUING> (6,648) (14,402)
<DISCONTINUED> (1,225) (3,090)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,873) (17,492)
<EPS-BASIC> (1.03) (2.65)
<EPS-DILUTED> (1.03) (2.65)
<FN>
<F1>Includes impairment loss of $5,766.
</FN>
</TABLE>
