UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________.
COMMISSION FILE NUMBER
0-20819
THERMATRIX INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2958515
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2025 GATEWAY PLACE, SUITE 132
SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices)
(408) 453-0490
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days:
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at September 30, 1998
----- ---------------------------------
Common stock, $.001 par value 7,695,872
THERMATRIX INC.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Certain Business Considerations" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in, or incorporated by reference into, this report.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements........................................... 3
Condensed Consolidated Balance Sheets.......................... 3
Condensed Consolidated Statements of Operations................ 4
Condensed Consolidated Statements of Cash Flows................ 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities.......................................... 15
Item 3. Defaults Upon Senior Securities................................ 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURE...................................................... 16
2
THERMATRIX INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 2,658 $ 3,990
Short-term investments 1,647 3,587
Accounts receivable, net 5,570 3,520
Costs of uncompleted contracts, net 273 547
Prepaid expenses and other current assets 296 250
-------- --------
Total current assets 10,444 11,894
PROPERTY AND EQUIPMENT
Machinery and equipment 833 857
Demonstration equipment 558 506
Furniture and fixtures 441 322
-------- --------
1,832 1,685
Less - Accumulated depreciation and amortization (1,152) (749)
-------- --------
Net property and equipment 680 936
-------- --------
PATENTS AND OTHER ASSETS, net 1,354 1,157
-------- --------
$ 12,478 $ 13,987
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,556 $ 1,055
Accrued liabilities 848 802
Billings on uncompleted contracts in excess of costs 46 181
-------- --------
Total current liabilities 4,450 2,038
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value 8 8
Additional paid-in capital 48,756 48,644
Accumulated other comprehensive income 50 -
Accumulated deficit (40,786) (36,703)
-------- --------
Total stockholders' equity 8,028 11,949
-------- --------
$ 12,478 $ 13,987
======== ========
See notes to condensed consolidated financial statements.
3
THERMATRIX INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
REVENUES $ 3,964 $ 2,304 $ 9,642 $ 5,638
COST OF REVENUES 3,705 2,311 8,850 6,200
------- ------- ------- -------
Gross margin 259 (7) 792 (562)
------- ------- ------- -------
OPERATING EXPENSES:
Research and development 390 302 1,053 922
Selling, general and administrative 1,247 1,877 4,113 5,309
------- ------- ------- -------
Total operating expenses 1,637 2,179 5,166 6,231
------- ------- ------- -------
Loss from operations (1,378) (2,186) (4,374) (6,793)
OTHER INCOME:
Interest income (net) 82 152 292 546
Other income 7 1 49 4
------- ------- ------- -------
Total other income 89 153 341 550
------- ------- ------- -------
Net loss before income taxes (1,289) (2,033) (4,033) (6,243)
PROVISION FOR INCOME TAXES (17) (17) (50) (50)
------- ------- ------- -------
Net loss $(1,306) $(2,050) $(4,083) $(6,293)
======= ======= ======= =======
BASIC NET LOSS PER SHARE $ (0.17) $ (0.27) $ (0.53) $ (0.84)
======= ======= ======= =======
BASIC WEIGHTED AVERAGE
COMMON SHARES 7,696 7,573 7,668 7,526
======= ======= ======= =======
See notes to condensed consolidated financial statements.
4
THERMATRIX INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,083) $(6,293)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization 531 308
Provision for doubtful accounts 190 175
Changes in assets and liabilities -
Accounts receivable (2,240) (632)
Costs of uncompleted contracts 279 (332)
Prepaid expenses and other (45) 42
Accounts payable 2,500 (319)
Accrued liabilities 44 (83)
Billings on uncompleted contracts in excess of costs (136) (8)
------- -------
Net cash used in operating activities (2,960) (7,142)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments 1,940 6,291
Purchases of property and equipment (147) (429)
Increase in patents and other assets (324) (256)
------- -------
Net cash provided by investing activities 1,469 5,606
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 112 118
------- -------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (1,379) (1,418)
CUMULATIVE EFFECT OF FOREIGN EXCHANGE RATES ON CASH 47 -
------- -------
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD 3,990 4,781
------- -------
CASH & CASH EQUIVALENTS END OF PERIOD $ 2,658 $ 3,363
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest 10 24
Cash paid for income taxes 54 99
See notes to condensed consolidated financial statements.
5
THERMATRIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. The condensed
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three months and nine months ended September 30, 1998 and 1997. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The results for the nine months ended September
30, 1998 are not necessarily indicative of the results expected for the full
fiscal year.
2. BASIC NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding. No diluted loss per share information has been
presented in the accompanying statements of operations since potential common
shares from conversion of stock options and warrants are antidilutive.
3. SHORT-TERM INVESTMENTS
In accordance with the Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has classified all marketable debt securities as held-to-maturity and has
accounted for these investments at amortized cost. Short-term investments are
marketable securities with original maturities greater than three months and
less than one year. As of September 30, 1998, short-term investments consist of
certificates of deposit.
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 (SFAS
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
6
statements. The following table reconciles comprehensive income under the
provisions of SFAS 130 for the three months and nine months ended September 30,
1998 and 1997.
For the Three Months
Ended September 30
1998 1997
--------- --------
Net Loss $(1,306) $(2,050)
Other Comprehensive Income, net of tax
Unrealized Currency Gain $ 37 $ -
------- -------
Comprehensive Loss $(1,269) $(2,050)
======= =======
For the Nine Months
Ended September 30
1998 1997
--------- --------
Net Loss $(4,083) $(6,293)
Other Comprehensive Income, net of tax
Unrealized Currency Gain $ 50 $ -
------- -------
Comprehensive Loss $(4,033) $(6,293)
======= =======
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Statement
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. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Statement 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of
Statement 133 to have a material effect on the financial statements.
7
THERMATRIX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking information that involves
known and unknown risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from those indicated herein as a
result of certain factors, including those set forth under "Certain Business
Considerations."
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1997, contained in the Company's Annual Report on Form 10-K.
GENERAL
- -------
Thermatrix Inc. is a global industrial technology company engaged in the
development, manufacture and sale of industrial process equipment for the
destruction of volatile organic compounds and hazardous air pollutants
(collectively "VOCs"). The core component of the Company's technology is its
proprietary flameless thermal oxidizer ("FTO"). The Company's products also
include PADRE(R), a proprietary technology used to capture and recover very low
concentration VOCs from low-to-medium flow vapor streams. In addition to its
primary focus on the industrial VOC emissions control market, the Company is
currently focusing its development activities on the application of its FTO
technology to treat emissions from both mobile and stationary diesel engines.
The Company derives its revenues primarily from contracts to design, develop,
manufacture and install systems for the treatment of VOCs. The Company uses the
percentage-of-completion method of accounting to recognize contract revenues.
Losses on contracts are charged to cost of revenues as soon as such losses
become known.
The Company experienced a shift in market demand for its products during the
last two fiscal years. In 1997, the United States VOC market declined,
reflecting, the Company believes, low capital expenditures in new process
facilities. However, the Company experienced an increase in demand for its
products overseas, primarily due to the continued globalization of the chemical
and pharmaceutical industries, increased adoption of ISO 14000 standards, and
capital expenditures by overseas companies. The Company responded to this shift
by reducing its United States sales and operating staff and increasing its
presence overseas. In 1998, the Company experienced positive momentum in its
global VOC business, particularly in Europe. The geographic split of the orders
received during the first nine months of fiscal 1998 is approximately 62% in
Europe and 38s% in the United States and includes orders from the
pharmaceutical, specialty chemical, refining and remediation industries.
In addition to its primary focus on the industrial VOC emissions control market,
the Company is currently evaluating the feasibility of applying the Company's
technology to treat emissions from diesel engines. During the second quarter of
fiscal 1998, the Company announced the successful conclusion of an eighteen-
month testing and technology evaluation program and the completion of a joint
development project with Lucas Diesel Systems, a division of LucasVarity plc.
The testing and evaluation program provided 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.
In the course of conducting this test program, the Company developed a new
configuration that would allow the technology to be downsized to enhance its
suitability for mobile applications while confirming
8
the ability to inject diesel fuel into the matrix core to maintain operating
temperature. The results of the testing show a level of control equal to or
superior to any other technology commercially available and significantly better
than the U.S. Environmental Protection Agency's proposed regulations for mobile
sources including trucks, off-road vehicles, locomotives and marine vessels.
During the third quarter of fiscal 1998, the Company entered into a
Demonstration Project Partnership Agreement with the Massachusetts Executive
Office of Environmental Affairs working with the Massachusetts Executive Office
of Transportation and Construction whose jurisdiction includes the Massachusetts
Bay Transportation Authority ("MBTA"). The goal of the project is to
demonstrate the application of the FTO to treat the exhaust of a diesel
locomotive owned by the MBTA, to validate the performance of the technology on a
locomotive, and to evaluate the cost-effectiveness of this particular
application. The program also includes demonstrating the integration of various
oxides of nitrogen ("NOx") reduction technologies to achieve as complete
destruction as possible of all the undesirable components contained in this
diesel engine emission exhaust.
Subsequent to September 30, 1998, the Company received a contract award from the
Advanced Technology Program ("ATP") of the National Institute of Standards and
Technology, an agency of the U.S. Department of Commerce, for the development of
a four-way diesel emissions treatment device. Pursuant to the contract the
Company will develop and test a device capable of reducing or eliminating all
four key pollutants in diesel engine exhaust by combining the Company's FTO
technology for the reduction of particulate matter, carbon monoxide, and
hydrocarbons with a proprietary Lean NOx Catalyst developed by Southwest
Research Institute of San Antonio, Texas. ATP grants funding to industry for
research and development projects that have the potential to provide direct,
broad-based economic benefits to the United States.
Expenses incurred by the Company in connection with these development programs,
primarily labor and equipment operation costs, are generally recorded as
research and development expenses. The Company may also provide an evaluation
system as part of a joint development program, and if it does, the capital cost
of the evaluation system is amortized over the estimated useful life of the
system. Such expenses incurred by the Company for these evaluation programs
have not been material. However, due to the positive test results in the diesel
engine emissions program, the Company anticipates that more extensive
development and engineering will be needed in order to commercialize its
technology for such use. There can be no assurance as to the outcome of such
evaluation programs or, if initiated, the outcome of any such applications
development and engineering effort.
RESULTS OF OPERATIONS
- ---------------------
Revenues were $4.0 million and $9.6 million for the three months and nine months
ended September 30, 1998, up from $2.3 million and $5.6 million for the three
months and nine months ended September 30, 1997. The increase in revenues was
primarily attributable to sales of large FTO systems to customers overseas,
primarily in the United Kingdom, and an increase in domestic activity. Two
significant customers accounted for 62% and 11%, respectively, of revenues in
the three months ended September 30, 1998, and 48% and 15%, respectively, of
revenues in the nine months ended September 30, 1998. Revenues from
international customers for the three months and nine months ended September 30,
1998 were 67% and 60%, respectively, compared to 33% and 38%, respectively, of
revenues for the three months and nine months ended September 30, 1997.
The Company had a gross margin contribution of $259,000 and $792,000,
respectively, in the three months and nine months ended September 30, 1998
compared to gross margin losses of $7,000 and $562,000, respectively, in the
comparable periods 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
9
engineering and operations in the United States and Europe, and to a lesser
extent, reductions in costs from repeat sales of systems for established
applications.
Research and development expenses were $390,000 and $1,053,000, respectively, in
the three months and nine months ended September 30, 1998, compared to $302,000
and $922,000, respectively, for the comparable periods in 1997. Research and
development expenses were largely 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 expenses decreased to $1.2 million and $4.1
million, respectively, for the three months and nine months ended September 30,
1998, compared to $1.9 million and $5.3 million, respectively, in the comparable
periods in 1997. The decrease in selling, general and administrative expenses
reflects reduced staffing and related costs, lower sales commissions and
marketing expenses, and a decrease in travel expenses, partially offset by
higher consulting and legal fees.
Net interest income of $82,000 and $292,000 for the three months and nine months
ended September 30, 1998 primarily results from the investment of cash at hand.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total cash and short-term investments were $4.3 million at September 30, 1998,
down from $7.6 million at December 31, 1997. This decrease was primarily due to
cash used in operations. Net cash used in operating activities was $3.0 million
in the nine months ended September 30, 1998, compared to $7.1 million used in
operating activities during the nine months ended September 30, 1997. The
reduction in cash used in operating activities is primarily a result of reduced
operating losses and an increase in accounts payable, partially offset by an
increase in accounts receivable. The increases in accounts payable and accounts
receivable are primarily attributable to the increase in revenue.
The Company has a $4.0 million accounts receivable line of credit with a
$2,000,000 letter of credit sub-limit. The committed line will bear interest at
the prime interest rate plus 0.50% and is subject to certain financial and non-
financial covenants. There are no interest-bearing borrowings outstanding under
the line of credit as of September 30, 1998. The Company has a stand-by letter
of credit issued under the sub-facility in the amount of $354,000. The Company
anticipates satisfying its cash requirements from, among other things, (i) its
cash and short-term investments, (ii) increased revenues and positive gross
margin, (iii) the timely collection of accounts receivable, and (iv) the line of
credit facility. These strategies are dependent on the Company's ability to
continue to meet its forecasts, including developing increased sales and
generating positive gross margins therefrom, the timely collection of amounts
due to the Company and compliance with the line of credit agreement covenants.
The Company believes that its existing cash and short-term investments and line
of credit facility will provide sufficient liquidity for it to meet its
obligations for the twelve-month period ending September 30, 1999.
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 has conducted a preliminary review of its products and internal
computer systems to identify the systems that could be affected by the Year 2000
issue. A more comprehensive review will be completed by the end of 1998. The
Company believes its products and most of its management
10
information systems are already Year 2000 compliant. However, its existing
accounting system is not. The Company plans to upgrade to a Year 2000 compliant
version of its accounting system by the end of 1998 and does not anticipate that
the cost of such a conversion will be material.
While the Company currently expects the Year 2000 issue will not pose
significant operational problems, failure to fully identify all Year 2000
dependencies in the Company's systems could have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, the Company cannot be sure that systems of other companies on which
the Company relies will be converted in a timely manner. The failure of other
companies to convert systems on which the Company relies may have a material
adverse effect on the Company's business, results of operations or financial
condition.
CERTAIN BUSINESS CONSIDERATIONS
- -------------------------------
The Company's business is subject to the following risks and uncertainties, in
addition to those described elsewhere.
Operating Losses and Accumulated Deficit; Uncertainty of Future Profitability.
The Company had a net loss of approximately $9.6 million in 1997 and $4.1
million for the nine months ended September 30, 1998, and had an accumulated
deficit of approximately $40.8 million at September 30, 1998. 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. In
the event the Company does not achieve such revenues or margins, the Company may
require additional financing to fund its operations in the future. There can be
no assurance that such financing will be available or, if available, that it
will be on favorable terms.
Ability to Compete Against Lower Cost Technologies. To date, FTO systems have
been installed in a small segment of a number of industries. There can be no
assurance that the Company's FTO technology will receive broad market acceptance
as an economically and environmentally acceptable means of destroying VOCs. 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. For the nine months ended September 30, 1998,
two projects accounted for 63% of the Company's revenues. In 1997, two projects
accounted for 38% of the Company's revenues and in 1996, three projects
accounted for 38% of the Company's revenues. Although the Company is expanding
the number of its customers and installations, the average size and dollar
volume of each installation has been increasing. The Company anticipates the
size of turnkey projects in 1998 will range from $1 million to $4 million, up
from an average of $850,000 in 1996. 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 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 are often issued in stages and it is not uncommon for
there to be delays between the completion of the engineering design phase and
the receipt of the equipment order due to complex permitting and/or other
requirements. In addition, orders for large systems often have tight delivery
schedules and the customer will often attempt to negotiate penalties for late
delivery and/or the
11
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.
Management of Growth. Although it relies on subcontractors to fabricate
subassemblies and to assemble and install completed systems, the Company uses
its own employees to design, test and commission systems. The Company seeks to
maintain engineering and design staffing levels adequate for current and near-
term demand. During periods of rapid growth, such as that experienced by the
Company during 1996 and 1998, the Company's engineering and design personnel
generally operate at full capacity. As a result, future growth, if any, is
limited by the Company's ability to recruit and train additional engineering,
design and project management personnel and by the ability and performance of
the individual employees in managing more and larger projects. Furthermore, any
failure to maintain quality or to meet customer installation schedules could
damage relationships with important customers, damage the Company's reputation
generally and result in contractual liabilities. There can be no assurance that
the Company will be able to effectively manage an expansion of its operations or
that the Company's systems or controls will be adequate to support the Company's
operations if expansion occurs. In such event, any failure to manage growth
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition.
Risks Associated with International Operations and Sales. In 1997, sales to
international customers in Europe and Asia increased to 35%, up from 14% in
1996. For the nine months ended September 30, 1998, sales to international
customers in Europe increased to 58%. The Company plans to increase its
revenues, in part, through an expansion of its overseas operations. Expansion
internationally encompasses the need to provide an infrastructure for
operations, sales and administration. The Company's overseas growth has placed,
and could continue to place, a significant strain on its managerial, operational
and financial resources. There can be no assurance that the Company will be able
to attract, hire and train personnel or to continue to develop the
infrastructure needed on a timely basis which may have an adverse impact on the
Company's business, results of operations and financial condition.
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 in either
United States dollars or local currencies. Sales in Europe have been primarily
denominated in pounds sterling. Since some expenses in connection with
international contracts are often incurred in foreign currency, there can be a
short-term exchange risk created. If the Company has significant international
sales or purchases in the future denominated in foreign currencies, the Company
may purchase hedging instruments to mitigate the exchange risk on these
contracts.
Risks Associated with Fixed Price Contracts. A majority of the Company's
contracts are performed using "fixed-price" rather than "cost-plus" terms. Under
fixed-price terms, the Company quotes firm prices to its customers and bears the
full risk of cost overruns caused by estimates that differ from actual costs
incurred or manufacturing delays during the course of the contract. Some costs,
including component costs, are beyond the Company's control and may be difficult
to predict. If manufacturing or installation costs for a particular project
exceed anticipated levels, gross margins would be materially adversely affected,
and the Company could experience losses. In addition, the manufacturing process
may be subject to significant change orders. However, 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.
12
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, both in the United States and overseas.
Employees may voluntarily terminate their employment with the Company at any
time, and none of the Company's employees is subject to any term employment
contract with the Company. The Company has limited personnel resources
available to address the different activities in its business. The loss of the
services of one or more of the Company's key employees could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company also believes that its future success will depend in large part upon
its ability to attract and retain additional highly skilled personnel,
particularly design and process engineers. Because of the technical
sophistication of the Company's systems and the sophisticated engineering
software utilized by the Company, design and process engineers who join the
Company generally are required to have advanced technical knowledge and
significant training to perform efficiently and productively. The availability
of such personnel is limited, and the Company has at times experienced
difficulty in locating new employees with the requisite level of expertise and
experience. In addition, the Company believes its ability to manage the
anticipated increase in customer orders for the Company's products in Europe
will depend in a large part on its success in attracting and retaining skilled
project managers and engineers in Europe. There can be no assurance that the
Company will be successful in retaining its existing key personnel or in
attracting and retaining the personnel it requires in the future.
The Company maintains key employee life insurance on the life of its Chairman,
President and Chief Executive Officer, John T. Schofield, in the amount of
$2,000,000. There can be no assurance that such amount will be sufficient to
compensate the Company for the loss of the services of such individual.
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.
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 Thermatrix technology
has been used in the past, and there can be no assurance that it 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 the results of its
recently completed technology evaluation program were positive, the
13
Company anticipates that more extensive development and engineering will be
needed in order to commercialize the technology for such use. The level of
expenditure by the Company in this area will depend on the degree of support it
receives from strategic partners. Although pilot test results to date have been
positive, there can be no assurance as to the success of any such effort.
14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company has been, or may become, involved in litigation
proceedings incidental to the conduct of its business. The Company does not
believe that any such proceedings presently pending will have a material adverse
effect on the Company's financial position or its results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.3 Restated Certificate of Incorporation of Registrant.(**)
3.4 Amended and Restated Bylaws of Registrant.(*)
4.2 Amended and Restated Investor Rights Agreement.(*)
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers.(*)
10.2 1987 Incentive Stock Plan, as amended and related agreements.(*)
10.3 1996 Stock Plan and form of Stock Option Agreement thereunder.(*)
10.4 Employee Stock Purchase Plan and forms of agreement thereunder.(*)
10.5 1996 Director Option Plan and form of Director Stock Option
Agreement thereunder.(*)
10.6 Asset Purchase Agreement between the Registrant and Purus, Inc.
dated January 4, 1996.(*)
10.8 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 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.
27.1 Financial Data Schedule.
15
--------------------
(*) 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 ended September 30,
1997.
(***) Incorporated by reference to exhibits field with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K
None
TRADEMARK ACKNOWLEDGMENTS
. Thermatrix and PADRE are registered trademarks of the Company.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMATRIX INC.
Date: November 13, 1998 By: /s/ Daniel S. Tedone
--------------------
Daniel S. Tedone
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMATRIX INC.
Date: November 13, 1998 By: /s/ Daniel S. Tedone
--------------------
Daniel S. Tedone
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17