SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended Commission File Number
March 31, 1998 33-87284-N4
THERMO-MIZER ENVIRONMENTAL CORP.
960 East Hazelwood Avenue
Rahway, NJ 07065
Tel: 908-381-8200
Delaware 22-2312917
(State of Incorporation) (I.R.S. Employer Identification No.)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ ]
At May 11, 1998, the latest practicable date, there were 12,353,092 shares of
Common Stock outstanding, $.001 par value.
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3, 4
Condensed Consolidated Statements of Operations
for the three months ended
March 31, 1998 and 1997 5
Condensed Statements of Consolidated Cash Flows
for the three months ended
March 31, 1998 and 1997 6
Condensed Consolidated Statement of Stockholders'
Equity for the three months ended March 31, 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION 20
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 1998 December 31, 1997
(unaudited)
Current Assets:
Cash $ 187,743 $ 299,179
Other time deposits
Contracts receivable-net of allowance
of $43,600 and $66,600 1,511,203 1,229,129
Inventories 778,830 790,180
Unbilled receivables 6,751 14,236
Prepaid expenses and other 265,137 189,676
---------- ----------
Total Current Assets 2,749,664 2,522,400
Property and Equipment - net 2,342,695 2,378,228
Other Assets 2,342,529 2,538,815
---------- ----------
Total Assets $7,434,888 $7,439,443
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP.
CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 1998 December 31, 1997
(unaudited)
Current Liabilities:
Notes payable and current
installments of long-term debt $ 490,479 $ 490,479
Accounts payable 1,008,187 763,651
Billings in excess of revenues 179,547 26,103
Accrued expenses and other 550,918 517,597
----------- -----------
Total Current Liabilities 2,229,131 1,797,830
----------- -----------
Long-Term Debt 2,908,714 3,988,878
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.001 par value,
25,000,000 shares authorized;
10,691,395 and 3,952,085 shares issued 10,691 3,952
Additional paid-in capital 6,149,836 5,218,565
Deficit (3,631,779) (3,338,077)
----------- -----------
Total 2,528,748 1,884,440
Less - Note receivable (160,000) (160,000)
Treasury Stock-at cost (71,705) (71,705)
----------- -----------
Stockholders' Equity-net 2,297,043 1,652,735
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,434,888 $ 7,439,443
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED March 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
Contract and other revenues $ 2,232,922 $ 527,818
Cost of revenues 1,786,262 418,109
----------- -----------
Gross profit 446,660 109,709
----------- -----------
Expenses:
Personnel and related costs 322,386 130,946
Selling and administrative expenses 349,806 230,256
Product development costs 6,134 88,543
----------- -----------
Total expenses 678,326 449,745
----------- -----------
Operating loss (231,666) (340,036)
Other- net (principally interest) (60,386) (22,871)
----------- -----------
Loss from operations (292,052) (362,907)
Income taxes - net 1,650 13,000
----------- -----------
Net loss $ (293,702) $ (375,907)
=========== ===========
Loss per share $ (.05) $ (.17)
=========== ===========
Weighted average number of common and
Common equivalent shares outstanding 5,964,786 2,260,551
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $ (293,702) $ (375,906)
Adjustments to reconcile net earnings
to net cash provided by operating
Activities:
Loss on property disposal 28,546
Depreciation and amortization 153,329 21,137
Decrease in net operating assets 155,280 82,401
----------- -----------
Net cash provided by (used in)
Operating activities 14,907 (243,822)
----------- -----------
Cash flows (used in )investing activities:
Purchase of property and equipment (78,681)
Deferred acquisition costs (100,789)
Other - net (7,333)
----------- -----------
Total (78,681) (108,122)
----------- -----------
Cash flows from financing activities:
Repayment of debt (47,662)
Issuance of securities 15,000
----------- -----------
Total (47,662) 15,000
----------- -----------
Net increase (decrease) in cash (111,436) (336,944)
Cash and cash equivalents - beginning 299,179 1,029,060
----------- -----------
Cash and cash equivalents - ending $ 187,743 $ 692,116
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated Treasury Note
Common Stock Capital Deficit Stock Receivable Total
------------ ---------- ----------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 3,952 $ 5,218,565 $(3,338,077) $(71,705) $(160,000) $ 1,652,735
Issuance of equity securities 6,739 931,271 938,010
Net loss (293,702) (293,702)
-------- ----------- ----------- -------- --------- -----------
Balance, March 31, 1998 $ 10,691 $ 6,149,836 $(3,631,779) $(71,705) $(160,000) $ 2,297,043
======== =========== =========== ======== ========= ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1--BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements for
the three-month periods ended March 31, 1998 and 1997 are unaudited and include
all adjustments considered necessary by Management for a fair presentation. The
results of operations realized during an interim period are not necessarily
indicative of results to be expected for a full year. These Consolidated
financial statements should be read in conjunction with the information filed as
part of the Company's Annual Report on Form 10-KSB.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's principal accounting and financial reporting
policies is as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Thermo-Mizer
Environmental Corp. and its wholly-owned subsidiary, Laminaire Corporation
("Laminaire") (collectively referred to as the "Company"), which was acquired on
October 17, 1997 in a transaction accounted for as a purchase in accordance with
the requirements set forth in Opinion No. 16 of the Accounting Principles Board.
Accordingly, the results of Laminaire's operations are included in the Company's
consolidated financial statements commencing with the date of acquisition.
Therefore, Laminaire's results of operations are included for the entire
three-month period ended March 31, 1998, but are entirely excluded from the
Company's results for the three-month period ended March 31,1997.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Revenue Recognition
Revenue for product sales is recognized in the period in which the product
is shipped.
Contract revenues are recognized on the percentage-of-completion method by
multiplying total contract revenue by the estimated percentage of contract
completion. Percentage of completion is generally estimated using the cost to
cost method, supplemented if appropriate by the percentage of labor hours
incurred. Contract costs include all direct material, subcontract and labor
costs and those indirect costs associated with contract performance such as
manufacturing overhead. Selling, general and administrative costs are charged to
operations as incurred. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
Earnings are also charged with a provision for doubtful accounts based on a
review of collectibility.
Service revenue amounted to $42,678 and $64,780, respectively, for the
three months ended March 31, 1998 and 1997. Such revenue is recognized when the
service is performed.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out cost flow assumption. At March 31, 1998,
inventories consist of:
8
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Description Amount
Raw materials and components $449,550
Work-in-progress 199,318
Finished goods 129,962
--------
Total $778,830
========
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using straight-line and accelerated
methods based upon the estimated useful lives of the related assets as follows:
Building and improvements 30 years
Furniture and fixtures 5 years
Vehicles 5 years
Machinery and equipment 5-7 years
Expenditures for repairs and maintenance are charged to expense as
incurred. Upon retirement, sale or other disposition of property and equipment,
the cost and accumulated depreciation are eliminated from the accounts and gain
or loss is included in operations.
Goodwill
Goodwill, which represents the excess of the purchase price for Laminaire
over the fair value of the net assets acquired, is being amortized on the
straight-line basis over 40 years.
Long Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may
not be recoverable. If required, impairment losses on assets to be held and used
are recognized based on the excess of the asset's carrying value over its fair
value. Long-lived assets to be sold are reported at the lower of carrying amount
or fair value reduced by estimated disposal costs.
Statement of Consolidated Cash Flows
Interest paid for the three months ended March 31, 1998 and 1997 was
$80,331 and $5,484, respectively. For the purposes of this statement,
investments and time deposits having an initial term of 90 days or less are
considered to be cash equivalents.
Product Development Costs
Product development costs are charged to operations as incurred.
9
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Advertising
The Company charges advertising costs to expense as incurred. Costs related
to mail order catalogs and promotional materials are charged to operations when
mailed or distributed. Advertising costs amounted to $44,545 and $31,907 for the
three months ended March 31, 1998 and 1997, respectively.
Basic Loss Per Share
Basic loss per common and common equivalent share are calculated by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during the period. The assumed exercise of
outstanding warrants and options and conversion of convertible debt would have
been antidilutive and, therefore, were excluded from the calculation of loss per
share in all periods presented.
Warranty Costs
The Company's policy is to warrant parts on new installations for one year
from start-up of the system. The cost of parts used in installations is
generally not a material component of the total installation costs. The
Company's policy is to accrue expenses related warranty costs when the related
revenue is recognized.
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The principal assumptions inherent in the
accompanying financial statements relate to estimated percentages of contract
completion and the realizability of certain assets. Actual results may differ
from those estimates. All liabilities are recorded and carried at approximate
fair values.
Fiscal Year
The Company changed its year-end from a fiscal year ending on June 30 to a
calendar year ending on December 31.
Reclassifications
Certain fiscal 1997 amounts and balances have been reclassified to conform
to the current presentation.
NOTE 3--ACQUISITION OF LAMINAIRE CORPORATION
On October 16, 1997 the Company acquired all of the outstanding shares of
Common Stock of Laminaire Corporation ("Laminaire") from Garay LLC for a
purchase price of $3,200,000, subject to adjustment based on Laminaire's
operating performance during the period immediately prior to the acquisition.
Laminaire, based in Rahway, New Jersey, manufactures and distributes cleanroom
products and also produces a variety of electronic circuit boards. The purchase
price consisted of a cash payment of $1,000,000, a convertible promissory note
in the principal amount of $2,200,000 (the "First Note") and a promissory note
with a principal amount to be determined (the "Second Note").
The First Note bears interest at the rate of 10% per annum and is payable
in 60 equal monthly installments of principal and interest of $33,830 commencing
November 16, 1997 with a final payment of principal of $1,000,000 due on October
16, 2002. The First Note is convertible into shares of Common Stock at a
conversion price of $1 per share. The First Note becomes convertible for a
period of two years commencing April 16, 1998 in amounts not exceeding $500,000
for each four-month period. The holder of the First Note is entitled to demand
registration of the Common Stock issuable upon conversion of the First Note on
one occasion at the Company's expense commencing April 16, 1999 and is also
entitled to piggyback registration for such shares of Common Stock with respect
to any registration statement filed by the Company with the exception of a
10
<PAGE>
registration statement to be filed in connection with any of the securities
issued in connection with obtaining the financing for the Company's acquisition
of Laminaire.
The Second Note will be in a principal amount equal to the difference
between (a) the Stockholders' Equity (as defined) of Laminaire as of September
30, 1997 minus $200,000 minus (b) the Stockholders' Equity of Laminaire as of
September 30, 1996. In the event that the adjustment to the purchase price is
negative, the principal amount of the First Note will be reduced by such amount.
The Second Note, which bears interest at the rate of 15% per anum, was to be due
on March 31, 1998; however, the final principal amount has not yet been
determined. The Company believes that the adjustment to the purchase price will
be negative.
In conjunction with the acquisition of Laminaire, the Company issued a
short-term promissory note to Charles Garay in the principal amount of $90,479
(the "Third Note").
The Company's obligations under the First, Second and Third Notes are
secured by first priority security interests in the real property and all
tangible and intangible personal property, including inventory and accounts
receivable, of Laminaire and the inventory and equipment of the Company and a
subordinate security interest in the accounts receivable of the Company. The
subordinate security interest is subordinate to the interests of the holders of
convertible debentures and convertible promissory notes in the principal amount
of $500,000. The agreements underlying First and Second Notes also contain
restrictions on the Company's ability to transfer cash from Laminaire and
require the Company to comply with various financial ratios.
In conjunction with the acquisition of all of the outstanding common stock
of Laminaire, the Company paid all of Laminaire's obligations, amounting to
approximately $1,100,000, to CoreStates National Bank ("CoreStates") under a
mortgage secured by Laminaire's interest in its real property and building
located in Rahway, New Jersey. Laminaire has used the building located as its
principal office and manufacturing facility. The Company relocated its principal
executive offices from Ridgefield, New Jersey to the Laminaire facility.
Garay LLC, the seller of the common stock of Laminaire, is a New Jersey
limited liability company which is partially owned by Charles J. Garay. Charles
J. Garay is a director of Laminaire and became a director of the Company on
October 28, 1997. He also served as a consultant to Laminaire through January
16, 1998.
The funds utilized by the Company to purchase the common stock of Laminaire
and satisfy Laminaire's obligations to CoreStates were obtained from the
issuance of (i) Common Stock of the Company for aggregate consideration of
$200,000 and (ii) convertible promissory notes and debentures for the balance.
Concurrent with the closing of the acquisition of Laminaire on October 16,
1997, the Company issued 326,521 shares of its Common Stock to a single
investor, the Optimum Fund, for aggregate consideration of $200,000 pursuant to
Regulation S under the Securities Act of 1933, as amended.
Concurrent with the closing of the acquisition of Laminaire, the Company
issued convertible debentures (the "Debentures") to three investors in the
principal amount of $300,000 pursuant to Regulation S under the Securities Act
of 1933, as amended. The Company will pay interest to the holders of the
Debenture at the rate of 5% per annum. Interest on the Debentures is payable in
cash or Common Stock of the Company, at the Company's discretion. The
Debentures, which are unsecured, are convertible into shares of the Company's
Common Stock at any time beginning 41 days after the date of issuance, at a
price per share equal to the lesser of 70% of the average closing bid price for
the five trading days preceding: (i) the date of conversion or (ii) the date of
closing, October 16, 1997.
Concurrent with the closing of the acquisition of Laminaire, the Company
issued convertible promissory notes (the "Convertible Notes") to Norwood Venture
Corp. in the principal amount of $500,000 pursuant to Regulation D under the
Securities Act of 1933, as amended. The Company is obligated pay interest to the
holders of the Convertible Notes at the rate of 12% per annum. The Company's
obligations under the Debentures are secured by a first lien in the Company's
accounts receivable and a lien that is second in priority to that of Garay LLC,
the seller of the common stock of Laminaire, with respect to the inventory and
equipment of the Company and the accounts receivable, inventory and equipment of
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Laminaire. Laminaire also executed a guaranty in favor of Norwood with respect
to the Company's obligations under the Convertible Notes. The Convertible Notes
are convertible into shares of the Company's Common Stock at any time at a price
per share equal to the lesser of 70% of the average closing bid price for the
five trading days preceding (i) the date of conversion or (ii) the date of
closing, October 16, 1997. The Company agreed to register the shares of Common
Stock issuable upon conversion of the Convertible Note under the Securities Act
of 1933, as amended. Subsequent to June 30, 1997 but prior to the closing of the
Laminaire acquisition, the Company issued convertible debentures (the "First
Debentures") to ten investors, in the aggregate principal amount of $1,500,000
pursuant to Regulation S under the Securities Act of 1933, as amended. The
Company is obligated to pay interest to the holders of the First Debentures at
the rate of 5% per annum. Interest on the First Debentures is payable in cash or
Common Stock of the Company, at the Company's discretion. The Company's
obligations under $50,000 principal amount of the Debentures are secured by a
lien on the Company's accounts receivable. The First Debentures are convertible
into shares of the Company's Common Stock at any time commencing 41 days after
the date of issuance, at a price per share equal to the lesser of 70% of the
average closing bid price for the five trading days preceding (i) the date of
conversion or (ii) the date of closing.
The total principal amount of convertible debentures issued was $1,800,000
of which $280,000 had been converted into 580,497 shares of common stock through
December 31, 1997 ($1,032,500 into 6,539,310 shares of common stock through
March 31, 1998). An additional $387,500 was converted into 1,737,196 shares of
Common Stock during the period April 1, 1998 to May 12, 1998.
The Company also borrowed $200,000 from an individual investor. The terms
and conditions of such borrowing have not yet been finalized and, accordingly,
such note is classified as a current liability in the accompanying Consolidated
Balance Sheet at December 31, 1997.
NOTE 4--INCOME TAXES
The Company has established reserves for the entire benefit associated with
the unused Federal income tax loss carryforwards.
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Information set forth herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important factors
may affect the Company's actual results and could cause such results to differ
materially from forward-looking statements made by or on behalf of the Company.
Such factors include, but are not limited to, changing market conditions, the
impact of competitive products, pricing, acceptance of the Company's products in
development and other risks detailed herein and in other filings that the
Company makes with the Securities and Exchange Commission.
General
The Company's operations, prior to the acquisition of Laminaire, had been
dominated by systems contracts with customers in the pharmaceutical and chiller
control industries. Fluctuations in sales, revenues and operating results can
and did occur because of the timing of such contracts since certain larger
contracts require greater amounts of vendors' materials and use of
subcontractors than do other contracts. Generally, gross margins are lower on
those contracts which require the purchase of significant amounts of vendor
materials and services compared with contracts which are more engineering or
labor intensive. In addition, the Company's engineering staff is capable of
serving a significant volume of business. Thus, engineering costs do not
fluctuate at the same rate as revenues. This means that if revenues increase,
gross profits will increase at a faster rate than revenue. The reverse is true
if revenues were to decrease below the breakeven point.
Because of the Company's historical emphasis on systems sales, a
substantial portion of its revenue was derived from a relatively few number of
contracts. In general, the Company had less than 50 open contracts in a fiscal
quarter of which fewer than ten comprise more than 50 percent of revenues for
that quarter. This also means that a small number of customers made up a large
percentage of sales.
The acquisition of Laminaire makes the two periods not comparable.
Laminaire's results are included in the 1998 period but not the 1997 period. At
the same time, the 1998 period is affected by the costs necessary to integrate
the companies. As part of its restructuring following the Laminaire acquisition,
the Company has implemented or plans to implement certain changes in its
operating procedures, including:
o Combining all operations into a single facility in Rahway, New Jersey.
o Limiting its bidding activities for Thermo-mizer Control Systems
("TCS") Contracts to potential contracts in which TCS anticipates
having a commercial advantage over its competition. The Company has
also instituted new management review procedures required for all
proposals.
o Centralizing the purchasing effort and instituting new inventory
controls.
o Determining how best to incorporate Thermo technology into Laminaire
products to give such products a competitive advantage.
Certain of these initiatives will require time to implement. Management
will assess each aspect of the Company's operations carefully and will take
steps to discontinue or eliminate any operation that does not make a positive
contribution towards general overheads. Laminaire's low
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margin distribution line was discontinued in March 1998. That division
contributed sales, on an annualized basis, of approximately $1,500,000, but
generated gross margins of only about $50,000.
In general, the Company is now positioned to compete in niche markets on
the basis of service and a willingness to customize. As a rule, it is not
competing based on technology. Management believes that controls are in place to
minimize the risk of incurring significant losses on individual contracts or
projects, although no assurances can be given that no such losses will occur.
The Company believes that operating losses are likely for the first two quarters
of 1998, although the cash impact of such losses are likely to be less than
those incurred over the immediately prior quarters. A substantial portion of the
Company's backlog of $3,570,000 at March 31, 1998 will be performed during the
third and fourth quarters of 1998.
Results of Operations
Comparison of the Three Months Ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Caption 1998 % 1997 % Change
<S> <C> <C> <C> <C> <C>
Contract and other revenues $2,232,922 $527,818 $1,705,104
Cost of revenues 1,786,262 80.00% 418,109 79.21% 1,368,153
Gross profit 446,660 20.00% 109,709 20.79% 336,951
Expenses:
Personnel and related costs 322,386 14.44% 130,946 24.81% 191,440
Selling & Administration expenses 349,806 15.67% 230,256 43.62% 119,550
Product development costs 6,134 0.27% 88,543 16.78% -82,409
Total Expenses 678,326 30.38% 449,745 85.21% 228,581
Operating income -231,666 -10.38% -340,036 -64.42% 108,370
Other-Net -60,386 -2.70% -22,871 -4.33% -37,515
Income before income taxes -292,052 -13.08% -362,907 -68.76% 70,855
Income Taxes-Net 1,650 -0.07% 13,000 2.46% 11,350
Net Income ($293,702) -13.15% ($375,907) -71.22% $82,205
</TABLE>
Prior to the acquisition of Laminaire, the Company had one business, the
controls system business. Following the acquisition of Laminaire, the Company
operates with four divisions - Cleanroom Manufacturing ("CM"), Cleanroom
Distribution ("CD"), Electronic Manufacturing ("EM") and TCS. The table below
sets forth the sales and gross profits contributed by each division for the
three months ended March 31, 1998.
TCS EM CD LM CM Total
Sales $625,536 $388,550 $342,408 $344,626 $531,802 $2,232,922
Cost of Sales 502,197 281,667 285,866 323,393 393,139 1,786,262
Gross Profit 123,339 106,883 56,542 21,233 138,663 446,660
Percentage 19.71% 27.51% 16.51% 6.16% 26.07% 20.00%
The percentages between divisions are distorted somewhat because the
allocation of joint costs must be further refined following the move of the TCS
operations into the Laminaire facility.
The LM business represents Low Margin cleanroom distribution sales
involving transactions in which the Company served as a distributor for vendors
that only sell through distributors. In these cases the products were drop
shipped by the vendor to the end customer. A substantial portion of this segment
of the business is being phased out.
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The remaining expenses are not comparable between periods because of the
inclusion of Laminaire in 1998. Other - net in 1998 consists principally of
interest on indebtedness incurred to finance Laminaire.
No net benefit was recognized for the benefit of Federal income tax loss
carryforwards because of the uncertainty of utilization of such carryforwards.
1997
The Company completed an initial public offering of its common stock and
warrants in March 1996. Thereafter, it commenced implementing a strategy
designed to make it a product and service, rather than a systems driven
business. This strategy required it to make a variety of investments in human
resources, management systems and product development which negatively impacted
earnings during the fiscal year ended June 30, 1997. At the same time, it
introduced a new product and commenced two major contracts that incorporated
such product. The Company required longer than expected to identify and correct
certain problems which arose in connection with the operation of this new
product which resulted in it incurring a substantial loss during the periods of
contract performance. The loss was caused because significant amounts of
engineering labor and subcontractor assistance was required on these jobs to
analyze and address the problems. Both of these contracts were closed finally in
March 1998, and all estimated losses have been accrued. The Company also did not
make a meaningful penetration into the targeted Continuous Emissions Monitoring
business or obtain significant contracts from new customers despite increased
marketing efforts. Therefore, its overall revenues were not sufficient to cover
its overheads.
The foregoing factors resulted in the Company changing its overall strategy
and determining that it should acquire Laminaire as a means of stabilizing its
operations. At the same time, it ceased many of its initiatives with regard to
its traditional systems business and will concentrate its future efforts on
Laminaire's product lines and selected systems business that appears to require
no new product development efforts.
Liquidity and Capital Resources
On October 16, 1997, the Company acquired all of the outstanding shares of
Common Stock of Laminaire from Garay LLC for a purchase price of $3,200,000,
subject to adjustment based on Laminaire's operating performance during the
period immediately prior to the acquisition. Laminaire, based in Rahway, New
Jersey, manufactures and distributes cleanroom products and also produces a
variety of electronic circuit boards. Garay LLC is an affiliate of Charles
Garay, who became a director of the Company following the acquisition of
Laminaire. The purchase price consisted of a cash payment of $1,000,000, a
convertible promissory note in the principal amount of $2,200,000 (the "First
Note") and a promissory note with a principal amount to be determined (the
"Second Note").
First , Second and Third Notes - The First Note bears interest at the rate of
10% per annum and is payable in 60 equal monthly installments principal and
interest of $33,830 commencing November 16, 1997 with a final payment of
principal of $1,000,000 due on October 16, 2002. The First Note is convertible
into shares of Common Stock at a conversion price per share equal to $1. The
First Note becomes convertible for a period of two years commencing April 16,
1998 in amounts not exceeding $500,000 for each four month period. The Second
Note will be in a principal amount equal to the difference between (a) the
Stockholders' Equity (as defined) of Laminaire as of September 30, 1997 minus
$200,000 minus (b) the Stockholders' Equity of Laminaire as of September 30,
1996. In the event that the adjustment to the purchase price is negative, the
principal amount of the First Note will be reduced by such amount. The Second
Note, which bears interest at the rate of 15% per annum, was to be due on March
31, 1998; however, the final principal amount of the Second Note has not yet
been determined.
In conjunction with the acquisition of Laminaire, the Company issued a
short-term promissory note to Charles Garay in the principal amount of $90,479
(the "Third Note").
The Company's obligations under the First, Second and Third Notes are
secured by first priority security interests in the real property and all
tangible and intangible personal property, including inventory and accounts
receivable, of Laminaire and the inventory and equipment of the Company and a
subordinate security interest in the accounts receivable of the Company. The
subordinate security interest is subordinate to the
16
<PAGE>
interests of the holders of convertible debentures and convertible promissory
notes in the principal amount of $500,000. The security agreements underlying
the First, Second and Third Notes also contain restrictions on the Company's
ability to transfer cash from Laminaire and require the Company to comply with
various financial ratios.
In conjunction with the acquisition of all of the outstanding common stock
of Laminaire, the Company paid all of Laminaire's obligations, amounting to
approximately $1,100,000, to Corestates National Bank ("Corestates") under a
mortgage secured by Laminaire's interest in its real property and building
located in Rahway, New Jersey. Laminaire has used the building as its principal
office and manufacturing facility. The Company anticipates continuing
Laminaire's operations at such location and relocated the Company's principal
executive offices from Ridgefield, New Jersey to the Laminaire facility in
Rahway, New Jersey.
Other Financings - The funds in excess of those provided by the issuance of the
notes to Garay LLC utilized by the Company to purchase the common stock of
Laminaire and satisfy Laminaire's obligations to Corestates were obtained from
the issuance of (i) Common Stock of the Company for aggregate consideration of
$200,000 and (ii) convertible promissory notes and debentures for $2,300,000.
Subsequent to June 30, 1997 but prior to the closing of the Laminaire
acquisition, the Company issued convertible debentures (the "First Debentures")
to ten investors, in the aggregate principal amount of $1,450,000 pursuant to
Regulation S under the Securities Act of 1933, as amended, (the "Securities
Act"). Concurrent with the closing of the acquisition of Laminaire on October
16, 1997, the Company also issued 326,521 shares of its Common Stock to a single
investor for aggregate consideration of $200,000 pursuant to Regulation S under
the Securities Act and issued convertible debentures (the "Debentures") to three
investors in the principal amount of $300,000 pursuant to Regulation S under the
Securities Act. The Company will pay interest to the holders of the Debenture at
the rate of 5% per annum. Interest on the Debentures is payable in cash or
Common Stock of the Company, at the Company's discretion. The Debentures, which
are unsecured, are convertible into shares of the Company's Common Stock at any
time beginning 41 days after the date of issuance, at a price per share equal to
the lesser of 70% of the average closing bid price for the five trading days
preceding: (i) the date of conversion or (ii) the date of closing, October 16,
1997. Through March 31, 1998, an aggregate of $1,312,500 of the principal amount
of the Debentures have been converted into 7,119,807 shares of Common Stock.
Concurrent with the closing of the acquisition of Laminaire, the Company
issued a convertible promissory note (the "Convertible Note") to Norwood Venture
Corp. in the principal amount of $500,000 pursuant to Regulation D under the
Securities Act. The Company is obligated pay interest to the holders of the
Convertible Note at the rate of 10% per annum. The Company's obligations under
the Convertible Note are secured by a first in the Company's accounts receivable
and a lien that is second in priority to that of Garay LLC, the seller of the
common stock of Laminaire, with respect to the inventory and equipment of the
Company and the accounts receivable, inventory and equipment of Laminaire.
Laminaire also executed a guaranty in favor of Norwood with respect to the
Company's obligations under the Convertible Note. The Convertible Note is
convertible into shares of the Company's Common Stock at any time at a price per
share equal to the lesser of 70% of the average closing bid price for the five
trading days preceding (i) the date of conversion or (ii) the date of closing,
October 16, 1997. The Company agreed to register the shares of Common Stock
issuable upon conversion of the Convertible Note under the Securities Act. In
addition, the Company is obligated to pay Norwood $10,000 per month commencing
January 16, 1998 until such shares of Common Stock are registered under the
Securities Act.
The Company also borrowed $200,000 from an individual investor in September
1992. The terms and conditions of such borrowing have not yet been finalized.
To the extent that a portion of principal of the Convertible Note and
Debentures is not converted, the Company will seek a funding source to refinance
such indebtedness. No assurance can be given that the Company will be successful
in such efforts.
The National Association of Securities Dealers, Inc. ("the NASD"), which
administers The NASDAQ SmallCap Market, sets the criteria for continued
eligibility on The NASDAQ SmallCap Market. In order to continue to be included
on The NASDAQ SmallCap Market, a company must maintain $2 million in net
tangible assets, a $1 million market value of its public float, two
market-makers, at least 300 holders of the Common Stock, 500,000 shares in the
public float and a minimum bid price of $1.00 per share. NASDAQ has advised the
Company that it is not in compliance with the maintanence requirements for
continued listing because, amoung other factors, the Company's Common Stock
currently trades at less than $1.00 per share. The Company has submitted a
written plan to NASDAQ in support of its continued listing on NASDAQ and is
requesting a formal
16
<PAGE>
hearing to determine whether such plan will be accepted. The outcome of this
matter is not presently determinable. The Company's failure to meet the NASDAQ
SmallCap Market's maintenance criteria in the future or future maintenance
requirements imposed by the NASDAQ SmallCap Market may result in the
discontinuance of the inclusion of its securities on the NASDAQ SmallCap Market.
In such event, trading, if any, in the securities may then continue to be
conducted on the Boston Stock Exchange in the non-NASDAQ over-the-counter market
in what are commonly referred to as the electronic bulletin board and the "pink
sheets." As a result, an investor may find it more difficult to dispose of or
obtain accurate quotations as to the market value of the securities.
Furthermore, the Company may experience greater difficulty in obtaining
financing if and when needed.
Lack of Credit Facilities - The Company does not have any working capital or
other credit facilities. The Company is dependent on revenue from operations
and, to date, has satisfied its obligations when due. However, it may require
credit facilities or other source of liquidity to meet the needs of its
business, particularly in light of the restrictions on the Company's ability to
transfer cash generated by Laminaire for other Corporate purposes as long as the
First and Second Notes are outstanding. No assurance can be given that it will
obtain such financing or, if available, on terms acceptable to the Company.
Seasonality
The demand for the Company's products is not seasonal. However, lengthy
stretches of inclement weather can create delays in the performance of some
systems contracts.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share"; No. 129, "
Disclosure of Information about Capital Structure"; No. 130, "Reporting
Comprehensive Income"; and No. 131, "Disclosure about Segments of an Enterprise
and Related Information." These new accounting pronouncements are not expected
to have a significant impact on the Company. SFAS No. 128 requires the
presentation of Basic Earnings Per Share that the Company believes will, in its
case, approximate the amounts reported as Primary Earning Per Share. The
disclosure requirements in SFAS No. 129 and 130 are not expected to impact the
Company's financial statements. The acquisition of Laminaire Corporation is
expected to result in the Company having to provide segment information.
The American Institute of Certified Public Accountants adopted Statement of
Position 97-2, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", which sets forth criteria for capitalizing certain
software development costs. This pronouncement could impact a future period if
the Company should decide to update ceretain software used by its engineers.
17
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
See Note 3 to the Condensed Financial Statements
Item 3 Defaults on Senior Securities
None
Item 4 Submission of Matters to a Vote of Shareholders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
18
<PAGE>
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.
THERMO-MIZER ENVIRONMENTAL CORP.
(Registrant)
/s/ GERARD M. GALLAGHER
----------------------------------
Gerard M. Gallagher
Vice President, CFO
Date: May 14, 1998
19
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<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 187,743
<SECURITIES> 0
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<INVENTORY> 778,830
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