SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal period ended December 31, 1997
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from July 1, 1997 to December 31, 1997
Commission file number 33-80961-NY
THERMO-MIZER ENVIRONMENTAL CORP.
(Exact name of small business in its charter)
Delaware 22-2312917
(State or other jurisdiction of incorporation I.R.S. Employer Identification
or organization) No.)
960 East Hazelwood Avenue, Rahway, NJ 07065
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 732-381-8200
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001;
Redeemable Warrants
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 the past 90 days. Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form 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-KSB or any amendment to
this Form 10-KSB.[X]
Issuer's revenues for its most recent six-month fiscal period were
$2,887,447. The aggregate market value of common voting stock held by
non-affiliates of the Issuer was approximately $4,000,000 computed by reference
to the last sale price at which the stock was sold on April 8, 1998 as reported
by Nasdaq. As of March 31, 1998,10,691,395 shares of common stock and 1,725,000
redeemable warrants were outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Thermo-Mizer Environmental Corp. (the "Company") was founded in 1978 and
has been engaged in various aspects of the energy conservation and environmental
control businesses. The Company reincorporated in Delaware in October 1994, at
which time it changed its name from Thermo Engineering, Inc. to Thermo-Mizer
Environmental Corp. The Company completed an initial public offering ("IPO") of
its common stock and redeemable warrants in March 1996.
Following the completion of its IPO, the Company implemented a strategy
designed to (i) enter the markets that appeared to be created or expanded by the
adoption of amendments to the Clean Air Act and (ii) introduce new, more
advanced versions of its microprocessor based product line used to monitor and
control a wide variety of environmental conditions. These efforts ultimately
required a greater amount of resources than the Company initially anticipated,
thus requiring a change in focus. The Company adopted a strategy of seeking
growth by acquiring companies in related markets. In October 1997, the Company
completed the first step in that strategy by acquiring Laminaire Corporation
("Laminaire"). Laminaire, located in Rahway, New Jersey, was founded in 1964 and
is a manufacturer and distributor of cleanroom products and also assembles a
variety of electronic circuit boards. This acquisition marked a fundamental
change in the way that The Company's business is conducted by making it a
product-driven business rather than a systems-driven business.
Products
Following the acquisition of Laminaire, the Company operates with four
business groups - Cleanroom Manufacturing, Cleanroom Distribution, Electronic
Manufacturing and Thermo Control Systems.
Cleanroom Manufacturing ("CM") - The Cleanroom Manufacturing Division's
principal products are:
Horizontal Laminar Flow Work Stations
CS Series Console Slimline Workstation - The purpose of this unit is to
provide a Class 100 horizontal laminar flow environment within a work chamber.
Class 100 is an industry standard under which there can be no more than 100
particles of material that are greater than .5 microns within one cubic foot of
air. A laminar (also known as a unidirectional) flow environment is one in which
air flows in a single pass in a single direction in parallel streamlines through
an air device or clean zone. This unit is a freestanding self-contained device
that functions effectively in controlled and uncontrolled areas wherever clean
air is a requirement. The unit can fit through standard doorways, facilitating
easy installation. Applications include but are not limited to optical assembly,
pharmaceutical preparation, critical sample preparation, microelectronic
fabrication, assembly and inspection, and food processing. This device draws in
ambient air through a first stage prefilter and then passes this air through a
99.99% efficient High Efficiency Particulate Air ("HEPA") filter that filters
out particles down to 0.3 microns.
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C Series Console Workstation - Similar in function, purpose, use and design to
the CS Series, this unit offers full clearance below a work surface to enable
installation of sinks, tanks, plumbing, or any special process equipment. This
design requires simple disassembly of the tabletop to fit into standard doorways
and also comes in a completely separate isolated tabletop version that is suited
to microscope inspection processes in which vibration is a concern.
TS Series Table Mount Workstation - This unit, which is designed to be mounted
on an existing workbench or optional base cabinet, has the same function,
purpose and applications as the CS Series unit.
NFE Negative Flow Exhausting Work Station - This unit is designed to contain
contaminated air in a work chamber by removing gross particulate generated
within the work chamber through a process in which air is drawn from the outside
environment and across the work surface. The air is then passed through an
initial prefilter, and finally through a HEPA filter at the top of the unit. The
air is then released back to the outside area. Applications include powder
filling and handling, critical sample preparation, and cosmetic weighing.
WM and CRT Series Wall Modules and Cleanroom Tunnels - These units are designed
to create clean zones of Class 100 laminar airflow. Multiple units can be joined
together to create horizontal flow tunnels. Class 100 airflow is totally
displaced throughout the entire tunnel from wall to wall, ceiling to floor,
exiting the open end and carrying out entrained particles. These units are used
in microelectronic assembly, repair, inspection and fabrication processes and
pharmaceutical manufacturing areas.
Vertical Laminar Flow Work Stations
DWS Series Module on Frame and PPWS Wet Process Station - The purpose of this
unit is to provide a Class 100 vertical laminar flow environment within the work
chamber. A freestanding unit, typically installed over a process station, this
unit protects product from outside contamination within a work chamber. The
process stations can be of any type that require clean airflow. The PPWS wet
process stations, manufactured from stress relieved thermoplastics, are most
commonly installed under the units and can incorporate custom designed
operations with exhaust capabilities. Applications include microelectronic
assembly, inspection, and manufacturing, pharmaceutical processes, hybrid
manufacturing, laser research and development, optical assembly, and precision
engineering. When used in conjunction with a wet process station, applications
include etching and plating processes, semiconductor processing and biomedical
manufacturing.
R Series Recirculating Work Station - The purpose of this unit is to provide a
Class 100 vertical laminar flow environment within a work chamber and offer
recirculating capability to control against cross- contamination within the work
chamber. The laminar airflow is passed through a HEPA filter, down through a
perforated work surface prefiltered, and recirculated back through the entire
unit. The design allows for the addition of make-up air, and positive pressure
within the work chamber. Applications are similar to the DWS Series unit without
the PPWS.
E Series Exhausting Work Station - The purpose of this unit is to provide a
Class 100 vertical laminar flow environment within a work chamber and offer
exhausting capabilities. This unit is used when toxic odors and fumes are
present. The prefiltered laminar airflow is passed through a HEPA filter, down
through a perforated work surface, and exhausted out the top of the unit. A
remote exhaust system is required to maintain the correct air balance within the
unit. Applications are similar to those of the R Series unit.
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PVE Series Exhausting Work Station - The function and purpose of this unit are
similar to the E Series unit except that this unit is completely manufactured
from stress relieved thermoplastic which prevents corrosion, provides resistance
to acids and solvents and has non-conductive properties. It typically
incorporates custom designed operations with exhaust capabilities and can
accommodate the installation of sinks, special process tanks, heater baths,
ultrasonic tanks, and etching tanks. A remote exhaust system is required to
maintain the correct air balance within the unit. Applications include
microelectronic assembly and manufacturing, pharmaceutical processes, hybrid
manufacturing, laser research and development, etching and plating processes,
semiconductor processing and chemical cleaning operations.
PFH Series Fume Exhaust Hood - The function, purpose, and applications of this
unit are to remove harmful odors and fumes from a work chamber. Properties of
this unit are similar to that of the PVE Series. Air is drawn through the front
opening, across the tabletop, and exhausted through adjustable baffles at the
rear of the hood and up to exhaust collars at the top of the unit.
Personnel Entry Air Showers
ASA Series - This unit is designed to remove surface contamination from
personnel entering a clean zone or cleanroom. The unit incorporates high
velocity air nozzles, microprocessor technology, timed, controlled sequences,
and HEPA filtered air to provide the cleaning process. Applications include all
areas of industry where cleanrooms or clean zones are present, such as
automobile painting processes, semiconductor assembling and pharmaceutical
manufacturing.
LO-Pro Series Modules, Softwall and Hardwall Cleanroom Environments
Lo-Pro(R) Module - The Lo-Pro filter-blower module is designed to act as an
independent HEPA filtered source of Class 100 ultra clean unidirectional air.
The unit can be placed in existing T-grid ceilings, tool enclosures, hanged from
a ceiling, in steel frame or support structures to provide clean work zones.
Uses include, but are not limited to, retrofit of existing spaces, cleanroom
construction, laser optics, microelectronic manufacturing, semiconductor process
tool equipment, pharmaceutical manufacturing, home infusion, aerospace
manufacturing, sterile filling and medical device manufacturing.
Lo-Pro(R) PDE Softwall Portable Downflow Environment - This unit, which is
designed for areas where hard wall cleanroom construction would not be practical
or cost-effective, provides a HEPA filtered portable vertical laminar flow
environment. These units are pre-engineered for ceiling coverage of Lo-Pro
units, lights and ceiling tiles to provide product isolation or spot coverage
over process equipment. The units incorporate steel painted support structure on
locking casters enclosed by a vinyl curtain perimeter and provide a continuous
downflow purge of Class 100 airflow. Depending on the amount of ceiling filter
module coverage, Class 100,000 to Class 10 room classifications can be achieved.
Applications are similar to those of the Lo-Pro Series.
Lo-Pro(R) FDE Softwall Fixed Downflow Environment - The function, purpose and
uses are similar to the PDE Series unit, however this unit is provided with
fixed leveling mounts. Generally, these units are larger in design than those of
the PDE Series.
Lo-Pro(R) MDR Hardwall Cleanroom - The purpose of this unit is to provide a
vertical HEPA filtered airflow environment in a pre-fabricated hardwall
semi-permanent design. These units are pre-engineered for ceiling coverage of
Lo-Pro units, lights and ceiling tiles. The MDR features vinyl covered wall
panels, pre-hung doors, low side wall return, aluminum T-grid ceiling
suspension, windows and HVAC (option) to create Class 100,000 to Class 10 room
classifications. Applications are the same as the PDE and FDE Series units.
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CM sells its products through its own salesmen, augmented by independent
sales representatives. It competes on the basis of its reputation for timely
deliveries and its ability to customize products to meet specific customer
requirements. It believes that its principal competitors consist of a variety
privately held companies, none of which have a significant segment of the
overall marketplace.
Cleanroom Distribution - Cleanroom Distribution ("CD") sells a large variety of
disposable items, such as hats, coats, boots and gloves, that are used in
cleanroom facilities. All such products are manufactured by others.
CD sells its products through catalogs and by a direct marketing force that
uses telephone sales as its primary tool. CD's typical customer is a facility
that requires a small quantity of each item ordered.
Laminaire has a site on the World Wide Web to communicate principally with
customers of CD and CM and provide a convenient means of describing its
products, communicate specifications and take orders from its approved
customers. Laminaire believes that this means of accessing the entire national
market will improve the prospects for increased sales.
Electronic Manufacturing - Electronic Manufacturing ("EM") specializes in small
production runs of high end critical components such as precision circuit
boards, wire harnesses and control panels. All products are assembled to
customer-provided specifications.
EM sells through a limited direct sales effort, appearances at Job Shop
Technology Shows and word of mouth. Its customers tend to be military
contractors and high precision manufacturers.
Thermo Control Systems - Thermo Control Systems ("TCS") represents the Company's
product group prior to the acquisition of Laminaire. Systems' products are
designed to permit users to gather, analyze, summarize, and store data about
certain aspects of a physical environment on a real time basis. Users of these
products include the pharmaceutical industry and large office buildings. All of
TCS' products are microprocessor-based and use the same computer board,
proprietary operating system (an operating system owned by and developed for the
Company), and input/output circuit board.
TCS' products all use the same basic technology and can be modified and
configured to meet the particular needs of each industry and comply with future
regulatory requirements because they are modular in design requiring only the
change of specific boards to perform different functions. The applications
software runs on many platforms or operating systems of personal computers,
including Windows 95 and Windows NT. TCS believes that it can adapt to future
changes by revising software and changing the modules.
TCS current products are designed around a custom interpreter software
kernel that has cross platform capabilities. The interpreter enables the
software to be transportable to different hardware platforms and be menu driven
so that, in many cases, they can be installed without the assistance of a
company engineer. Its products can be adapted to different systems, making them
cost effective and easy to install and use. When regulatory authorities make
changes in regulations, TCS believes that it will be able to respond by
modifying the software to adapt the system so a customer can comply with the
changes. The operating system is modular in design and therefore flexible in
nature. As changes are required the modules can be added, removed or modified
easily without effecting the rest of the operating system.
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Each system is comprised of three basic parts. Data gathering is
accomplished in the target environment through sensors and analyzers that are
hardware devices purchased from other manufacturers. The sensors and analyzers
are placed in environmentally-controlled rooms or in exhaust outlets. In the
pharmaceutical manufacturing facilities, the sensors and analyzers are placed in
the manufacturing area. The analyzers convert the data to electrical signals
which are transferred to the microprocessor. Systems' oldest core product, the
Thermo-Mizer, is a microprocessor included in all Systems' products which
converts the real time data transmitted from the analyzers and sensors to
digital form which can then be processed by a computer. The Thermo-Mizer
digitizes the data from the analyzers and sensors, performs all the required
calculations, prepares the data for storage, formats the data, and transmits the
data to a personal computer. The personal computer is used to store the data in
a database and generates reports as required or needed.
The microprocessor used in TCS' products is designed, manufactured, and
programmed by TCS. It is comprised of a micro-controller purchased from an
outside source, but whose operating system is designed by TCS' software
development engineers. Application software is written by TCS' engineers to use
the micro-controller in a Thermo-Mizer system. The micro-controller chip is
placed on a circuit board designed by TCS with other electronic components. All
of TCS' products utilize the same circuit board, micro-controller chip, and
electronic components. The manufacturing and testing of circuit boards is done
by contract manufacturers (although this work may be performed by Laminaire in
the future). TCS' engineers do all final assembly, testing and programming.
Competition in the market niches in which TCS operates is fragmented.
Competition serving the pharmaceutical industry consists of major industrial
companies, including Landis & Gyr Powers, Johnson Controls, and Honeywell.
Competitors serving the chiller control large office building niche include
Carrier, Trane, and York. TCS believes that its competitive advantage is derived
from the flexibility of its products which permits users to integrate equipment
made by more than one manufacturer. TCS markets its products using a direct
sales effort and appearances at tradeshows. These efforts are augmented by use
of brochures and printed materials. Large system contracts generally require
formal bids. At first, TCS by request submits a proposal. When a customer
determines that the products meet the specifications and requirements, TCS then
submits a formal bid. The process frequently takes several months.
TCS sells a limited number of control systems each year. Therefore, each
contract comprises a significant percentage of annual sales. The nature of this
industry results in revenue and profits being very volatile. Delays or problems
(regardless of cause) can result in wide variations in quarterly or annual
operating results. TCS has incurred operating losses and realized small gross
profit percentages over the past two years. Therefore, TCS is attempting to
implement a strategic change in focus away from large systems installation
contracts towards smaller, more engineering intensive contracts. Management is
also considering combining a modified version of TCS' control technology in
certain CM products to give such products a competitive advantage.
Employees
At March 31, 1998, the Company had 58 employees, of which 12 function as
engineers or have degrees in applied science, and three write software. The
remaining employees perform administrative, sales and shop assembly
responsibilities. The employees are not unionized, and the Company has no
collective bargaining agreement.
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ITEM 2. FACILITIES
The Company owns a 47,000 square foot facility having office and
manufacturing space in Rahway, New Jersey.
Manufacturing
Management believes that its sources of equipment, parts and supplies are
sufficient as all required parts and components are readily available and can be
acquired from alternative sources.
The Company generally does not commence assembling a system unless it has a
contract or a purchase order from the customer. The Company has limited
inventory. At March 31, 1998, its backlog was approximately $3,300,000, a
substantial portion of which is expected to be completed during 1998, although
delays outside of the Company's control may push certain of the work covered by
the purchase orders in backlog into 1999.
Research and Development
Although no precise dollar amount has been determined, the Company will
continue to allocate resources to develop and enhance its current products
further and the design of complementary products. However, resources will not be
expended unless Management believes that there is reasonable likelihood of a
short-term return on the expenditure. The Company expenses development costs as
incurred. The Company intends to work closely with its customers and prospective
customers to determine their requirements and to design enhancements and new
products to meet changing customer needs.
The Company has two patents but relies on its proprietary technology and
know-how to maintain or establish competitive position or advantage.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of
any pending or threatened litigation that could have a material adverse effect
on it or its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock and Redeemable Warrants are quoted on the NASDAQ
Small Cap Market under the symbols "THMZ" and "THMZW", respectively, and on the
Boston Stock Exchange under the symbols "THM" and "THMW", respectively. Both
securities commenced trading on February 27, 1996.
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The table below sets forth the high and low sale prices for the Company's
Common Stock and Warrants as reported by NASDAQ:
<TABLE>
<CAPTION>
Quarter Ended Common Stock Redeemable Warrants
High Low High Low
<S> <C> <C> <C> <C>
March 31, 1996 $8.00 $ 1 31/64 $ 5 3/8 $ 1 1/4
June 30, 1996 3.00 1 3/8 1 1/4 1/8
September 30,1996 2 11/32 1 1/16 1/2 1/8
December 31, 1996 2 7/32 29/32 13/32 3/32
March 31, 1997 2 3/32 11/16 9/16 3/32
June 30, 1997 1 1/4 7/16 1/14 1/16
September 30, 1997 1 7/16 19/32 7/32 1/16
December 31, 1997 1 1/32 7/16 7/32 1/32
</TABLE>
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. The Company's Common
Stock currently trades at less than $1.00 per share and is, therefore, not in
compliance with NASDAQ SmallCap Market maintenance requirements. 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 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. In addition, the
Company would be subject to Rule 15g (the "Rule") promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"), which imposes various
sales practice requirements on broker-dealers who sell securities governed by
the Rule to persons other than established customers and accredited investors.
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transactions prior to sale
There are approximately 1400 stockholders of record of the Company's Common
Stock.
Item 6. 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.
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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. For the six months ended December 31, 1997, sales to two
customers accounted for 25% of total sales with individual customers comprising
14% and 11%, respectively, of total sales. For the fiscal year ended June 30,
1997 ("fiscal 1997"), sales to two customers accounted for 31% of total sales
with individual customers comprising 17% and 14%, respectively, of total sales.
For the fiscal year ended June 30, 1996 ("fiscal 1996"), sales to six customers
comprised 87% of total sales (with individual customers comprising 23%, 20%,
13%, 11%, 10% and 10%, respectively, of total sales).
The Company believes that it is beneficial to implement a strategy designed
to reduce its dependence on large contracts by increasing its focus on product
sales and service. The acquisition of Laminaire accelerates this strategy
because Laminaire is a product-driven business. Because of the acquisition of
Laminaire, most historical relationships between costs and revenues set forth
below will not be indicative of such relationships in the future.
Results of Operations
Comparison of the Six Months Ended December 31, 1997 to the Six Months Ended
December 31, 1996
<TABLE>
<CAPTION>
Caption 1997 % 1996 % Change
<S> <C> <C> <C> <C> <C>
Contract and other $ 2,887,447 100.0% $ 961,000 100.0% $ 1,926,447
revenues
Cost of revenues 2,414,766 83.6% 1,043,297 108.6% 1,371,469
Gross profit 472,681 16.4% -82,297 -8.6% 554,978
Expenses:
Personnel and related 473,320 16.4% 295,234 30.7% 178,086
costs
Selling & Administration 712,968 24.7% 447,520 46.6% 265,448
expenses
Product development costs 121,578 4.2% 125,246 13.0% -3,668
Total Expenses 1,307,866 45.3% 868,000 90.3% 439,866
Operating income -835,185 -28.9% -950,297 -98.9% 115,112
Other-Net -878,718 -30.4% -407,534 -42.4% -471,184
Income before income -1,713,903 -59.4% -1,357,831 -141.3% -356,072
taxes
Income Taxes-Net -4,499 -0.2% 0 0.0% -4,499
Net loss ($1,718,402) -59.5% ($1,357,831) -141.3% ($ 360,571)
</TABLE>
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The information presented is not comparable because the 1997 amounts
include the results of Laminaire's operations from the date of acquisition.
Laminaire, therefore, contributed sales of $1,762,578 and gross profits of
$405,569 to the consolidated results for this period. Substantially all of the
contribution towards corporate and joint overheads came from the Laminaire
operations. The Company did not begin to realize fully the benefits of the
Laminaire acquisition in 1997 because the two entities did not combine their
operations into a single facility until January 1998. Additional time will also
be needed to fully integrate systems and strategies. The Company's traditional
business continued to be adversely impacted by (i) the sales level being
insufficient to cover all overheads and (ii) a small number of loss contracts.
These contracts, which were closed in March 1998 resulted in TCS reporting
little or no gross margin for the past eighteen months. In anticipation of the
Laminaire acquisition the direct work force of TCS was adjusted to reflect the
level of contract in its backlog.
As part of its restructuring following the Laminaire acquisition, the
Company has implemented or plans to implement certain changes in its operating
procedures, including:
Combining all operations into a single facility in Rahway, New Jersey.
Limiting its bidding activities for TCS Contracts to potential contracts in
which TCS anticipates having a commercial technical advantage over its
competition. The Company has also instituted new management review
procedures required for all proposals.
Centralizing the purchasing effort and instituting new inventory controls.
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 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.
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
will be performed during the third and fourth quarters of 1998.
The results of operations for 1997 were also adversely affected by the
impact of (i) amortizing the debt discount associated with the favorable
conversion feature of the debt issued to finance the acquisition of Laminaire
and the accrual of the remaining lease liability associated with the Company's
rented facility in Ridgefield, New Jersey. These two matters resulted in noncash
charges of approximately $778,000. In addition, the Company incurred public
relations expenses of $239,580, which were also noncash in nature. The results
of operations in 1996 also reflect the impact of nonrecurring matters which are
described in Note 10 to the Consolidated Financial Statements.
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Results of Operations
Comparison of Fiscal 1997 to 1996
<TABLE>
<CAPTION>
Caption 1997 % 1996 % Change %
<S> <C> <C> <C> <C> <C> <C>
Contract and other $2,351,191 $2,125,959 $225,232 10.6%
revenues
Cost of revenues 2,099,873 89.3% 1,437,682 67.6% 662,191 46.1%
Gross profit 251,318 10.7% 688,277 32.4% -436,959 -63.5%
Expenses:
Personnel and related 524,401 22.3% 246,489 11.6% 277,912 -63.5%
costs
Selling and 897,839 38.2% 417,686 19.6% 480,153 -63.5%
administrative
Product development costs 221,429 9.4% 169,667 8.0% 51,762 30.5%
Occupancy costs 32,955 1.4% 38,333 1.8% -5,378 -14.0%
Total 1,676,624 71.3% 872,175 41.0% 804,449 2.9%
Operating income -1,425,306 -60.6% -183,898 -8.7% -1,241,408
Nonoperating expenses - -478,653 -20.4% 15,117 0.7% -493,770
net
Loss before income taxes -1,903,959 -81.0% -168,781 -7.9% -1,735,178
Income taxes - net -19,207 -0.8% -55,643 -2.6% -74,850
Net loss ($1,923,166) -81.8% ($113,138) -5.3% ($1,810,028)
</TABLE>
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. The investments included
(i) expanding the Company's product and software development capabilities, (ii)
hiring new financial, engineering, sales and marketing professionals, (iii)
conducting an analysis of the Company's marketplace, and (iv) acquiring the
rights to certain new products which the Company believes fit well into the
Company's overall strategy. Certain of these investments were made late in
fiscal 1996.
The Company believed that it would begin to realize the benefits of these
investments during fiscal 1997. However, operations for fiscal 1997 were
adversely impacted by two sets of circumstances. First, certain of the Company's
principal customers significantly and unexpectedly reduced their capital
spending. These cutbacks resulted in the Company's actual volume of work for the
period being significantly below the level planned and was insufficient to cover
its overhead despite the fact that the Company increased its selling efforts and
augmented its marketing resources that resulted in a significant increase in its
bidding and proposal activity. Secondly, the Company introduced a new product in
fiscal 1997 and performed 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 period on one of these
contracts and significantly reduced margins on the other. The loss was caused
because significant amounts of engineering labor and subcontractor assistance
was required on these jobs to analyze and address the problems. Throughout
fiscal 1997, the Company did not make a meaningful penetration into the targeted
CEM business or obtain significant contracts from new customers despite
increased marketing efforts.
11
<PAGE>
In January 1997, the Company made certain reductions in its workforce to
permit it to approach breakeven at lower levels of sales activity. The Company
also believes that it has identified the problems in its new product.
Nevertheless, the Company did not receive a sufficient quantity of new orders
and contracts to permit its traditional core business to operate at a profitable
level. In addition, there are prepaid expenses of $183,334 associated with a
public relations program. A substantial portion of such prepaid amount was
amortized during the six months ended December 31, 1997.
The Company's strategy is to reduce its dependence on large contracts by
increasing its focus on product sales. No assurance can be given that the
Company will be successful in these efforts. However, in October 1997 the
Company acquired Laminaire (see Note 1 to "Notes to Financial Statements" and
"Liquidity and Capital Resources" below). Management believes that the
acquisition of Laminaire, a product-driven manufacturer and distributor of clean
room products which also produces a variety of electronic circuit boards and had
annual sales in excess of $6,000,000, represents a critical element in its
effort to make this transition and stabilize its financial condition. A
significant portion of its management, marketing and technical resources will be
focused towards integrating and, where possible, expanding and enhancing the
Laminaire business. This refocusing may result in a transition away from the
Company's core niches and contract orientation.
Operating expenses are not comparable between periods because fiscal 1997
includes the costs associated with. (i) expanding the Company's software
development capabilities, (ii) hiring new financial, engineering, sales and
marketing professionals, (iii) conducting a sophisticated analysis of the
Company's marketplace, (iv) acquiring the rights to certain new products which
fit well into the Company's overall strategy and (v) significant public
relations and other "public company" related costs. The costs associated with
being a public company include public relations costs, additional insurance,
professional fees, shareholder and board of director costs. The financial public
relations costs included in "Selling and administrative" amounted to $150,633.
There were substantially fewer such costs incurred in fiscal 1996. The Company
also hired several new engineers and incurred the customary time and costs
associated with training.
Product development costs increased because the Company hired four
engineers who devote a significant portion of their time to developing or
enhancing software and other new products and enhancements to existing products.
In addition, significant development efforts were necessary in connection with
the problems encountered with a newly-introduced product.
In addition, operating results were significantly impacted by several
transactions which took place during the fiscal year ended June 30, 1997 and
related to the engagement of a public relations and acquisition consultant, the
issuance of nonqualified stock options and the cancellation of the Underwriting
Agreement with Nationwide Securities, Inc. Management believes that each of
these expenditures and transactions had the potential to contribute positively
to future shareholder value, although no assurance thereof can be given. There
were no similar investments or transactions during the fiscal year ended June
30, 1996. A detailed listing and description of these charges, which include
noncash items aggregating approximately $247,000, is set forth in Note 10 to the
Consolidated Financial Statements included elsewhere herein. Management does not
anticipate incurring similar charges in the future
The Company has established reserves for the entire benefit associated with
the unused income tax loss carryforwards because the Company must realize income
in the future to utilize such carryforwards.
12
<PAGE>
Comparison of Fiscal 1996 to 1995
As described elsewhere herein, 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 following the closing of the
public offering and continued to impact earnings during fiscal 1997. The Company
believes that it will begin realizing the benefits from these investments during
the second half of fiscal 1997, although no assurances thereof can be given.
A comparison of activity between fiscal 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Caption 1996 % 1995 % Change
<S> <C> <C> <C> <C> <C>
Contract and other revenues $2,125,959 $2,548,660 $-422,701
Cost of revenues 1,437,682 0.676 1,661,470 0.652 -223,788
Gross profit 688,277 0.324 887,190 0.348 -198,913
Expenses:
Personnel and related costs 246,489 0.116 233,110 0.091 13,379
Administration expenses 304,057 0.143 180,039 0.071 124,018
Product development costs 169,667 0.080 197,978 0.078 -28,311
Selling expenses 113,629 0.053 68,344 0.027 45,285
Occupancy costs 38,333 0.018 39,593 0.016 -1,260
Total Expenses 872,175 0.410 719,064 0.282 153,111
Operating Income (Loss) -183,898 -0.087 168,126 0.066 -352,024
Interest-Net 15,117 0.007 42,572 0.017 57,689
Income before income taxes -168,781 -0.079 125,554 0.049 -294,335
Income Taxes-Net 55,643 0.026 30,874 0.012 86,517
Net Income (Loss) $-113,138 -0.053 $94,680 0.037 $-207,818
</TABLE>
Sales decreased by $422,701 (or 16.6%)in fiscal 1996 compared to fiscal
1995 because (i) a portion of a major contract expected to be completed in
fiscal 1996 was delayed by the customer such that it was substantially completed
in fiscal 1997; (ii) service revenues declined by $30,200; (iii) two large
pharmaceutical customers had unexpected temporary moratoriums on capital
expenditures and (iv) there was a decrease in the number of smaller jobs. The
Company engaged a new national sales manager, as well as two salesmen, to
solicit new business in a more aggressive way in fiscal 1997 and thereafter.
Cost of sales decreased by $224,788 (or 13.5%) in fiscal 1996 compared with
fiscal 1995. The decrease resulted from the decrease in sales. Cost of sales, as
a percentage of sales, increased to 67.6% in fiscal 1996 from 65.2% in fiscal
1995 principally because the contracts undertaken in fiscal 1996 were more
material intensive than were those in fiscal 1995. Material and outside
purchases constituted 27% of cost of sales in fiscal 1996 compared with 20% in
fiscal 1995. A substantial portion of this change relates to one large hospital
contract in progress. Material-intensive contracts are generally less profitable
than are engineering- intensive contracts.
The major changes in selling, general and administrative expenses during
fiscal 1996 compared with fiscal 1995 relate to: administrative expenses
($124,018) and selling expenses ($153,111). Administrative expenses increased
principally because of (i) amortization of the consulting agreement associated
with the
13
<PAGE>
underwriter ($38,700), expenses of financial public relations ($23,224),
increased insurance costs principally caused by director and officer liability
insurance ($23,647), and increased accounting and director costs caused by being
a public company ($47,784). These increases were partially offset by decreases
in software and other office costs. The increase in selling expenses was
principally caused by costs of a comprehensive marketing survey ($29,516) and
the costs of attending tradeshows ($22,433). As stated above, the Company has
hired additional finance, marketing, sales and engineering personnel in order
for it to implement its strategic plan. Most of these individuals were hired
during the fourth quarter of fiscal 1996 or early in the first quarter of fiscal
1997. Thus, the impact of their salaries on operations was greater in fiscal
1997 than is reflected in fiscal 1996 results.
The change in interest-net is a direct result of the Company realizing
interest income of $43,092 in fiscal 1996 because it invested the proceeds from
its initial public offering in time deposits.
The income tax benefit in fiscal 1996 relates to the amount of income taxes
that are recoverable from the carryback of the net operating loss incurred in
fiscal 1996.
Liquidity and Capital Resources
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. 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
promissory note to Charles Garay in the principal amount of $90,479 (the "Third
Note"). The Third Note, and all accrued interest at the rate of 15% per annum,
is due May 13, 1998.
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
14
<PAGE>
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.
Laminaire's operations are currently generating sufficient cash flow to service
the First and Second Notes, although no assurances can be given that this trend
will continue for the term of the First and Second Notes.
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.
15
<PAGE>
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.
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.
The Company is also seeking other complementary business acquisitions, the
financing of which is dependent on the Company's ability to locate funding on
acceptable terms. No assurances can be given that the Company will be successful
in these efforts.
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.
Item 7. FINANCIAL STATEMENTS
The consolidated financial statements are filed as part of this Annual
Report on Form 10-KSB.
Item 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None. The Company has not had any disagreements with its independent
auditors regarding the presentation of its financial statements or the
application of any Generally Accepted Accounting Principles.
16
<PAGE>
PART III.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE
WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The executive officers and directors of the Company are as follows:
Name Age Position with Company
Edward A. Sundberg 50 Chairman of the Board
Jon J. Darcy 50 President and Director
Gerard M. Gallagher 62 Chief Financial Officer
Edward A. Heil 47 Director
K. Ivan F. Gothner 39 Director
Charles J. Garay 58 Director
Steven W. Schuster 43 Secretary
All Directors hold office until the completion of their term of office,
which is not longer than three years, or until their successors have been
elected. The Company has a staggered Board of Directors. Mr. Garay's term
expires in 1998. The terms of Messrs. Heil and Gothner expire in 1999. The terms
of Messrs. Darcy and Sundberg expire in 2000. All officers are appointed
annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
The Board of Directors has an Audit Committee, Finance, Operating and
Compensation Committee. The Audit Committee reviews the results and scope of the
audit and other services provided by the Company's independent auditors, reviews
and evaluates the Company's internal audit and control. The Finance Committee,
established in February 1998, oversees the Company's treasury function. The
Operating Committee, established in February 1998, reviews and establishes the
Company's strategies, goals and direction.
Background of Executive Officers and Directors
Jon J. Darcy co-founded the Company in 1978 and has been an executive with
it since inception and President since 1987. He has a Bachelor of Science degree
from the State University of New York Maritime College.
Edward A. Sundberg has been President of ConsultAmerica, Inc., a
business-consulting firm, since 1992. From 1989 to 1992, he was Executive Vice
President of ISS International Service Systems, Inc. Mr. Sundberg holds a
Bachelor of Science degree from the United States Naval Academy and a Master of
Business Administration from Boston University.
Edward A. Heil is a certified public accountant and a managing director,
since January 1992, in Independent Network Group, Inc., a financial consulting
firm. From 1984 through December 1991 he was a partner in the accounting firm,
Deloitte & Touche, LLP. From 1973 to 1984 he was employed in various
professional capacities by Deloitte & Touche, LLP. Mr. Heil holds Bachelor of
Arts and Master of Business Administration degrees from New York University.
K. Ivan F. Gothner has been a Managing Director of The Adirondack Group
LLC, a financial consulting firm, since March 1997. Prior thereto, he was
employed as a managing director of First United
17
<PAGE>
Equities, Inc., a broker-dealer that is a member of the National Association of
Securities Dealers, Inc., since August 1995. He was President of Breasy Medical
Equipment (US), Inc. from October 1994 to August 1995. From January 1993 through
September 1994 he was General Partner of Adirondack Partners, LP. From 1990 to
1992 he was a Senior Vice President at Barclays Bank of New York. Prior thereto,
he was a Senior Vice President at Kleinwort Benson Limited, an investment
banking firm. Mr. Gothner holds Bachelor of Arts and Master of Arts degrees from
Columbia University. Mr. Gothner is also a director of The Ashton Technology
Group, Inc., a publicly-traded company headquartered in Philadelphia.
Charles J. Garay, the founder of Laminaire became a member of the Board of
Directors in October 1997 upon the completion of the Laminaire acquisition. From
1968 to October 1997 he was President and Chief Executive Officer of Laminaire.
Mr. Garay attended Rutgers University.
Gerard M. Gallagher became Chief Financial Officer of the Company in
February 1998. For the preceding five years, he served as an independent
consultant to a variety of businesses. He is a graduate of Iona College.
Steven W. Schuster has been secretary of the Company since July 1996. He is
a member of McLaughlin & Stern, LLP, counsel to the Company, since 1995. Mr.
Schuster has practiced corporate and securities law for the past 18 years. He
received a Bachelor of Arts degree from Harvard University and a Juris Doctorate
from New York University. Mr. Schuster is a director of ACTV, Inc., an
interactive television company.
Outside directors receive $4,000 per year plus $350 per meeting as
compensation for serving on the Board of Directors. All Directors are reimbursed
by the Company for expenses incurred in attending Directors' meetings. Firms
associated with outside directors and the Company's Secretary received an
aggregate of $217, 675 (principally for professional fees associated with the
acquisition of Laminaire and the negotiation of the financing therefor, and in
the case of Mr. Schuster, legal services). In addition, the directors (including
Mr. Darcy) who served as of October 15, 1997 each received options to purchase
up to 100,000 shares of common stock at an exercise price equal to the average
conversion price of convertible debentures converted between the period January
1, 1998 and April 15, 1998. Mr. Schuster received an option to purchase 50,000
shares. Each option also includes the right to purchase two Class A Redeemable
Warrants at a price of $.05 per warrant. These options become exercisable on
April 16, 1998 and remain exercisable for a period of five years thereafter.
Item 10. EXECUTIVE COMPENSATION
The following tabulation shows the total compensation paid by the Company
to its executive officers for the fiscal years ended June 30, 1996, June 30,
1997 and the transition fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Long Term
Compensation Awards Payouts
------------------- -------
Annual Compensation (1)
-----------------------
Name and Other Annual Restricted Stock Options/ LTIP All Other
Principal Position Year Salary Bonus Compensation Awards ($) SARs Payouts Compensation
- ------------------ ---- ------ ----- ------------ --------------- ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jon J. Darcy 1997 (6 mos.) $71,170 $4,000 (a) (a) (a) --
1997 123,000 8,000 (a) (a) (a) --
1996 123,000 8,000 (a) (a) (a) --
</TABLE>
18
<PAGE>
In fiscal 1996, Mr. Darcy received options to purchase 95,000 shares at an
exercise price of $.83 per share, the market price of the shares on the date of
issuance. In October 1997, Mr. Darcy received options to purchase up to 100,000
shares of common stock at an exercise price equal to the average conversion
price of convertible debentures converted between the period January 1, 1998 and
April 15, 1998. Each option also includes the right to purchase two Class A
Redeemable Warrants at a price of $.05 per warrant. These options become
exercisable on April 16, 1998 and remain exercisable for a period of five years
thereafter.
No other employee or officer received annual compensation of as much as
$100,000.
In October 1997, the Company entered into Memorandums of Understanding with
three directors under which firms with which they are associated receive fees
for consulting services performed. The fees specified are $10,000 per month for
firms associated with Messrs. Heil and Sundberg and $4,000 per month for a firm
associated with Mr. Gothner.
The Board of Directors has established a compensation committee comprised
of outside directors to review compensation matters as well as any new
employment contracts. The Company has a health and disability plan and a 401(k)
plan for its employees.
Employment Agreements
In July 1997, the Company entered into a three-year employment agreement
with Jon J. Darcy, President of the Company, under which he will receive an
annual salary of $135,000, $ 145,000 and $155,000, respectively, during each of
the three fiscal years in the period ended June 30, 2000. The contract also
provides for the issuance of stock options based on the achievement of specified
operating performance, the use of a car and that the Board of Directors may
award Mr. Darcy bonuses and other incentive compensation as it deems
appropriate, based upon the Company's operating performance or other reasonable
criteria and includes a restrictive covenant limiting Mr. Darcy's ability to
obtain employment with a competitor or potential competitor.
In June 1996, the Company entered into three-year employment agreements
with three software engineers under which it is obligated to pay annual salaries
of $60,000 to each such engineer. The agreements contain
covenants-not-to-compete and confidentiality agreements, as well as provisions
for severance pay if the Company terminates any or all such agreements for other
than cause.
The Company is obligated under contracts with two Laminaire executives to
pay annual salaries aggregating $220,000. Such contracts are cancelable with 30
days notice but require severance payments for periods ranging from six to nine
months.
Stock Option Plan
The Thermo-Mizer Environmental Corp. 1996 Stock Incentive Plan (the
"Plan"), which expires ten years from the date adopted, enables the Company to
grant incentive stock options, nonqualified options and stock appreciation
rights ("SARs") for up to 500,000 shares of the Company's Common Stock.
Incentive stock options granted under the Plan must conform to applicable
Federal income tax regulations and have an exercise price not less than the fair
market value of shares at the date of grant (110% of fair market value for ten
percent or more stockholders). Other options and SARs may be granted on terms
determined by a committee of the Board of Directors. As of December 31, 1997,
there were 288,000 options outstanding under the Plan, all with an exercise
price of $1 per share.
19
<PAGE>
Item 11. SECURITY OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at March 31, 1998
by (i) each person known by the Company to own, directly or beneficially, more
than 5% of the Company's Common Stock at such date (assuming that all shares
issued to such persons are still held by them), (ii) each of the Company's
directors, and (iii) all officers and directors of the Company as a group.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Common Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject to
community property laws, where applicable.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF PERCENT Of
BENEFICIAL OWNER (6) SHARES OWNED (5) SHARES OWNED (4)
<S> <C> <C>
Jon J. Darcy(1) 539,750 5.1
Edward Sundberg 1,500 --
Edward A. Heil(2) -- --
K. Ivan F. Gothner -- --
Charles J. Garay -- --
Gerard M. Gallagher -- --
Steven W. Schuster(3) 17,000 --
David Morgenstern 609,488 5.7
Norwood Venture Group(4) 2,083,333 16.3
Austost Anstalt Schaan(4) 1,693,535 14.9
UFH Endowment(4) 1,678,780 14.8
Arcadia Mutual Fund Co., Inc(4) 3,021,354 27.1
Directors and Officers As a Group 558,250 5.2
</TABLE>
1. Excludes 441,543 shares held in three trusts for Mr. Darcy's children over
which Mr. Darcy disclaims beneficial ownership.
2. Excludes 80,000 shares owned by a company in which Mr. Heil is managing
director. Mr. Heil disclaims beneficial ownership thereof.
3. Excludes 41,000 shares held by the law firm in which Mr. Schuster is a
partner. Includes 15,000 shares of Common Stock issuable upon the exercise
of options at an exercise price of $.10 per share.
4. Excludes the assumed conversion of warrants and options which have exercise
or conversion prices in excess of the current market price. Assumes that
convertible debt having an aggregate principal amount of $1,187,500 will be
converted at a price of $.24 per share. Includes the issuance of 2,083,333
shares of Common Stock to Norwood Venture Group upon conversion of a
promissory note in the principal amount of $500,000; the issuance of
687,500 shares of Common Stock to each of UFH Endowment, and Austost
Anstalt Schaan and the issuance of 447,917 shares of Common Stock to
Arcadia Mutual Fund Co., Inc. upon conversion by each entity of $165,000
outstanding principal amount of convertible debentures.
5. Excludes all options held by the respective individuals which have exercise
prices above the current market price or which are not redeemable.
6. The address for each officer or director listed above is 960 East Hazelwood
Avenue, Rahway, New Jersey 07065.
20
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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. Garay LLC is an affiliate of
Charles Garay, who became a director of the Company after the acquisition of
Laminaire was completed. 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 Note, Second and Third Notes - 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 per share equal to $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 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 annum, was to be
due on March 31, 1998; however, the final principal amount thereof has not yet
been determined.
In conjunction with the acquisition of Laminaire, the Company issued a
promissory note to Charles Garay in the principal amount of $90,479 (the "Third
Note"). The Third Note, and all accrued interest at the rate of 20% per annum,
is due May 13, 1998.
The Company's obligations under the First and Second 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.
During the six months ended December 31, 1997 and the fiscal years ended
June 30, 1997 and 1996, the Company paid professional, consulting and legal fees
amounting to $217,675 (of which $126,180 relates to the acquisition of Laminaire
or obtaining the financing therefor); $332,953(of which $153,924 relates to the
acquisition of Laminaire or obtaining the financing therefor) and $97,095 (of
which $40,220 relates to services associated with the initial public offering)
to directors or firms related to directors or officers. The
21
<PAGE>
law firm in which the Company's Secretary is a partner also received 41,000
shares of common stock in satisfaction of fees owed in fiscal 1997.
In October 1997, the Company entered into Memorandums of Understanding with
three directors under which firms with which they are associated receive fees
for consulting services performed. The fees specified are $10,000 per month for
firms associated with Messrs. Heil and Sundberg and $4,000 per month for a firm
associated with Mr. Gothner.
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. Arcadia Mutual Fund Co., Inc. purchased Debentures in the
aggregate principal amount of $500,000. Austost Anstalt Schaan purchased
Debentures in the aggregate principal amount of $325,000. David Morgenstern
purchased Debentures in the aggregate principal amount of $100,000. UFH
Endowment Ltd. purchased Debentures in the aggregate principal amount of
$325,000. 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 $1,562,500 of the principal amount
of the Debentures have been converted into 7,621,059 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.
22
<PAGE>
PART IV Exhibits and Reports on Form 8-K
a. Exhibits
INDEX TO EXHIBITS
1.1 Release Agreement among Nationwide Securities, Inc. (and its affiliates)
and Thermo-Mizer Environmental Corp.(1)
2. Plan of Merger for Thermo Engineering, Certificate of Ownership and
Merger, Certificate of Merger.(1)
3.1 Certificates of Incorporation.(1)
3.2 By-Laws.(1)
4.1 Specimen Certificate of Common Stock.(1)
4.2 Form of Underwriter's Warrant Purchase Option.(1)
4.3 Form of Option issued to Solay, Inc. and Crystal Line, Inc.(2)
4.4 Form of Options issued to Officers, Directors, Consultants and
Employees.(3)
4.5 Form of Class B Warrant.(3)
10.2 Agreement with D.R. Maruster & Co. dated December 10, 1996.(4)
10.2 Premium Reduction Option Cafeteria Plan.(1)
10.3 Lease Agreement.(1)
10.4 401(k) Retirement Plan and Profit Sharing Plan.(1)
10.5 Thermo-Mizer Environmental Corp. 1996 Stock Incentive Plan.(2)
10.6 Employment Agreement - Thomas B. Lewis(1)
10.7 Employment Agreement - Jeffrey A. Buser(1)
10.8 Employment Agreement - Eric W. Stark(1)
10.9 Agreement between the Registrant and Enersave, Inc. dated July 1996(3)
10.10 Agreement between the Registrant and American Process Controls, Inc.(3)
10.11 Consulting Agreement with Solay, Inc.(2)
10.12 Amendment to Consulting Agreement between Registrant and Solay, Inc.
dated as of February 21, 1997.(5)
10.13 Agreement with Continental Capital & Equity Corporation dated April 29,
1997.(6)
10.14 Form of Convertible Debenture regarding July 7, 1997 issuance.(7)
10.15 Form of Regulation S Securities Subscription Agreement.(7)
10.16 Form of Escrow Agreement.(7)
23
<PAGE>
10.17 Form of Registration Rights Agreement.(7)
10.18 Form of Employment Agreement between the Registrant and Jon J. Darcy
dated July 1, 1997.(7)
10.19 Purchase Agreement between the Company and Laminaire Corporation dated
October 13, 1997.(9)
10.20 Promissory Note in Principal Amount of $2,200,000 dated October 16, 1997
executed by the Company in favor of Garay LLC.(10)
10.21 Promissory Note dated October 16, 1997 executed by the Company in favor
of Garay LLC.(10)
10.22 Promissory Note in Principal Amount of $90,479 dated October 16, 1997
executed by Company in favor of Charles Garay.(10)
10.23 Guaranty executed by Laminaire Corporation on October 16, 1997.(10)
10.24 Mortgage and Security Agreement executed by Laminaire Corporation.(10)
10.25 Employment Agreement of Charles J. Garay dated October 16, 1997.(10)
10.26 Employment Agreement of Antonio Garay dated October 16, 1997.(10)
10.27 Employment Agreement of Gerald E. Reilly dated October 16, 1997.(10)
10.28 Employment Agreement of Etta Monteleone dated October 16, 1997.(10)
10.29 Form of 5% Convertible Debenture issued by the Company pursuant to
Regulation S.(10)
10.30 Convertible Note Purchase Agreement between the Company and Norwood
Venture Corp. dated October 16, 1997, with form of Convertible
Promissory Note executed by the Company in favor of Norwood Venture
Corp. dated October 16, 1997.(10)
10.31 Security Agreement executed by the Company in favor of Norwood Venture
Corp. dated October 16, 1997.(10)
10.32 Security Agreement executed by Laminaire Corporation in favor of Norwood
Venture Corp. dated October 16, 1997.(10)
10.33 Guaranty executed by Laminaire Corporation in favor of Norwood Venture
Corp. dated October 16, 1997.(10)
10.34 Consulting Agreement with Continental Capital & Equity Corp. dated July
12, 1997.(7)
10.35 Consulting Agreement with Roy Meadows dated March 29, 1998.(11)
10.36 Memorandum of Understanding with Adirondack Capital, LLC dated October
28, 1997.
10.37 Memorandum of Understanding with Consult America Inc. dated October 28,
1997.
10.38 Memorandum of Understanding with The Ridge Group dated October 28, 1997.
10.39 Nonqualified Option Plan(8).
24
<PAGE>
14. Assignment of Patent.(1)
27. Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
(1)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form SB-2.
(2)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form S-8, filed on September 26, 1996.
(3)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form S-8, filed on June 30, 1996.
(4)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form S-8, filed on January 21, 1997.
(5)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form S-8, filed on March 11, 1997.
(6)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form S-8, filed on May 13, 1997.
(7)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form 8-K, filed on July 22, 1997.
(8)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form S-8 filed on April 14, 1997.
(9)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form 10-KSB filed on October 13, 1997.
(10)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form 8-K filed on October 27, 1997.
(11)Included in, and incorporated by reference to, the Registrant's Registration
Statement on Form S-8 filed on March 31, 1998.
b. Reports on Form 8-K to describe offerings pursuant to Regulation S under
the Securities Act was filed on October 27, 1997.
25
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/ Jon J. Darcy
------------------------------
JON J. DARCY
Title: President
Date: 04/12/98
/s/ Gerard M. Gallagher
------------------------------
GERARD M. GALLAGHER
Title: Chief Financial Officer
Date: 04/12/98
Directors
/s/ Edward A. Sundberg
------------------------------
EDWARD A. SUNDBERG
Title: Director and Chairman
Date: 04/12/98
/s/ Edward A. Heil
------------------------------
EDWARD A. HEIL
Title: Director
Date: 04/12/98
/s/ K. Ivan F. Gothner
------------------------------
K. IVAN F. GOTHNER
Title: Director
Date: 04/12/98
------------------------------
CHARLES J. GARAY
Title: Director
Date:
26
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP.
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 28
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet at December 31, 1997 29-30
Consolidated Statements of Operations for the 31
Six Months Ended December 31, 1997 and the
Fiscal Years Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1997 and the 32
Fiscal Years Ended June 30, 1997 and 1996
Consolidated Statements of Stockholders' 33
Equity for the Six Months Ended December 31,
1997 and the Fiscal Years Ended June 30,
1997 and 1996
Notes to Financial Statements 34-48
27
<PAGE>
To the Board of Directors
Thermo-Mizer Environmental Corp.
Rahway, New Jersey
We have audited the accompanying consolidated balance sheet of Thermo-Mizer
Environmental Corp. and subsidiary as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended June 30, 1997 and the six months ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the financial position of
Thermo-Mizer Environmental Corp. and subsidiary as of December 31, 1997 and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1997 and the six months ended December 31, 1997 in
conformity with generally accepted accounting principles.
Eichler Bergsman & Co., LLP
New York, NY
April 13, 1998
28
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Actual Pro forma
(Note 1)
Current Assets: (Unaudited)
Cash $299,179 $299179
Accounts receivable-net of allowance of $66,600 1,229,129 1,229,129
Inventories 790,180 790,180
Unbilled receivables 14,236 14,236
Prepaid expenses and other 189,676 189,676
---------- ----------
Total Current Assets 2,522,400 2,522,400
Property, Plant and Equipment - net 2,378,228 2,378,228
Other Assets 2,538,815 2,369,377
---------- ----------
Total Assets $7,439,443 $7,270,005
========== ==========
See Notes to Consolidated Financial Statements.
29
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Actual Pro Forma
(Note 1)
(Unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable and current portion of long-term debt $490,479 $490,479
Accounts payable - trade 763,651 763,651
Billings in excess of costs and earnings 26,103 26,103
Accrued expenses and other 517,597 517,597
----------- -----------
Total Current Liabilities 1,797,830 1,797,830
----------- -----------
Long-term Debt 3,988,878 2,956,378
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.001 par value; 25,000,000 shares 3,952 10,691
Authorized; 3,952,085 shares issued (pro forma-10,691,395
Shares issued)
Additional paid-in capital 5,218,565 6,074,888
Deficit (3,338,077) (3,338,077)
----------- -----------
Total 1,884,440 2,747,502
Less - Note receivable (160,000) (160,000)
Treasury stock - at cost ( 75,5000 shares) (71,705) (71,705)
----------- -----------
Stockholders' Equity - net 1,652,735 2,515,797
Total Liabilities and Stockholders' Equity $7,439,443 $7,270,005
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND THE YEARS ENDED JUNE 30, 1997 AND
1996
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended
---------------- ---------- ----------
December 31, 1997 June 30,1997 June 30,1996
----------------- ------------ ------------
<S> <C> <C> <C>
Contract and sales revenues $2,887,447 $2,351,191 $2,125,959
Cost of revenues 2,414,766 2,099,873 1,437,682
----------- ----------- -----------
Gross profit 472,681 251,318 688,277
----------- ----------- -----------
Expenses:
Personnel and related costs 473,320 524,401 246,489
Selling and administration expenses (including
financial public relations costs) 712,968 930,794 456,019
Product development costs 121,578 221,429 169,667
Nonrecurring and other expenses - net (including
$750,000 relating to the amortization of debt discount
associated with a favorable conversion feature) 878,718 478,653 (15,117)
----------- ----------- -----------
Total expenses 2,186,584 2,155,277 857,058
----------- ----------- -----------
Loss before income taxes (1,713,903) (1,903,959) (168,781)
Income taxes 4,499 19,207 55,643
Net loss $(1,718,402) $(1,923,166) $(113,138)
=========== =========== ===========
Basic loss per share $(.52) $(.86) $(.08)
=========== =========== ===========
Weighted average number of shares of common stock 3,310,040 2,231,372 1,387,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND THE YEARS ENDED JUNE 30, 1997 AND 1996
Six Months Ended Year Ended Year Ended
---------------- ---------- ----------
December 31, 1997 June 30,1997 June 30,1996
----------------- ------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(1,718,402) $(1,923,166) $(113,138)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 53,558 41,551 22,342
Loss on disposal of assets 27,756
Nonoperating writeoffs and charges 778,019 204,555
Provision for doubtful accounts 20,000 15,000
(Increase) decrease in assets:
Accounts receivable (289,084) (184,594) (185,012)
Inventories (411,896) (62,832) (162,362)
Unbilled receivables 13,740 226,862 (204,207)
Prepaid expenses and other 47,971 (497,633) (209,391)
Increase (decrease) in liabilities:
Accounts payable 381,663 121,896 168,878
Billings in excess of costs and earnings (56,550) 82,653 (7,419)
Accrued expenses and other (257,698) 191,185 (41,943)
---------- ---------- ----------
Net cash used in operating activities (923,283) (1,756,767) (732,252)
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,285,462) (104,112) (56,730)
---------- ---------- ----------
FINANCING ACTIVITIES:
Issuance of commons stock and warrants 1,388,706 428,764 3,222,600
Payments on debt (1,510,995) (311,839)
Proceeds from debt 4,479,357 375,000
Acquisition and financing costs (1,420,525) (282,272)
Investment in other time deposit 375,000 (375,000)
Other investments (198,619)
Purchase of treasury stock (37,625) (34,080)
---------- ---------- ----------
Net cash provided by (used in) financing activities 3,273,918 (86,207) 2,910,761
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 65,173 (1,947,086) 2,121,779
Cash - beginning 234,006 2,181,092 59,313
---------- ---------- ----------
Cash - ending $299,179 $234,006 $2,181,092
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND THE YEARS ENDED
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, July 1,1995 1,125,000 $1,125 $129,375 $416,629 $547,129
Sale of Common Stock and
Warrants--net 771,500 771 3,113,776 3,114,547
Net Loss (113,138) (113,138)
--------- ------ ---------- ----------- ----------
Balance, June 30,1996 1,896,500 1,896 3,243,151 303,491 3,548,538
Sale of Common Stock 821,000 821 587,943 588,764
Net Loss (1,923,166) (1,923,166)
--------- ------ ---------- ----------- ----------
Balance, June 30, 1997 2,717,500 2,717 3,831,094 (1,619,675) 2,214,136
Issuance of Common Stock 327,557 328 237,172 - 237,500
Conversion of Debt Securities 907,028 907 400,299 401,206
Amount attributable to
conversion feature 750,000 750,000
Net Loss (1,718,402) (1,718,402)
--------- ------ ---------- ----------- ----------
Balance, December 31, 1997 3,952,085 $3,952 $5,218,565 $(3,338,077) 1,884,440
========= ====== ========== =========== ==========
Less - Note receivable (160,000)
- Treasury stock - at cost (71,705)
----------
Total $1,652,735
==========
</TABLE>
Note - All amounts give retroactive effect to a .75 to 1 reverse stock split
declared in January 1996.
See Notes to Consolidated Financial Statement
33
<PAGE>
THERMO-MIZER ENVIRONMENTAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACQUISITION OF LAMINAIRE CORPORATION AND NATURE OF
BUSINESS
Thermo-Mizer Environmental Corp. (the "Company"), based in Rahway, New
Jersey, designs, assembles and sells a family of products and systems used in
cleanroom facilities and to monitor a wide variety of environmental conditions.
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
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.
In conjunction with the acquisition of Laminaire, the Company issued a
promissory note to Charles Garay in the principal amount of $90,479 (the "Third
Note"). The Third Note, and all accrued interest at the rate of 20% per annum,
is due May 13, 1998.
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
34
<PAGE>
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
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,
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<PAGE>
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 ($1,312,500 into 7,119,807 shares of common stock through
March 31, 1998). The Pro forma column in the accompanying Consolidated Balance
Sheet has been prepared assuming that the conversions that took place between
January 1, 1998 and March 31, 1998 had taken place at December 31, 1997.
For financial reporting purposes, the Company accounted for the 30%
difference between the market price of its common stock and the conversion price
of the convertible debt (amounting to $750,000) as being attributed to the
conversion feature and, accordingly, credited such amount to Additional Paid-in
Capital. The resulting debt discount was amortized to interest expense over the
period commencing with the date of issuance through the date on which the
securities became convertible. The discount was fully amortized at December 31,
1997. The costs associated with obtaining the financing is reflected as deferred
debt expenses (see Note 5).
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.
The obligations above (net of amounts converted through March 31, 1997) are
scheduled to mature as follows:
Year of Maturity Amount
1998 $490,479
1999 260,366
2000 408,267
2001 433,617
2002 366,628
Thereafter 1,487,500
---------
Total 3,446,857
Amount converted prior to
March 31,1998 1,032,500
---------
Total $4,479,357
==========
36
<PAGE>
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. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The following unaudited pro forma operating data assumes that the
acquisition of Laminaire had taken place as of the beginning of July 1, 1997
(for the six months ended December 31, 1997), 1996 (fiscal 1997) and 1995
(fiscal 1996), respectively. The data combines the operating results of the
Company's fiscal year with corresponding data from Laminaire's calendar year and
gives effect to (i) the amortization of purchase adjustments and goodwill and
(ii) incremental interest expense associated with the financing arrangements. No
effect has been given to assumed cost savings brought about by the consolidation
of the two entities.
12/31/97 Fiscal 1997 Fiscal 1996
(6 months)
Net revenues $4,500,550 $8,777,632 $8,185,390
Cost of sales 3,623,487 6,635,974 5,712,061
Gross profit 877,063 2,141,658 2,473,329
Operating expenses 1,691,811 3,322,865 2,428,859
Nonoperating expenses 917,510 480,221 181,343
Income (loss) before taxes -1,732,258 -1,858,292 -136,873
Income taxes-net 4,497 19,607 55,493
Net income (loss) -1,736,755 -1,877,899 -81,380
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
37
<PAGE>
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 $81,000 for the six months ended December 31,
1997, and $232,22 and $184,029 for the fiscal years ended June 30, 1997 and
1996, respectively. 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 December 31, 1997,
inventories consist of:
Description Amount
Raw materials and components $435,417
Work-in-progress 209,069
Finished goods 145,694
-------
Total $790,180
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.
38
<PAGE>
Statement of Cash Flows
Interest paid for the six months ended December 31, 1997 was $76,847 and
for the years ended June 30, 1997 and 1996 was $22,697 and $28,527,
respectively. Income taxes paid for the year ended June 30,1997 was $19,207. 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. During the
six months ended December 31, 1997 and the fiscal year ended June 30, 1997, such
charges include the cost of engineering labor and overhead. Substantially all
charges during the fiscal year ended June 30, 1996 were paid to consultants and
contractors.
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 $50,841, $102,396 and
$104,868 for the three periods ended December 31, 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, after giving retroactive effect
to the .75 to 1 reverse stock split effected in January 1996. The assumed
exercise of outstanding warrants and options 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.
39
<PAGE>
Revenue and Credit Concentration
Prior to the acquisition of Laminaire, a significant portion of the
Company's revenue was derived from a small number of systems contracts performed
for customers located principally in the New York Metropolitan Area.
Accordingly, a substantial portion of the Company's accounts receivable at
December 31, 1997 is due from customers located in the New York Metropolitan
area.
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 and 1996 amounts and balances have been reclassified to
conform to the current presentation.
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 include contract receivables of
$377,350 and exclude retainages on contract receivables of $244,836 (which are
included in the Balance Sheet caption "Other Assets").
Costs and estimated earnings on uncompleted contracts at December 31, 1998
are summarized below:
Costs incurred on uncompleted contracts $2,031,125
Estimated earnings (18,461)
--------
Total 2,012,664
Less - Billings to date 2,024,531
---------
Total $(11,867)
=========
Included in accompanying balance sheet captions:
Unbilled receivables $14,236
Billings in excess of costs and earnings (26,103)
-------
Total $(11,867)
========
40
<PAGE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997:
Land and building $2,713,857
Furniture and fixtures 1,083,561
Machinery and equipment 579,685
Vehicles 19,230
------
Total 4,396,333
Less - accumulated depreciation 2,018,105
---------
Property and equipment - net $2,378,228
==========
NOTE 5--OTHER ASSETS
Other assets consist of the following at December 31, 1997:
Retainages (note 3) $244,836
Deferred debt costs (note 1) 331,592
Goodwill-net (notes 1 and 2) 1,767,386
Rights and miscellaneous 189,134
Other 5,867
----------
Total $2,538,815
==========
Rights and miscellaneous consist of:
American Process Controls,Inc. $114,299
Enersave,Inc. 74,835
----------
Total $189,134
==========
In August 1996, the Company made a noninterest-bearing loan of $93,750
(which was subsequently increased to $114,299 to American Process Controls, Inc.
("APC"), the proceeds from which were used to fund the development of a working
temperature-activated steam trap alarm device (the "Product"). The loan is
collateralized by all of APC's assets. The Company has the right to receive 45%
of APC's common stock in full satisfaction of such loan plus the (i) exclusive
right to sell the Product in the Heating, Ventilation and Air Conditioning
market and (ii) nonexclusive right to sell the product in all other markets. APC
is required to sell the Product to the Company at a price equivalent to 120% of
APC's manufacturing costs. The Company believes that additional costs must be
incurred to complete the Product's design and testing and has advised APC that
it is currently unwilling to advance such funds. The Company has proposed that
APC obtain alternative financing in sufficient amount as to repay the amounts
due to the Company and complete the Product. No assurance can be given that APC
will be successful in such efforts.
In July 1996, the Company and Enersave, Inc. ("Enersave") entered into an
agreement under which the Company acquired, for $100,000, all of Enersave's
rights to provide all necessary
41
<PAGE>
performance metering and billing services pursuant to certain energy service
contracts between Enersave and certain public utility companies. The acquisition
price will be amortized based on actual cash collections.
NOTE 6--INCOME TAXES
The Company incurred a net operating loss for the six months ended December
31, 1997 and for the year ended June 30, 1997. The Company has established an
allowance for the full potential benefit of all such carryforwards because of
doubt as to the realizability of such benefit. The income tax benefit for the
year ended June 30, 1996 consists entirely of the estimated benefit available
from the carryback of the Company's net operating losses. The entire provision
in 1997 relates to state franchise taxes and fees.
A reconciliation of income tax benefit calculated using the Federal
statutory rate to the reported income tax benefit for fiscal 1996 is as follows:
Federal statutory rate applied to $(59,073)
pretax income (loss)
Investment and research credits (17,000)
Benefit of graduated rates 20,430
---------
Income tax benefit $(55,643)
=========
Deferred income taxes will be recorded for the net tax effects when
temporary differences arise between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income tax
purposes. No deferred income taxes are recorded at December 31, 1997.
The Company has net operating loss carryforwards of approximately
$3,400,000 expiring in the year 2012 and investment and research and development
credits amounting to $37,000 that are available to reduce future income taxes
through 2012.
NOTE 7--STOCKHOLDERS' EQUITY
The Company is a Delaware corporation. Its Certificate of Incorporation
provides that its authorized capital stock consists of 25 million shares of
Common Stock, par value $.001 per share. The holders of the Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of stockholders. Holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. The Board of Directors, without shareholder approval, could
issue shares of Common Stock upon such terms as it determines to whomever it
pleases, including persons or entities who would help present management
maintain control.
Initial Public Offering
In March 1996, the Company completed an initial public offering in which it
sold 771,500 shares of its common stock and 1,725,000 redeemable warrants (the
"Redeemable Warrants") which resulted in net proceeds, after all expenses, of
$3,114,547. Each Redeemable Warrant entitles the holder thereof to purchase one
share of common stock for $6.00 (120% of the initial
42
<PAGE>
public offering price), subject to adjustment, commencing one year from the date
of the initial public offering and remains exercisable for a period of four
years thereafter. The Redeemable Warrants are redeemable for $.05 per warrant
commencing two years from the closing date of the offering if the closing price
of the Company's common stock equals or exceeds $7.50 for 20 consecutive trading
days. The Company also sold, for nominal consideration, a warrant to the
underwriter entitling the holder thereof to purchase 75,000 shares of common
stock and 150,000 warrants at a price equal to 165% of the initial public
offering price thereof. This warrant becomes exercisable one year from the date
of the initial public offering and remains exercisable for a period of four
years thereafter. As part of the initial public offering, the Company also paid,
at closing, a fee of $120,000 for a two-year consulting agreement (see Note 10).
The transactions described below, together with other issuances of
securities associated with the financing of the acquisition of Laminaire (see
Note 1), result in a modification of the exercise price of the Redeemable
Warrants issued as part of the Company's initial public offering under the
antidilution provisions of the warrant agreement. Such issuances result in the
exercise price of the Redeemable Warrants being reduced from $6.00 (the price in
effect on the date of issuance) to $.89 at December 31, 1997. In addition, each
Redeemable Warrant, as adjusted, will entitle the holder thereof to purchase 6.7
shares of Common Stock at the adjusted purchase price of $.89 per share.
Solay Agreement
On July 30, 1996, the Company entered into a one-year financial consulting
agreement with Solay, Inc. ("Solay") under which Solay agreed to provide the
Company with financial public relations and acquisition-related services in
consideration for a payment of $165,000 and an option (the "Option") granting
Solay the right to purchase 550,000 units at an exercise price of $1 per unit.
Each unit consists of one share of common stock and two Class B warrants. Each
Class B warrant entitled the holder thereof to purchase one share of common
stock at an exercise price equal to the greater of (i) $3 per share or (ii) 120%
of the offering price of a share of common stock in a secondary public offering
which results in gross proceeds of at least $3,000,000. The Class B warrants
were exercisable for a period of five years commencing on the earlier of (i) one
year from the date that the option was granted or (ii) the consummation of an
acquisition, as defined, by the Company. The Company registered all securities
covered by the Option in a Registration Statement on Form S-8. In February 1997,
the Company and Solay agreed to modify the terms of the option such that it
cancelled 470,000 previously issued Class B Warrants and Solay's right to
purchase 30,000 Class B Warrants and issued an aggregate of 100,000 shares of
Common Stock (one share of Common Stock for each five Class B Warrants).
Solay is entitled to exercise options for up to 300,000 shares, of which it
exercised such option for 260,000 such shares, including 160,000 for which it
issued a note to the Company in the principal amount of $160,000. The note is
interest-free and is nonrecourse to Solay, except to the extent that an officer
of the Company repays a note due by such officer to Solay. The remainder of the
Option becomes exercisable at the earlier of (i) the consummation by the Company
of an acquisition, as defined, or (ii) 18 months from the date of grant. The
Option expires five years from the date of grant. Solay granted an irrevocable
proxy to vote all shares purchased and held by Solay pursuant to the Option to
the Company's President. Such proxy
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<PAGE>
terminates at the time that the shares are sold, exclusive of a transfer
pursuant to a pledge of the shares.
As part of the agreement with Solay, Nationwide Securities, Inc.
("Nationwide"), the underwriter for the Company's initial public offering in
March 1996, agreed to terminate the underwriting agreement effectively
eliminating all restrictive covenants set forth therein and severing the
relationship between the Company and Nationwide. Accordingly, the Company also
wrote off the unamortized portion, amounting to $100,000, of the Nationwide
consulting agreement during the fiscal year ended June 30, 1997.
The Company issued nonqualified options for 180,000 units to officers and
directors. The units covered by these nonqualified options are identical to the
units included in the Option issued to Solay, except that they were exercisable
at estimated fair market value at the date of grant ($1.16). The Class B
Warrants included in such units were treated in the same manner as the Class B
Warrants included in the Solay agreement described above. The conversion of the
Class B Warrants results in the exercise price per share becoming $.83.
For financial reporting purposes, the Company ascribed a value of $.05 to
each Class B Warrant. The aggregate difference between the fair market value of
a share of common stock on the date of grant ($1.0623) and the value ascribed to
each share of common stock included in the units described above ($.90) for the
Solay Options amounts to $89,375 and was accounted for as an expense during the
fiscal year ended June 30, 1997. There are no remaining unamortized costs
associated with the Solay Agreement at December 31, 1997.
Continental Capital & Equity Corp.
On April 30, 1997, the Company entered into an agreement with Continental
Capital & Equity Corporation ("CCE") under which CCE agreed to conduct a
financial public relations campaign and provide other consulting services to the
Company in consideration for the receipt of (i) $25,000 plus 225,000 shares of
the Company's Common Stock at the commencement of services and (ii) $125,000
payable in cash or the issuance of Common Stock at a price equivalent 80 percent
of the closing bid price of such shares on June 15, 1997. In August 1997, the
Company issued 177,587 shares of Common Stock to CCE to satisfy this obligation.
The agreement was extended in October 1997 at which time the Company agreed to
pay CCE an additional 300,000 shares. The accompanying consolidated financial
statements include expenses of $239,580 during the six months ended December 31,
1997 and $91,666 for the year ended June 30, 1997 (classified in the caption
"Selling, general and administrative) relating to the CCE agreement. In
addition, the unamortized portion of the payment amounts to $56,250 at December
31, 1997 and is included in the caption "Prepaid expenses and other."
Stock Options
In December 1996, the shareholders approved a stock incentive plan under
which the Company may issue incentive stock options, nonqualified stock options
and stock appreciation rights. As of June 30, 1997, the Company has granted
options covering 314,000 shares of Common Stock, of which 169,000 options are
vested and the remaining vest ratably over four years. The maximum number of
shares which may be issued under this plan is 500,000.
44
<PAGE>
In June 1997, the Company issued stock options for 140,000 shares of Common
Stock exercisable at a price of $.10 per share in consideration for services
performed by outside directors in connection with the acquisition of Laminaire.
The difference between the exercise price and the market price of these shares
was accounted for as part of the acquisition price of Laminaire (see Note 14).
The Company accounts for all options using the intrinsic value method in
accordance with Accounting Principles Board Opinion No.25, "Accounting For Stock
Issued To Employees" and its related interpretations. Effective with fiscal
1997, the Company is subject to the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation" ("SFAS
123"). SFAS 123 establishes a fair value method of determining compensation
expense relating to stock-based compensation plans, and requires the disclosure
of the pro forma effects of recording such expense using the fair value method
rather than the intrinsic method. Under SFAS 123, the fair value of stock-based
awards to employees is calculated using option pricing models, even though such
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's pro forma
calculations were made using the Black- Scholes option pricing model with the
following assumptions:
Risk-Free Interest Rate 9%
Dividend Rate 0%
Expected Term of Option In Years Five years
On a pro forma basis, net loss and loss per common share for the six months
ended December 31, 1997 and for fiscal 1997 and 1996 would not have changed
significantly if the Company had accounted for options using the fair value
method rather than the intrinsic value method.
A summary of stock option activity follows:
Description Number Price Range
Year Ended June 30, 1997:
Options granted 1,286,000 $.10 to $1.00
Options exercised 400,000 $1.00
Options cancelled 55,000 $1.00
Options outstanding 831,000 $.83 to $1.00
Six Months Ended December 31,
1997:
Options granted 565,000 $.20 to $.57
Options exercised
Options cancelled 17,250 $1.00
Options outstanding 1,378,750 $.20 to $1.00
Of the total options outstanding, 1,006,250 are exercisable at December 31,
1997.
45
<PAGE>
NOTE 8--COMMITMENTS AND CONTINGENCIES
In July 1997, the Company entered into a three-year employment agreement
effective July 1, 1997, with its President under which he will receive an annual
salary of $135,000, $145,000 and $155,000, respectively, during each of the
three fiscal years in the period ended June 30, 2000. The contract also provides
for the issuance of stock options based on the achievement of specified
operating performance, the use of a car and that the Board of Directors may
award bonuses and other incentive compensation to the President as it deems
appropriate, based upon the Company's operating performance or other reasonable
criteria and includes a restrictive covenant limiting the President's ability to
obtain employment with a competitor or potential competitor.
In June 1996, the Company entered into three-year employment agreements
with three software engineers under which it is obligated to pay annual salaries
of $60,000 to each such engineer. The agreements contain
covenants-not-to-compete and confidentiality agreements, as well as provisions
for severance pay if the Company terminates any or all such agreements for other
than cause.
The Company is obligated under contracts with two Laminaire executives to
pay annual salaries aggregating $220,000. Such contracts are cancelable with 30
days notice but require severance payments for periods ranging from six to nine
months.
The Company's management does not believe that its products are subject to
material product liability claims and has no insurance to cover such risk.
The Company has a qualified 401(k) profit sharing plan available to
full-time employees who meet the plan's eligibility requirements. The plan
permits participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. In addition, the Company has no
obligation to contribute to the plan, however, it can elect a discretionary
contribution. The Company made no contributions to the plan during the six
months ended December 31, 1997 and either of the two years in the period ended
June 30, 1997.
Total rent expense for the six months ended December 31, 1997 and the
fiscal years ended June 30, 1997 and 1996 amounted to $62,720, $74,985 and
$50,492, respectively. The amount for the six months ended December 31, 1997
includes $28,019 representing an accrual for the remainder of the lease term of
the agreement covering the Company's former office in Ridgefield, New Jersey,
which the Company vacated in December 1997 following its acquisition of
Laminaire.
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<PAGE>
NOTE 9--CONCENTRATION OF CREDIT RISK
The Company's 11 largest customers accounted for 57% of its net revenues
during the six months ended December 31, 1997; its two largest customers
accounted for 25% of net revenues in 1997, and its six largest customers
accounted for 87% of net revenues in 1996 as follows:
Six Months Year Ended June Year Ended
---------- --------------- ----------
Ended 12/31/97 30, 1997 June 30,1996
-------------- -------- ------------
Customer A 2.0% 14% 23%
Customer B 0.2% 6% 13%
Customer C 3.2% 7% 20%
Customer D 4.5% 7% 11%
Customer E 6.4% 17% ---
Customer F 0.4% 1% 10%
Customer G 0.2% 1% 10%
Customer H 14.1% -- --
Customer I 11.4% -- --
Customer J 7.6% -- --
Customer K 6.7% -- --
No other customers accounted for ten percent or more of net revenue during
either fiscal year. Customer G is located in Canada. No other sales were made to
customers located outside the United States.
The employees and facilities of the Company service all customers. Company
costs other than direct material are not related to specific customers. All
major customers above relate to the Systems Division.
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 Control Systems
("TCS"). The table below sets forth the sales and gross profits contributed by
each division for the six months ended December 31, 1997. The results of CM, CD
and EM are included commencing on their date of acquisition, October 16, 1997.
<TABLE>
<CAPTION>
CM CD EM TCS Total
<S> <C> <C> <C> <C> <C>
Revenues $520,523 $740,369 $501,686 $1,124,869 $2,887,447
Cost of revenues 362,185 670,126 324,698 1,057,757 2,414,766
Gross profit 158,338 70,243 176,988 67,112 472,681
Direct selling and product development 44,611 45,004 49,583 267,310 406,508
Contribution 113,727 25,239 127,405 (200,198) 66,173
Joint overhead costs 99,361 56,430 100,058 767,086 1,022,935
Other costs 9,285 3,483 7,813 858,138 878,719
Income (Loss) before taxes 5,081 (34,674) 19,534 (1,703,844) (1,713,903)
</TABLE>
47
<PAGE>
Many costs are allocated based on various allocation bases including
relative sales and square footage used. It is not practicable to ascribe assets
to specific divisions. In 1998, the Company expects that several customers from
the Cleanroom Manufacturing Division and the Electronic Manufacturing Division
will comprise 10 percent or more of consolidated sales.
NOTE 10--NONRECURRING EXPENSES AND OTHER
Nonrecurring expenses and other consist of the following for the six months
ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Six Months Year Ended Year Ended
---------- ---------- ----------
Ended 12/31/97 June 30,1997 June 30, 1997
-------------- ------------ -------------
<S> <C> <C> <C>
Solay agreement (Note 7) $ 294,375
Write-off - Nationwide consulting
agreement (Note 7) 95,000
Postemployment cost 40,000
Professional fees associated with
nonrecurring transactions 67,510
Amortization of discount
associated with the favorable
conversion feature $750,000
Amortization of goodwill 11,115
Interest - net 89,584 (43,436) $ (15,117)
Disposal of equipment (and write-
off of lease obligation) 27,756
Write-off of lease costs (Note 8) 28,019
Other (2,552)
--------- ---------
Total $878,718 $ 478,653 $ (15,117)
======== ========= =========
</TABLE>
The Company agreed to purchase an annuity for an officer who retired during
the fiscal year ended June 30, 1997, the cost of which ($40,000) was charged to
operations.
NOTE 11--RELATED PARTY TRANSACTIONS
During the six months ended December 31, 1997 and the fiscal years ended
June 30, 1997 and 1996, the Company paid professional, consulting and legal fees
amounting to $217,675 (of which $126,180 relates to the acquisition of Laminaire
or obtaining the financing therefor); $332,953(of which $153,924 relates to the
acquisition of Laminaire or obtaining the financing therefor) and $97,095 (of
which $40,220 relates to services associated with the initial public offering)
to directors or firms related to directors or officers. The law firm in which
the Company's Secretary is a partner also received 41,000 shares of common stock
in satisfaction of fees owed during fiscal 1997.
48
Exhibit 10.36
Memorandum of
Understanding between
Thermo-Mizer Environmental Corp.
and
Adirondack Capital, LLC
28 October 1997
1. Thermo-Mizer Environmental Corp. and its subsidiaries ("Thermo") wish to
engage Adirondack Capital, LLC ("Adirondack"), as an investment banker,
financial advisor and special consultant to Thermo and its Board of Directors.
2. In consideration for his services to Thermo, Adirondack will be paid a cash
retainer by Thermo of $4,000 on the date hereof and on the first day of each
month hereafter, commencing November 1, 1997.
It is further understood and agreed that there may be "success fees"
associated with certain projects which Adirondack may undertake for Thermo
pursuant to this memorandum of understanding. Any success fee will be agreed to
by Adirondack and Thermo's Board of Directors from time to time and as may be
appropriate.
3. Thermo will reimburse Adirondack for all of his reasonable out-of-pocket
expenses associated with the performance of his services to Thermo pursuant to
this memorandum of understanding.
4. Adirondack will perform such services and render such advice to Thermo as its
Board of Directors may from time to time request and to which Adirondack may
reasonably agree. These services will initially include, but not be limited to:
i. assistance in the development and drafting of business plans for
Thermo and its operating units,
ii. assisting Thermo in its communications with the investment community
and helping to raise the investment community's awareness of Thermo,
its plans and strategy,
iii. evaluate financing strategies and identify financing alternatives for
the support of Thermo and its subsidiaries business plans,
iv. support and advise Thermo and its management in negotiations with:
sources of financing, acquisition targets and strategic partners.
5. Pursuant to his work as an advisor to Thermo, Thermo will indemnify
Adirondack in a form and substance mutually agreeable.
JD
K.I.G.
ES
EH
49
Exhibit 10.37
Memorandum of
Understanding between
Thermo-Mizer Environmental Corp.
and
ConsultAmerica, Inc.
28 October 1997
1. Thermo-Mizer Environmental Corp. and its subsidiaries ("Thermo") wish to
engage ConsultAmerica, Inc. ("Consult"), as an investment banker, financial
advisor and special consultant to Thermo and its Board of Directors.
2. In consideration for his services to Thermo, Consult will be paid a cash
retainer by Thermo of $10,000 on the date hereof and on the first day of each
month hereafter, commencing November 1, 1997.
It is further understood and agreed that there may be "success fees"
associated with certain projects which Consult may undertake for Thermo pursuant
to this memorandum of understanding. Any success fee will be agreed to by
Consult and Thermo's Board of Directors from time to time and as may be
appropriate.
3. Thermo will reimburse Consult for all of his reasonable out-of-pocket
expenses associated with the performance of his services to Thermo pursuant to
this memorandum of understanding.
4. Consult will perform such services and render such advice to Thermo as its
Board of Directors may from time to time request and to which Consult may
reasonably agree. These services will initially include, but not be limited to:
i. assistance in the development and drafting of business plans for
Thermo and its operating units,
ii. assisting Thermo in its communications with the investment community
and helping to raise the investment community's awareness of Thermo,
its plans and strategy,
iii. evaluate financing strategies and identify financing alternatives for
the support of Thermo and its subsidiaries business plans,
iv. support and advise Thermo and its management in negotiations with:
sources of financing, acquisition targets and strategic partners.
5. Pursuant to his work as an advisor to Thermo, Thermo will indemnify Consult
in a form and substance mutually agreeable.
JD
EH
ES
KIG
50
Exhibit 10.38
Memorandum of
Understanding between
Thermo-Mizer Environmental Corp.
and
The Ridge Group
28 October 1997
1. Thermo-Mizer Environmental Corp. and its subsidiaries ("Thermo") wish to
engage The Ridge Group ("Ridge"), as an investment banker, financial advisor and
special consultant to Thermo and its Board of Directors.
2. In consideration for his services to Thermo, Independent will be paid a cash
retainer by Thermo of $10,000 on the date hereof and on the first day of each
month hereafter, commencing November 1, 1997.
It is further understood and agreed that there may be "success fees"
associated with certain projects which Independent may undertake for Thermo
pursuant to this memorandum of understanding. Any success fee will be agreed to
by Independent and Thermo's Board of Directors from time to time and as may be
appropriate.
3. Thermo will reimburse Independent for all of his reasonable out-of-pocket
expenses associated with the performance of his services to Thermo pursuant to
this memorandum of understanding.
4. Independent will perform such services and render such advice to Thermo as
its Board of Directors may from time to time request and to which Independent
may reasonably agree. These services will initially include, but not be limited
to:
i. assistance in the development and drafting of business plans for
Thermo and its operating units,
ii. assisting Thermo in its communications with the investment community
and helping to raise the investment community's awareness of Thermo,
its plans and strategy,
iii. evaluate financing strategies and identify financing alternatives for
the support of Thermo and its subsidiaries business plans,
iv. support and advise Thermo and its management in negotiations with:
sources of financing, acquisition targets and strategic partners.
5. Pursuant to his work as an advisor to Thermo, Thermo will indemnify
Independent in a form and substance mutually agreeable.
KIG
JD
EH
ES
51
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet at December 31, 1997 and the Consolidated
Statement of Operations for the fiscal period then ended and is qualified in its
entirety by reference to such consolidated financial statements and the notes
thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 299,179
<SECURITIES> 0
<RECEIVABLES> 1,295,729
<ALLOWANCES> 66,600
<INVENTORY> 790,180
<CURRENT-ASSETS> 2,522,400
<PP&E> 4,396,333
<DEPRECIATION> 2,018,105
<TOTAL-ASSETS> 7,439,443
<CURRENT-LIABILITIES> 1,797,830
<BONDS> 0
0
0
<COMMON> 3,952
<OTHER-SE> 1,648,793
<TOTAL-LIABILITY-AND-EQUITY> 7,439,443
<SALES> 2,887,447
<TOTAL-REVENUES> 2,887,447
<CGS> 2,414,766
<TOTAL-COSTS> 2,186,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,718,402)
<INCOME-TAX> 4,499
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,718,402)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> 0
</TABLE>
