SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Six Months Ended Commission File Number
June 30, 1998 33-87284-N4
Laminaire Corporation
(Formerly Thermo-Mizer Environmental Corp.)
960 East Hazelwood Avenue
Rahway, NJ 07065
Tel: 908-381-8200
Delaware 22-2312917
(State of Incorporation) (I.R.S. Employer Identification No.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
At August 11, 1998, the latest practicable date, there were 3,282,751 shares of
Common Stock outstanding, $.001 par value.
<PAGE>
Laminaire Corporation
INDEX
PAGE
----
PART I.
FINANCIAL INFORMATION
Item 1. :
Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the six months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Operations 6
for the three months ended June 30, 1998 and 1997
Condensed Statements of Consolidated Cash Flows
for the six months ended June 30, 1998 and 1997 7
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 1998 8
Notes to Condensed Consolidated Financial Statements 9
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II.
OTHER INFORMATION 24
2
<PAGE>
Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
(unaudited) (Note 1)
<S> <C> <C>
Current Assets:
Cash $282,130 $299,179
Accounts receivable-net of allowance
of $ -0- and $66,600 516,725 1,229,129
Inventories 565,668 790,180
Unbilled receivables 14,236
Prepaid expenses and other 63,611 189,676
---------- ----------
Total Current Assets 1,428,134 2,522,400
Property and Equipment - net 2,267,809 2,378,228
Other Assets 1,945,709 2,538,815
Net Assets of Discontinued Operation 68,735
---------- ----------
Total Assets $5,710,387 $7,439,443
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
(unaudited) (Note 1)
<S> <C> <C>
Current Liabilities:
Notes payable and current
Installments of long-term debt $490,479 $490,479
Accounts payable 537,929 763,651
Billings in excess of revenues 26,103
Accrued expenses and other 250,373 517,597
Net current liabilities of
discontinued operation 136,706
----------- -----------
Total Current Liabilities 1,415,487 1,797,830
----------- -----------
Long-Term Debt 2,832,250 3,988,878
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.001 par value,
25,000,000 shares authorized;
3,262,740 and 988,021 shares issued 3,263 3,952
Additional paid-in capital 6,217,264 5,218,565
Deficit (4,526,174) (3,338,077)
----------- -----------
Total 1,694,355 1,884,440
Less - Note receivable (160,000) (160,000)
Treasury Stock-at cost (71,705) (71,705)
----------- -----------
Stockholders' Equity-net 1,462,650 1,652,735
----------- -----------
Total Liabilities and Stockholders' Equity $5,710,387 $7,439,443
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
CONTINUING OPERATIONS:
Sales $3,158,008
Cost of Sales 2,548,955
-----------
Gross Profit 611,053
-----------
Expenses
Personnel and related costs 306,212
Selling and administrative expenses 391,239
-----------
Total expenses 697,451
-----------
Operating loss (86,398)
Other-net (principally interest) (183,896)
Income taxes 7,869
-----------
Loss from continuing operations (278,163)
-----------
DISCONTINUED OPERATIONS:
Loss from operations (540,934) $(565,326)
Loss from disposal and close down (369,000)
-----------
Los from discontinued operation (909,934) (565,326)
----------- -----------
NET LOSS $(1,188,097) $(565,326)
=========== ===========
BASIC LOSS PER SHARE:
Continuing Operations $(.12)
Discontinued Operations (.40) $(.95)
----------- -----------
Net Loss $(.52) $(.95)
=========== ===========
Weighted average number of common and
Common equivalent shares outstanding 2,257,430 595,612
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
Laminaire Corporation
(FormerlyTHERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED June 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
CONTINUING OPERATIONS:
Sales $1,550,622
Cost of sales 1,226,032
-----------
Gross profit 324,590
-----------
Expenses:
Personnel and related costs 122,118
Selling and administrative expenses 159,815
-----------
Total expenses 281,933
-----------
Income from operations 42,657
Operating loss
Other- net (principally interest) (123,510)
Income taxes 6,219
-----------
Loss from continuing operations (87,072)
-----------
DISCONTINUED OPERATIONS:
Loss from operations (438,323) $(189,426)
-----------
Loss from disposal and close down (369,000)
-----------
Loss from discontinued operation (807,323) 189,426
----------- -----------
NET LOSS $(894,395) $(189,426)
=========== ===========
BASIC LOSS PER SHARE:
Continuing Operations $(.03)
Discontinued Operations (.27) $(.30)
----------- -----------
Net Loss $(.30) $(.30)
=========== ===========
Weighted average number of common and
Common equivalent shares outstanding 3,023,663 626,086
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,188,097) $(565,326)
Adjustments to reconcile net earnings
to net cash provided by operating
Activities:
Loss from discontinued operations 909,934 565,326
Depreciation and amortization 171,692
Decrease in net operating assets 603,080
Net cash provided by
continuing operations 496,609
Net cash(used by) discontinued
operations (344,153) (537,166)
----------- -----------
Net cash used by all operating activities 152,456 (537,166)
----------- -----------
Cash flows (used in )investing activities:
Purchase of property and equipment (78,681) (5,081)
----------- -----------
Cash flows from financing activities:
Repayment of debt (95,324)
Issuance of securities 60,000 262,164
Deferred acquisition costs (55,500) (282,272)
Purchase of Treasury Stock (34,080)
Other (198,619)
----------- -----------
Total (90,824) (252,807)
----------- -----------
Net increase (decrease) in cash (17,049) (795,054)
Cash and cash equivalents - beginning 299,179 1,029,060
----------- -----------
Cash and cash equivalents - ending $282,130 $234,006
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.) .
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Common Additional Accumulated Treasury Note
Stock Paid-in Capital Deficit Stock Receivable Total
----------- --------------- ----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $3,952 $5,218,565 $(3,338,077) $(71,705) $(160,000) $1,652,735
Issuance of equity
securities 998,010 998,010
Reclassification to give
effect to reverse split (689) 689
Net loss (1,188,097) (1,188,097)
----------- ----------- ----------- ----------- ---------------- -----------
Balance, June 30, 1998 $3,263 $6,217,264 $4,526,174 $(71,705) $(160,000) $1,652,735
=========== =========== =========== =========== ================ ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1--BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements for
the three and six-month periods ended June 30, 1998 and 1997 are unaudited and
include all adjustments considered necessary by Management for a fair
presentation. The results of operations realized during an interim period are
not necessarily indicative of results to be expected for a full year. These
consolidated financial statements should be read in conjunction with the
information filed as part of the Company's Annual Report on Form 10-KSB.
The Company decided to phase out its Control Systems ("TCS") Division and
product line in June 1998 because of ongoing operating losses and the estimated
requirements for future investment in research and development was not deemed an
effective use of the Company's limited resources. Prior to the acquisition of
Laminaire, all of the Company's revenues and operations related to and were
generated by TCS. The Company has restated its prior financial statements to
present the operating results of TCS as a discontinued operation (see Note 5).
All results of operations in 1997 are reflected as Discontinued Operations
because TCS represented all of the Company's operating activities in that
period. The operating assets and liabilities of TCS at June 30, 1998 are
included in the caption "Net Assets of Discontinued Operation" and are stated at
their estimated net realizable value. The Balance Sheet at December 31, 1997 was
not restated because it was not practicable to do so.
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 Laminaire
Corporation and its wholly-owned subsidiary, Laminaire Corporation ("Laminaire")
(collectively referred to as the "Company" or "Laminaire"). The subsidary, also
named Laminaire, was acquired on October 17, 1997 in a transaction accounted for
as a purchase in accordance with the requirements set forth in Opinion No. 16 of
the Accounting Principles Board. Accordingly, the results of Laminaire's
operations are included in the Company's consolidated financial statements
commencing with the date of acquisition. Therefore, Laminaire's results of
operations are included for the entire three and six-month period ended June 30,
1998, but are entirely excluded from the Company's results for the corresponding
period ended June 30,1997.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
9
<PAGE>
Revenue Recognition
Revenue for product sales is recognized in the period in which the product
is shipped.
Contract revenues are recognized on the percentage-of-completion method by
multiplying total contract revenue by the estimated percentage of contract
completion. Percentage of completion is generally estimated using the cost to
cost method, supplemented if appropriate by the percentage of labor hours
incurred. Contract costs include all direct material, subcontract and labor
costs and those indirect costs associated with contract performance such as
manufacturing overhead. Selling, general and administrative costs are charged to
operations as incurred. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
Earnings are also charged with a provision for doubtful accounts based on a
review of collectibility.
Service revenue 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 June 30, 1998,
inventories of continuing operations consist of:
Raw Materials $222,088
Work-in-process 173,324
Finished Goods 170,256
-------
Total $565,668
========
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.
10
<PAGE>
Goodwill
Goodwill, which represents the excess of the purchase price for Laminaire
over the fair value of the net assets acquired, is being amortized on the
straight-line basis over 40 years.
Long Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may
not be recoverable. If required, impairment losses on assets to be held and used
are recognized based on the excess of the asset's carrying value over its fair
value. Long-lived assets to be sold are reported at the lower of carrying amount
or fair value reduced by estimated disposal costs.
Statement of Consolidated Cash Flows
Interest paid for the six months ended June 30, 1998 was $167,886. 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, substantially all of which relate to
discontinued operations, are charged to operations as incurred.
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 charged to Continuing Operations
amounted to $$21,981 and $32,873 for the three and six months ended June 30,
1998, 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 each period after giving retroactive effect
to a one for four reverse stock split approved in June 29, 1998. The assumed
exercise of outstanding warrants and options and conversion of convertible debt
would have been antidilutive and, therefore, were excluded from the calculation
of loss per share in all periods presented.
Warranty Costs
The Company's policy is to warrant parts on new installations for one year
from start-up of the system. The cost of parts used in installations is
generally not a material
11
<PAGE>
component of the total installation costs. The Company's policy is to accrue
expenses related warranty costs when the related revenue is recognized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The principal assumptions inherent in the
accompanying financial statements relate to estimated percentages of contract
completion and the realizability of certain assets. Actual results may differ
from those estimates. All liabilities are recorded and carried at approximate
fair values.
Fiscal Year
The Company changed its year-end from a fiscal year ending on June 30 to a
calendar year ending on December 31.
Reclassifications
Certain fiscal 1997 amounts and balances have been reclassified to conform
to the current presentation. All amounts related to the operations of TCS, are
included in the caption "Discontinued operations." Prior to the acquisition of
Laminaire, all of the Company's revenues and operations related to and were
generated by TCS.
All share and per share amounts give retroactive effect to the four for one
reverse stock split effected June 29, 1998.
NOTE 3--ACQUISITION OF LAMINAIRE CORPORATION
On October 16, 1997 the Company acquired all of the outstanding shares of
Common Stock of Laminaire Corporation ("Laminaire") from Garay LLC for a
purchase price of $3,200,000, subject to adjustment based on Laminaire's
operating performance during the period immediately prior to the acquisition.
Laminaire, based in Rahway, New Jersey, manufactures and distributes cleanroom
products and also produces a variety of electronic circuit boards. The purchase
price consisted of a cash payment of $1,000,000, a convertible promissory note
in the principal amount of $2,200,000 (the "First Note") and a promissory note
with a principal amount to be determined (the "Second Note").
The First Note bears interest at the rate of 10% per annum and is payable
in 60 equal monthly installments of principal and interest of $33,830 commencing
November 16, 1997 with a final payment of principal of $1,000,000 due on October
16, 2002. The First Note is convertible into shares of Common Stock at a
conversion price of $1 per share. The First Note becomes convertible for a
period of two years commencing April 16, 1998 in amounts not exceeding $500,000
for each four-month period. The holder of the First Note is entitled to demand
registration of the Common Stock issuable upon conversion of the First Note on
one occasion at the Company's expense commencing April 16, 1999 and is also
entitled to piggyback registration for such shares of Common Stock with respect
to any registration
12
<PAGE>
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 was 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 or approximately $28000.
In conjunction with the acquisition of Laminaire, the Company issued a
short-term promissory note to Charles Garay in the principal amount of $90,479
(the "Third Note").
The Company's obligations under the First, Second and Third Notes are
secured by first priority security interests in the real property and all
tangible and intangible personal property, including inventory and accounts
receivable, of Laminaire and the inventory and equipment of the Company and a
subordinate security interest in the accounts receivable of the Company. The
subordinate security interest is subordinate to the interests of the holders of
convertible debentures and convertible promissory notes in the principal amount
of $500,000. The agreements underlying First and Second Notes also contain
restrictions on the Company's ability to transfer cash from Laminaire and
require the Company to comply with various financial ratios.
In conjunction with the acquisition of all of the outstanding common stock
of Laminaire, the Company paid all of Laminaire's obligations, amounting to
approximately $1,100,000, to CoreStates National Bank ("CoreStates") under a
mortgage secured by Laminaire's interest in its real property and building
located in Rahway, New Jersey. Laminaire has used the building located as its
principal office and manufacturing facility. The Company relocated its principal
executive offices from Ridgefield, New Jersey to the Laminaire facility.
Garay LLC, the seller of the common stock of Laminaire, is a New Jersey
limited liability company which is partially owned by Charles J. Garay. Charles
J. Garay is a director of Laminaire and became a director of the Company on
October 28, 1997. He also served as a consultant to Laminaire through January
16, 1998.
The funds utilized by the Company to purchase the common stock of Laminaire
and satisfy Laminaire's obligations to CoreStates were obtained from the
issuance of (i) Common Stock of the Company for aggregate consideration of
$200,000 and (ii) convertible promissory notes and debentures for the balance.
Concurrent with the closing of the acquisition of Laminaire on October 16,
1997, the Company issued 326,521 shares of its Common Stock to a single
investor, the Optimum Fund, for aggregate consideration of $200,000 pursuant to
Regulation S under the Securities Act of 1933, as amended.
13
<PAGE>
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, 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 $1,200,000 had been converted into shares of common stock through June
30, 1997
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 June 30, 1998.
NOTE 4--INCOME TAXES
The Company has established reserves for the entire benefit associated with
the unused Federal income tax loss carryforwards.
14
<PAGE>
NOTE 5--SEGMENTS AND DISCONTINUED OPERATION
Prior to the acquisition of Laminaire, the Company had one business, the
controls system business. In the period immediately following the acquisition of
Laminaire, the Company operated with four divisions - Cleanroom Manufacturing
("CM"), Cleanroom Distribution ("CD"), Electronic Manufacturing ("EM"), and TCS.
The LM business represents Low Margin cleanroom distribution sales involving
transactions in which the Company served as a distributor for vendors that only
sell through distributors. In these cases the products were drop shipped by the
vendor to the end customer. A substantial portion of this segment of the
business is being phased out. TCS' operations were discontinued in June 1998
because of ongoing operating losses and the estimated future investment in
research and development was not deemed an effective use of the Company's
resources.
The table below sets forth the sales and operating profits contributed to
continuing operations by division for the six months ended June 30, 1998. All of
these operating divisions share the same facility and use a common
administrative pool. These joint costs have been allocated using various
formulas developed by the former management of Laminaire. The Company is
currently reviewing the allocation bases being used and may revise or modify
such bases.
<TABLE>
<CAPTION>
CM CD LM EM Total
<S> <C> <C> <C> <C> <C>
Sales $1,108,540 $867,770 $410,913 $770,784 $3,158,007
Operating expenses 1,061,561 928,386 386,663 747,985 3,124,595
----------- ----------- ----------- ----------- -----------
Operating profit $46,979 ($60,616) $24,250 $22,799 33,412
=========== =========== =========== ===========
Corporate 119,810
Interest and other 183,896
----------
Pretax loss ($270,294)
==========
</TABLE>
Prior to the acquisition of Laminaire, all of the Company's revenues and
operations pertained to and was generated by TCS. A summary of TCS' operations,
all of which are included in Discontinued Operations is as follows for the six
months ended June 30:
1998 1997
Revenues $961,799 $1,390,191
Cost of revenues 1,021,270 1,056,576
Gross profit (59,471) 333,615
Operating expenses (481,483) 879,734
Loss before taxes (540,934) (546,119)
Operating expenses for the six months ended June 30, 1998 do not include
corporate, facilities and similar type expenses that have been charged to
continuing operations
15
<PAGE>
The Loss on Disposal of the Discontinued Operations consists principally of
write-downs of inventories, receivables on certain long-term contracts, other
assets and fixed assets.
NOTE 6--LETTER OF INTENT TO ACQUIRE CRP HOLDING CORP.
On June 26, 1998, the Company announced that it signed a letter of intent
to acquire CRP Holding Corp., a Ronkonkoma, New York-based manufacturer of clean
room products. The business combination, which will be accounted for as a
purchase, is subject to the completion of due diligence procedures and certain
other matters.
16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Information set forth herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important factors
may affect the Company's actual results and could cause such results to differ
materially from forward-looking statements made by or on behalf of the Company.
Such factors include, but are not limited to, changing market conditions, the
impact of competitive products, pricing, acceptance of the Company's products in
development and other risks detailed herein and in other filings that the
Company makes with the Securities and Exchange Commission.
General
Prior to the acquisition of Laminaire, the Company's operations had been
dominated by systems contracts with customers in the pharmaceutical and chiller
control industries. Fluctuations in sales, revenues and operating results
occurred because of the timing of such contracts since certain larger contracts
required greater amounts of vendors' materials and use of subcontractors than
did other contracts. Generally, gross margins were lower on those contracts
which required the purchase of significant amounts of vendor materials and
services compared with contracts which were more engineering or labor intensive.
In addition, the Company's engineering staff was capable of serving a
significant volume of business. Thus, engineering costs did not fluctuate at the
same rate as revenues. This meant that if revenues increased, gross profits
increased at a faster rate than revenue. The reverse was 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 meant that a small number of
customers made up a large percentage of sales.
The Company was unable to generate sufficient and timely contracts to
permit it to operate at a profitably. The Company had attempted to reduce
business volatility by becoming a product oriented company serving various
aspects of the environmental controls industry, but its efforts, which were
limited by the level of available resources, failed to make a meaningful
penetration in the selected market niches. It then decided that the best way to
implement its strategy was to acquire a product-based company. In October 1997,
it acquired Laminaire Corporation as the first major step of this new strategy.
17
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Following the acquisition of Laminaire, the Company took various steps to
improve operations of the Controls System Division including:
o Combining all operations into a single facility in Rahway, New Jersey.
o Limiting its bidding activities for Control Systems Division ("TCS")
contracts to potential contracts in which TCS anticipates having a
commercial advantage over its competition. The Company has also
instituted new management review procedures required for all
proposals.
o Centralizing the purchasing effort and instituting new inventory
controls.
o Determining if there was a cost effective way to incorporate TCS
technology into Laminaire products to give such products a competitive
advantage.
During the first half of 1998, TCS continued to impact cash flow negatively
and incur operating losses. The Company determined that the costs necessary to
improve TCS' operating results, including ongoing development and support costs,
were significant in relation to the Company's resources and decided to focus all
of its efforts and resources in the clean room industry. At the same time, it
decided to phaseout of the control systems business because:
o TCS requires significant amounts of research and development
expenditures to maintain products at state-of-the-art levels.
o TCS was facing increased levels of competition from companies having
substantially greater financial resources.
o The costs to perfect and introduced new versions of products were
greater than the amount of resources available to the Company.
During the quarter ended June 30, 1998, the Company restructured its
management team and promoted a former senior executive from Laminaire to be its
President. At the same time, the Finance Committee of the Board of Directors
assumed a more active oversight responsibility. The phaseout process involves
assigning and/or subconracting out to others work on contracts that were in the
backlog when the phaseout decision was made. The Company may incur additional
liability if subcontractors fail to perform properly and/or if problems arise
with respect to contracts completed prior to the phaseout decision. The Company
believes that the risk of incurring these liabilities is less than the risk of
incurring ongoing operating losses from TCS' operations.
Laminaire had operated profitably prior to its acquisition by the Company.
However, subsequent to such acquisition its reported operating results are and
will continue to be burdened by (i) the amortization of goodwill and other
purchase adjustments required by generally accepted accounting principles and
(ii) the costs associated with being a public company. Accordingly, the Company
believes that it needs a greater volume of revenue over which to spread these
and other fixed costs. On June 26, 1998, the Company
18
<PAGE>
announced that it signed a letter of intent to acquire CRP Holding corp., a
Ronkonkoma, New York-based manufacturer of clean room products. The business
combination is subject to the completion of due diligence procedures and certain
other matters. Both parties are committed to completing the transaction, which
does not require obtaining any outside financing, as quickly as possible. When
completed, the combined entity will generate annual sales of approximately
$20,000,000 making it one of the leading cleanroom products companies in the
Northeast part of the United States. No assurances can be given, however, that
such business combination will be completed.
Prior to the acquisition of Laminaire, all of the Company's revenues and
operations related to TCS. Therefore, the acquisition of Laminaire (in a
transaction accounted for as a purchase in accordance with the provisions of
Opinion No 16 of the Accounting Principles Board) and the discontinuance of TCS
means that the periods discussed below are not comparable in most respects.
In general, the Company is now positioned to compete in niche markets on
the basis of service and a willingness to customize. As a rule, it is not
competing based on technology. Management believes that controls are in place to
minimize the risk of incurring significant losses on individual contracts or
projects, although no assurances can be given that no such losses will occur.
The Company believes that operating losses are likely for the first two quarters
of 1998, although the cash impact of such losses are likely to be less than
those incurred over the immediately prior quarters. A substantial portion of the
Company's backlog associated with continuing operations of $1,720,179 at August
17, 1998 will be performed during the third and fourth quarters of 1998.
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"), and Electronic Manufacturing ("EM"), and TCS . In June
1998, the Company discontinued TCS because of ongoing operating losses and
Management's decision that TCS' research and development and other requirements
did not constitute an effective use of the Company's limited resources. Prior to
the acquisition of Laminaire, TCS made up all of the Company's operations.
The table below sets forth the sales and operating profits contributed to
continuing operations by each division for the six months ended June 30, 1998.
All of these operating divisions share the same facility and use a common
administrative pool. These joint costs have been allocated using various
formulas developed by the former management of Laminaire. The Company is
currently reviewing the allocation bases being used and may revise or modify
such bases.
<TABLE>
<CAPTION>
CM CD LM EM Total
<S> <C> <C> <C> <C> <C>
Sales $1,108,540 $867,770 $410,913 $770,784 $3,158,007
Operating expenses 1,061,561 928,386 386,663 747,985 3,124,595
----------- ----------- ----------- ----------- -----------
Operating profit $46,979 ($60,616) $24,250 $22,799 33,412
=========== =========== =========== ===========
Corporate 119,810
Interest and other 183,896
-----------
Pretax loss ($270,294)
===========
</TABLE>
19
<PAGE>
The LM business represents Low Margin cleanroom distribution sales
involving transactions in which the Company served as a distributor for vendors
that only sell through distributors. In these cases the products were drop
shipped by the vendor to the end customer. A substantial portion of this segment
of the business is being phased out.
General and administrative expenses for the six months ended June 30, 1998
include $38,896 relating to the amortization of goodwill and purchase
adjustments. Such expenses also include expenses of $263,902 associated with the
Company being a public entity. A significant portion of those costs is noncash
in nature.
No net benefit was recognized for the benefit of Federal income tax loss
carryforwards because of the uncertainty of utilization of such carryforwards.
Discontinued Operation
In June 1998, the Company discontinued TCS because of ongoing losses and
Management's decision that TCS' research and development requirements did not
constitute an effective use of the Company's limited resources. Prior to the
acquisition of Laminaire, TCS made up all of the Company's operations.
A summary of TCS' operations for the six months ended June 30, 1998 and
1997 follows:
1998 1997
Revenues $961,799 $1,390,191
Cost of revenues 1,021,270 1,056,576
Gross profit (59,471) 333,615
Operating expenses (481,483) 879,734
Loss before taxes (540,934) (546,119)
Operating expenses of TCS for the six months ended June 30, 1998 exclude
corporate, facilities and similar type expenses that have been charged to
continuing operations
The Company completed an initial public offering of its common stock and
warrants in March 1996. Thereafter, it commenced implementing a strategy
designed to make it a product and service, rather than a systems driven
business. This strategy required it to make a variety of investments in human
resources, management systems and product development which negatively impacted
earnings during the fiscal year ended June 30, 1997. At the same time, TCS
introduced a new product and commenced two major contracts that incorporated
such product. TCS required longer than expected to identify and correct certain
problems which arose in connection with the operation of this new product which
resulted in it incurring a substantial loss during the periods of contract
performance. The loss was caused because significant amounts of engineering
labor and subcontractor assistance were required on these jobs to analyze and
address the problems. Both of these contracts were closed finally in March 1998,
and all estimated losses have been accrued. TCS also did not make a meaningful
penetration into the targeted Continuous Emissions Monitoring business or obtain
significant contracts from new customers despite increased marketing efforts.
Therefore, its overall revenues were not sufficient to cover its overheads.
20
<PAGE>
The foregoing factors resulted in the Company changing its overall strategy
and determining that it should acquire Laminaire as a means of stabilizing its
operations. At the same time, it ceased many of its initiatives with regard to
its traditional systems business and will concentrate its future efforts on
Laminaire's product lines and selected systems business that appears to require
no new product development efforts.
Liquidity and Capital Resources
On October 16, 1997, the Company acquired all of the outstanding shares of
Common Stock of Laminaire from Garay LLC for a purchase price of $3,200,000,
subject to adjustment based on Laminaire's operating performance during the
period immediately prior to the acquisition. Laminaire, based in Rahway, New
Jersey, manufactures and distributes cleanroom products and also produces a
variety of electronic circuit boards. Garay LLC is an affiliate of Charles
Garay, who became a director of the Company following the acquisition of
Laminaire. The purchase price consisted of a cash payment of $1,000,000, a
convertible promissory note in the principal amount of $2,200,000 (the "First
Note") and a promissory note with a principal amount to be determined (the
"Second Note").
First , Second and Third Notes - The First Note bears interest at the rate of
10% per annum and is payable in 60 equal monthly installments principal and
interest of $33,830 commencing November 16, 1997 with a final payment of
principal of $1,000,000 due on October 16, 2002. The First Note is convertible
into shares of Common Stock at a conversion price per share equal to $1. The
First Note becomes convertible for a period of two years commencing April 16,
1998 in amounts not exceeding $500,000 for each four month period. The Second
Note will be in a principal amount equal to the difference between (a) the
Stockholders' Equity (as defined) of Laminaire as of September 30, 1997 minus
$200,000 minus (b) the Stockholders' Equity of Laminaire as of September 30,
1996. In the event that the adjustment to the purchase price is negative, the
principal amount of the First Note will be reduced by such amount. The Second
Note, which bears interest at the rate of 15% per annum, was to be due on June
30, 1998; however, the final principal amount of the Second Note has not yet
been determined.
In conjunction with the acquisition of Laminaire, the Company issued a
short-term promissory note to Charles Garay in the principal amount of $90,479
(the "Third Note").
The Company's obligations under the First, Second and Third Notes are
secured by first priority security interests in the real property and all
tangible and intangible personal property, including inventory and accounts
receivable, of Laminaire and the inventory and equipment of the Company and a
subordinate security interest in the accounts receivable of the Company. The
subordinate security interest is subordinate to the interests of the holders of
convertible debentures and convertible promissory notes in the principal amount
of $500,000. The security agreements underlying the First, Second and Third
Notes also contain restrictions on the Company's ability to transfer cash from
Laminaire and require the Company to comply with various financial ratios.
In conjunction with the acquisition of all of the outstanding common stock
of Laminaire, the Company paid all of Laminaire's obligations, amounting to
approximately
21
<PAGE>
$1,100,000, to Corestates National Bank ("Corestates") under a mortgage secured
by Laminaire's interest in its real property and building located in Rahway, New
Jersey. Laminaire has used the building as its principal office and
manufacturing facility. The Company anticipates continuing Laminaire's
operations at such location and relocated the Company's principal executive
offices from Ridgefield, New Jersey to the Laminaire facility in Rahway, New
Jersey.
Other Financings - The funds in excess of those provided by the issuance of the
notes to Garay LLC utilized by the Company to purchase the common stock of
Laminaire and satisfy Laminaire's obligations to Corestates were obtained from
the issuance of (i) Common Stock of the Company for aggregate consideration of
$200,000 and (ii) convertible promissory notes and debentures for $2,300,000.
Subsequent to June 30, 1997 but prior to the closing of the Laminaire
acquisition, the Company issued convertible debentures (the "First Debentures")
to ten investors, in the aggregate principal amount of $1,450,000 pursuant to
Regulation S under the Securities Act of 1933, as amended, (the "Securities
Act"). Concurrent with the closing of the acquisition of Laminaire on October
16, 1997, the Company also issued 326,521 shares of its Common Stock to a single
investor for aggregate consideration of $200,000 pursuant to Regulation S under
the Securities Act and issued convertible debentures (the "Debentures") to three
investors in the principal amount of $300,000 pursuant to Regulation S under the
Securities Act. The Company will pay interest to the holders of the Debenture at
the rate of 5% per annum. Interest on the Debentures is payable in cash or
Common Stock of the Company, at the Company's discretion. The Debentures, which
are unsecured, are convertible into shares of the Company's Common Stock at any
time beginning 41 days after the date of issuance, at a price per share equal to
the lesser of 70% of the average closing bid price for the five trading days
preceding: (i) the date of conversion or (ii) the date of closing, October 16,
1997. Through June 30, 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.
22
<PAGE>
The Company also borrowed $200,000 from an individual investor in September
1997, the terms and conditions of which have not yet been finalized.
To the extent that a portion of principal of the Convertible Note and
Debentures is not converted, the Company will seek a funding source to refinance
such indebtedness. No assurance can be given that the Company will be successful
in such efforts.
The National Association of Securities Dealers, Inc. (the "NASD"), which
administers The NASDAQ SmallCap Market, sets the criteria for continued
eligibility on the NASDAQ SmallCap Market. NASDAQ advised the Company that it
was not in compliance with the maintenance requirements for continued listing
and, accordingly, delisted the Company's securities from the NASDAQ SmallCap
Market. Trading in the Company's securities now takes place in the non-NASDAQ
over-the-counter market in what are commonly referred to as the electronic
bulletin board (known as the "OTC"), and on the Boston Stock Exchange. As a
result, an investor may find it more difficult to dispose of or obtain accurate
quotations as to the market value of the securities. Furthermore, the Company
may experience greater difficulty in obtaining financing if and when needed.
Lack of Credit Facilities - The Company does not have any working capital or
other credit facilities. The Company is dependent on revenue from operations
and, to date, has satisfied its obligations in the normal course of business,
although the payment cycle for certain vendors, particularly those for TCS, have
been stretched. However, it may require credit facilities or other source of
liquidity to meet the needs of its business, particularly in light of its
history of operating losses. No assurance can be given that it will obtain such
financing or, if available, on terms acceptable to the Company.
The Company is exploring options to reduce its interest costs. These
options include, but are not limited to, a possible sale/leaseback of its
building with the proceeds used to repay outstanding indebtedness. No assurances
can be given that any option being considered will be successfully completed.
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
No new pronouncement issued by the Financial Accounting Standards Board,
the American Institute of Certified Public Accountants or the Securities and
Exchange Commission is expected to have a material impact on the Company's
financial position or reported results of operations.
23
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
See Note 3 to the Condensed Financial Statements
Item 3 Defaults on Senior Securities
None
Item 4 Submission of Matters to a Vote of Shareholders
At its Annual Meeting of Shareholders held on June 29, 1998, the
shareholders:
o Elected Charles Garay as a director for a term of three years;
o Ratified the appointment of Eichler, Bergsman & Co., LLP as
independent auditors for 1998.
o Approved an amendment to the Company's Articles of Incorporation to
change the name of the Company to Lamnaire Corporation;
o Ratified the amendment of the Company's Articles of Incorporation to
effect a one-for-four reverse stock split of its common stock;
o Approved the adoption of a Stock Incentive Plan for the Company.
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
24
<PAGE>
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Laminaire Corporation
(Registrant)
/S/ Gerard M. Gallagher
-----------------------
GERARD M. GALLAGHER
Gerard M. Gallagher
Vice President, CFO
Date: August 18, 1998
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 282,130
<SECURITIES> 0
<RECEIVABLES> 516,725
<ALLOWANCES> 0
<INVENTORY> 565,668
<CURRENT-ASSETS> 1,428,134
<PP&E> 4,368,363
<DEPRECIATION> (2,100,554)
<TOTAL-ASSETS> 5,710,387
<CURRENT-LIABILITIES> 1,415,487
<BONDS> 0
0
0
<COMMON> 3,263
<OTHER-SE> 1,459,387
<TOTAL-LIABILITY-AND-EQUITY> 5,710,387
<SALES> 3,158,008
<TOTAL-REVENUES> 3,158,008
<CGS> 2,548,955
<TOTAL-COSTS> 697,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183,896
<INCOME-PRETAX> (1,188,097)
<INCOME-TAX> 0
<INCOME-CONTINUING> (278,163)
<DISCONTINUED> (909,934)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,188,097)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> 0
</TABLE>
