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 Nine Months Ended Commission File Number
September 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 October 28, 1998, the latest practicable date, there were 3,855,267 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 September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the nine months ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Operations 6
for the three months ended September 30, 1998 and 1997
Condensed Statements of Consolidated Cash Flows
for the nine months ended September 30, 1998 and 1997 7
Condensed Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1998 8
Notes to Condensed Consolidated Financial Statements 9
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II.
OTHER INFORMATION 23
2
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Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,199 December 31, 1997
(unaudited) (Note 1)
---------- ----------
Current Assets:
Cash $ 127,675 $ 299,179
Accounts receivable-net of allowance
of $ -0- and $66,600 735,717 1,229,129
Inventories 476,173 790,180
Unbilled receivables -0- 14,236
Prepaid expenses and other 147,842 189,676
---------- ----------
Total Current Assets 1,487,407 2,522,400
Property and Equipment - net 2,316,033 2,378,228
Other Assets, principally goodwill 2,038,873 2,538,815
---------- ----------
Total Assets $5,842,313 $7,439,443
========== ==========
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>
September 30, 1998 December 31, 1997
(unaudited) (Note 1)
----------- -----------
<S> <C> <C>
Current Liabilities:
Notes payable and current
Installments of long-term debt $ 400,000 $ 490,479
Accounts payable 868,671 763,651
Billings in excess of revenues -0- 26,103
Accrued expenses and other 318,696 517,597
Net current liabilities of discontinued operation 208,139
-----------
Total Current Liabilities 1,795,506 1,797,830
----------- -----------
Long-Term Debt 2,781,040 3,988,878
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.001 par value,
25,000,000 shares authorized; 10,691 3,952
3,855,267 and 988,021 shares issued
Additional paid-in capital 6,209,836 5,218,565
Deficit (4,723,055) (3,338,077)
----------- -----------
Total 1,497,472 1,884,440
Less - Note receivable (160,000) (160,000)
Treasury Stock-at cost (71,705) (71,705)
----------- -----------
Stockholders' Equity-net 1,265,767 1,652,735
----------- -----------
Total Liabilities and Stockholders' Equity $ 5,842,313 $ 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 THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
CONTINUING OPERATIONS:
Sales $ 1,565,058
Cost of Sales 1,158,457
-----------
Gross Profit 406,601
Selling and administrative expenses 456,920
-----------
Operating loss (50,319)
Other-net (principally interest) (58,184)
Income taxes --
-----------
Loss from continuing operations (108,503)
DISCONTINUED OPERATIONS:
Loss from operations $ (379,207)
Loss from disposal and close down (87,891)
Los from discontinued operation (379,207)
----------- -----------
NET LOSS $ (196,881) $ (379,207)
=========== ===========
BASIC LOSS PER SHARE:
Continuing Operations $ (.03)
Discontinued Operations (.03) $ (.52)
----------- -----------
Net Loss $ (.06) $ (.52)
=========== ===========
Weighted average number of common
Shares outstanding 3,264,702 750,208
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
CONTINUING OPERATIONS:
Sales $ 4,723,066
Cost of sales 3,453,532
-----------
Gross profit 1,269,534
Selling and administrative expenses 1,284,637
-----------
Operating loss (15,103)
Other- net (principally interest) (217,371)
-----------
Loss from continuing operations (232,474)
-----------
DISCONTINUED OPERATIONS:
Loss from operations (540,934) $ (944,533)
-----------
Loss from disposal and close down (611,570)
-----------
Loss from discontinued operation (1,152,504) (944,503)
----------- -----------
NET LOSS $(1,384,978) $ (944,503)
=========== ===========
BASIC LOSS PER SHARE:
Continuing Operations $ (.08)
Discontinued Operations (.45) $ (1.46)
----------- -----------
Net Loss $ (.53) $ (1.46)
=========== ===========
Weighted average number of common
shares outstanding 2,593,187 647,144
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
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Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $(1,384,978) $ (944,533)
Adjustments to reconcile net earnings
to net cash provided by operating
Activities:
Loss from discontinued operations 1,152,504 944,533
Depreciation and amortization 213,164
Decrease in net operating assets 901,570
-----------
Net cash provided by
continuing operations 882,260
Net cash(used by) discontinued
Operations (677,476) (469,505)
----------- -----------
Net cash used by all operating activities 204,784 (469,505)
----------- -----------
Cash flows (used in )investing activities:
Purchase of property and equipment (78,681) (5,081)
----------- -----------
Cash flows from financing activities:
Issuance of convertible debt 1,450,000
Repayment of debt (265,107) --
Issuance of securities 60,000 262,164
Deferred acquisition costs (92,500) (282,272)
Purchase of Treasury Stock (34,080)
Other (198,619)
-----------
Total (297,607) 722,517
----------- -----------
Net increase (decrease) in cash (171,504) 975,414
Cash and cash equivalents - beginning 299,179 1,029,060
----------- -----------
Cash and cash equivalents - ending $ 127,675 $ 2,004,474
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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
7,428 990,582 998,010
Reclassification to give
effect to reverse split (689) 689
Net loss (1,384,978) (1,384,978)
-----------
Balance, September 30, 1998
$10,691 $6,209,836 $(4,723,055) $(71,705) $(160,000) $1,265,767
======= ========== ============ ========= ========== ==========
</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 nine-month periods ended September 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 the Control Systems ("TCS") Division and
product line in June 1998 because of ongoing operating losses and the estimated
requirement 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 September 30, 1998 are
included in the caption "Net Liabilities of Discontinued Operation" and are
stated at their estimated net realizable value. The Consolidated Balance Sheet
at December 31, 1997 was not restated because it was not practicable to do so.
The Company changed its name from Thermo-Mizer Environmental Corp. to
Laminaire Corporation in June 1998.
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 nine-month period ended
September 30, 1998, but are entirely excluded from the Company's results for the
corresponding period ended September 30,1997.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
9
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Revenue Recognition
Revenue for product sales is recognized in the period in which the product
is shipped.
Inventories
Inventories are stated at the lower of cost with cost being determined
using the first-in, first-out cost flow assumption. At September 30, 1998,
inventories of continuing operations consist of:
Raw Materials $199,923
Work-in-process 71,277
Finished Goods 204,973
--------
Total $476,173
========
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.
10
<PAGE>
Statement of Consolidated Cash Flows
Interest paid for the nine months ended September 30, 1998 was
approximately $160,000. 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 $1,306 and $4,750 for the three and nine months ended September 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.
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.
11
<PAGE>
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 Old Laminaire from Garay LLC for a purchase price of $3,200,000,
subject to adjustment based on Old 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 following the acquisition of
Old 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 became
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 was in a
principal amount equal to the difference between (a) the Stockholders' Equity
(as defined) of Old Laminaire as of September 30, 1997 minus $200,000 minus (b)
the Stockholders' Equity of Old Laminaire as of September 30, 1996 or
approximately $28,000.
In conjunction with the acquisition of Old Laminaire, the Company issued a
promissory note to Charles Garay in the principal amount of $90,479 (the "Third
Note") to replace an existing liability due to Mr. Garay by the acquired
company. The Third Note, and all accrued interest at the rate of 15% per annum.
The Second and Third Notes were paid in October 1998.
The Company's obligations under the First Note are secured by first
priority security interests in the real property and all tangible and intangible
personal property, including inventory and accounts receivable, of Old
Laminaire. The security agreement underlying the First Note also contains
various financial ratios.
In conjunction with the acquisition of all of the outstanding common stock
of Old Laminaire, the Company paid all of Old Laminaire's obligations, amounting
to approximately $1,100,000, to Corestates National Bank ("Corestates") under a
mortgage secured by Old Laminaire's interest in its real property and building
located in Rahway, New Jersey.
The Company's operations have been generating sufficient cash flow to
service the First Note, although no assurances can be given that this trend will
continue for the term of the First Note.
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 Old
Laminaire and satisfy Old Laminaire's obligations to Corestates were obtained
from the issuance of (i) Common Stock of
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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 96,630 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, became convertible into shares of the Company's Common Stock
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 September 30, 1998, an aggregate of $1,250,000 of the principal
amount of the Debentures has been converted into 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 were secured by a first security interest in the TCS
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 closing or conversion. In June 1998, the
Company discontinued the operations of TCS, thereby affecting Norwood's
collateral position. In November 1998, the Company agreed to substitute the
common stock of Old Laminaire and a second mortgage on the Rahway building for
the TCS receivables as collateral under the Norwood agreement. The Company has
the right to substitute accounts receivable in lieu of the common stock of Old
Laminaire if certain conditions are met. Furthermore, Norwood will relinquish
its second mortgage on the Rahway building if the Company refinances such
building and uses the proceeds therefrom to satisfy the First Note.
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 September 30, 1998.
NOTE 4--INCOME TAXES
The Company has established reserves for the entire benefit associated with
the unused Federal income tax loss carryforwards.
13
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NOTE 5--SEGMENTS AND DISCONTINUED OPERATION
Prior to the acquisition of Old 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 nine months ended September 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 Old Laminaire. The Company is
currently reviewing the allocation bases being used and may revise or modify
such bases.
CM CD EM Total
-- -- -- -----
Sales $1,740,167 $1,810,418 $1,172,481 $4,723,066
Operating expenses 1,619,911 1,859,218 1,143,121 4,622,252
Operating profit 120,256 (48,800) 29,360 100,814
Corporate/G&A 171,417
Interest and other 217,371
----------
Pretax loss $ (287,974)
==========
Prior to the acquisition of Old 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 nine months ended September 30, 1998:
1998
----------
Revenues $ 961,799
Cost of revenues 1,021,270
Gross profit (59,471)
Operating expenses (481,483)
Loss before taxes (540,934)
The amounts above relate to operating results prior to the date of
discontinuance. All results thereafter are included as part of the closedown
costs of TCS. Operating expenses for the nine months ended September 30, 1998 do
not include corporate, facilities and similar type expenses that have been
charged to continuing operations.
14
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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.
15
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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 Old Laminaire, the Company's operations
consisted principally of 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.
The Company was unable to generate sufficient and timely contracts to
permit it to operate profitably and, accordingly, attempted to reduce business
volatility by becoming a product-oriented company serving various aspects of the
environmental controls industry. However, its efforts, which were limited
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 Old Laminaire
as the first major step of this new strategy.
Following the acquisition of Old Laminaire, the Company took various steps
to improve the operating results of its traditional core business that became
known as the Controls System Division ("TCS"), including:
o Combining all operations into a single facility in Rahway, New Jersey.
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o Trying to identify and correct defects in newly-introduced products.
o Limiting bidding activities for TCS contracts to potential contracts in
which TCS anticipated having a commercial advantage over its competition
and which did not include products experiencing significant technical
problems.
o Investigating whether there was a cost effective way to incorporate TCS
technology into Old Laminaire products to give such products a competitive
advantage.
Despite the foregoing efforts, 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 and would continue to be material in relation to the Company's resources.
Furthermore, there was no certainty that profitability could be achieved in the
foreseeable future. The Company, therefore, concluded that it was in its best
interests to focus all of its efforts and resources in the clean room industry.
During the quarter ended June 30, 1998, the Company replaced its President
with a former senior executive from Old Laminaire. At the same time, the Finance
Committee of the Board of Directors assumed a more active strategic and
oversight role in the Company. Management then subcontracted out as much of the
TCS open commitments as possible and eliminated its staff by September 30, 1998.
In August 1998, The Company advised its former President that his
employment agreement was being terminated for cause. He has verbally indicated
that he may contest this decision by instituting legal action, although no such
action has commenced. The Company, based on discussion with counsel, believes
that the former president's contentions are without merit and, accordingly, no
provision for loss has been recorded. The Board of Directors has also voted,
subject to shareholder approval, to remove the former president from the Board.
Old 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 announced that it
signed a letter of intent to acquire CRP, which 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. Management also expects major cost savings by combining these two
entities into one facility. No assurances can be given, however, that such
business combination will be completed.
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
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<PAGE>
losses will occur. The Company believes that operating losses are likely to
continue throughout 1998, although the cash impact of such operating losses is
likely to be less than those incurred over the immediately prior quarters.
Prior to the acquisition of Old Laminaire, the Company had one business,
the controls system business. Immediataely following the acquisition of Old
Laminaire, the Company operated with four divisions - Cleanroom Manufacturing
("CM"), Cleanroom Distribution ("CD"), and Electronic Manufacturing ("EM") (all
of which were acquired from Old Laminaire), and TCS. In June 1998, the Company
discontinued TCS because of ongoing operating losses and Management's decision
that the risk associated with TCS' research and development and other
requirements did not constitute an effective use of the Company's limited
resources. Prior to the acquisition of Old 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 nine months ended September 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 Old Laminaire. The Company is
currently reviewing the allocation bases being used and may revise or modify
such bases.
CM CD EM Total
---------- ---------- ---------- ----------
Sales $1,740,167 $1,810,418 $1,172,481 $4,723,066
Operating expenses 1,619,911 1,859,218 1,143,121 4,622,252
Operating profit 120,256 (48,800) 29,360 100,814
Corporate/G&A 171,417
Interest and other 217,371
----------
Pretax loss $ (287,974)
==========
General and administrative expenses for the nine months ended September 30,
1998 include approximately $39,000 relating to the amortization of goodwill and
purchase adjustments. Such expenses also include costs of approximately $265,000
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
As previously indicated, the Company discontinued TCS in June 1998. A
summary of TCS' operations for the nine months ended September 30, 1998 and 1997
follow
1998
----------
Revenues $ 961,799
Cost of revenues 1,021,270
Gross profit (59,471)
Operating expenses (481,483)
Loss before taxes (540,934)
18
<PAGE>
The amounts above relate to operating results prior to the date of
discontinuance. All results thereafter are included as part of the closedown
costs of TCS. Operating expenses of TCS for the nine months ended September 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 attempted to become 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.
The foregoing factors resulted in the Company changing its overall strategy
and determining that it should acquire Old 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
Old 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 Old Laminaire from Garay LLC for a purchase price of $3,200,000,
subject to adjustment based on Old 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 following the acquisition of
Old 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 became
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 was in a
principal amount equal to the difference between (a) the Stockholders' Equity
(as defined) of Old
19
<PAGE>
Laminaire as of September 30, 1997 minus $200,000 minus (b) the Stockholders'
Equity of Old Laminaire as of September 30, 1996 or approximately $28,000.
In conjunction with the acquisition of Old Laminaire, the Company issued a
promissory note to Charles Garay in the principal amount of $90,479 (the "Third
Note") to replace an existing liability due to Mr. Garay by the acquired
company. The Third Note, and all accrued interest at the rate of 15% per annum.
The Second and Third Notes were paid by October 31, 1998.
The Company's obligations under the First Note are secured by first
priority security interests in the real property and all tangible and intangible
personal property, including inventory and accounts receivable, of Old
Laminaire. The security agreement underlying the First Note also contains
various financial ratios.
In conjunction with the acquisition of all of the outstanding common stock
of Old Laminaire, the Company paid all of Old Laminaire's obligations, amounting
to approximately $1,100,000, to Corestates National Bank ("Corestates") under a
mortgage secured by Old Laminaire's interest in its real property and building
located in Rahway, New Jersey.
The Company's operations have been generating sufficient cash flow to
service the First Note, although no assurances can be given that this trend will
continue for the term of the First Note.
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 Old
Laminaire and satisfy Old 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 96,630 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, became convertible into shares of the Company's Common Stock
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 September 30, 1998, an aggregate of $1,250,00 of the principal
amount of the Debentures has been converted into 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
20
<PAGE>
obligated to pay interest to the holders of the Convertible Note at the rate of
10% per annum. The Company's obligations under the Convertible Note were secured
by a first security interest in the TCS 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 closing or conversion. In June 1998, the Company
discontinued the operations of TCS, thereby affecting Norwood's collateral
position. In November 1998, the Company agreed to substitute the common stock of
Old Laminaire and a second mortgage on the Rahway building for the TCS
receivables as collateral under the Norwood agreement. The Company has the right
to substitute accounts receivable in lieu of the common stock of Old Laminaire
if certain conditions are met. Furthermore, Norwood will relinquish its second
mortgage on the Rahway building if the Company refinances such building and uses
the proceeds therefrom to satisfy the First Note.
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 or 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 when due. However, it may require
credit facilities or other source of liquidity to meet the needs of its
business. 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 debt service obligations.
These options include, but are not limited to, a possible refinancing of its
building in Rahway, NJ with the proceeds used to repay outstanding indebtedness.
No assurances can be given that any option being considered will be successfully
completed.
21
<PAGE>
Seasonality
The demand for the Company's products is not seasonal.
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.
22
<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
The Company's discontinuance of the TCS business resulted in it
being in default of certain provisions of its agreement with Norwood
Venture Corp. In November 1998, the Company and Norwood agreed to
modifications of that agreement. (see "Managements Discussion and
Analysis of Results of Operations and Financial Condition-Liquidity
and Capital Resources").
Item 4 Submission of Matters to a Vote of Shareholders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
23
<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: November 19, 1998
24
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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