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, 1999 33-87284-N4
Laminaire Corporation
960 East Hazelwood Avenue
Rahway, NJ 07065
Tel: 732-381-8200
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 September 30, 1999, the latest practicable date, there were 7,258,649 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, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Operations 6
For the Three Months Ended September 30, 1999 and 1998
Condensed Statements of Consolidated Cash Flows
For the Nine Months Ended September 30, 1999 and 1998 7
Condensed Consolidated Statement of Stockholders' Equity for the Nine
Months Ended September 30, 1999 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
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 1999 December 31, 1998
(unaudited)
Current Assets:
Cash $ 28,584 $ 79,785
Accounts receivable-net of allowance of
$19,307 and $68,039 390,028 656,886
Inventories 459,440 534,982
Prepaid expenses and other 82,311 125,052
---------- ----------
Total Current Assets 960,363 1,396,705
Property and Equipment - net 2,077,981 2,190,898
Other Assets 3,106,475 1,930,092
---------- ----------
Total Assets $6,144,819 $5,517,695
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
Laminaire Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1999 December 31,1998
(unaudited)
<S> <C> <C>
Current Liabilities:
Notes payable and current portion of long-term debt $ 537,419 $ 460,373
Accounts payable 1,046,296 796,297
Accrued expenses and other 136,460 336,118
Net liabilities of discontinued operation 271,523 303,347
----------- -----------
Total Current Liabilities 1,991,698 1,896,135
Long-Term Debt 2,218,218 2,250,519
Deferred Income 1,300,000 0
----------- -----------
Total Liabilities 5,509,916 4,146,654
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.001 par value,
25,000,000 shares authorized;
7,258,649 and 3,855,267 shares issued 7,258 3,855
Additional paid-in capital 6,766,012 6,681,117
Deficit (5,978,367) (5,153,931)
----------- -----------
794,903 1,531,041
Less - Note receivable (160,000) (160,000)
----------- -----------
Stockholders' Equity-net 634,903 1,371,041
----------- -----------
Total Liabilities and Stockholders' Equity $ 6,144,819 $ 5,517,695
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
Laminaire Corporation
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
CONTINUING OPERATIONS:
Sales $ 2,858,234 $ 4,723,066
Cost of Sales 2,312,285 3,453,532
----------- -----------
Gross Profit 545,949 1,269,534
----------- -----------
Expenses
Selling and administrative expenses 1,110,313 1,284,637
----------- -----------
Total expenses 1,110,313 1,284,637
----------- -----------
Operating loss (564.364) (15,103)
Other-net (principally interest) (220,102) (217,371)
Income taxes 0
----------- -----------
Loss from continuing operations (784,466) (232,474)
----------- -----------
DISCONTINUED OPERATIONS:
Loss from operations 95,082 (540,934)
Income (Loss) from disposal and close down 0 (611,570)
----------- -----------
Income (Loss) from discontinued operation 95,082 (1,152,504)
----------- -----------
NET LOSS $ (689,384) $(1,384,978)
=========== ===========
BASIC LOSS PER SHARE:
Continuing Operations $ (.16) $ (.07)
Discontinued Operations .02 (.35)
----------- -----------
Net Loss $ (.14) $ (.42
=========== ===========
Weighted average number of common and
Common equivalent shares outstanding 4,993,228 3,264,702
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
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Laminaire Corporation
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
---- ----
CONTINUING OPERATIONS:
Sales $ 914,843 $ 1,565,058
Cost of sales 725,508 1,158,457
----------- -----------
Gross profit 189,335 406,601
----------- -----------
Operating Expenses 271,062 456,920
----------- -----------
Income (Loss) from operations (81,727) (50,319)
Operating loss
Other- net (principally interest) (67,647) (58,184)
Income taxes 0 0
----------- -----------
Loss from continuing operations (149,374) (108,503)
----------- -----------
DISCONTINUED OPERATIONS:
Loss from operations (88,378)
Loss from disposal and close down 0
Loss from discontinued operation (88,378)
-----------
NET LOSS $ (149,374) $ (196,881)
=========== ===========
BASIC LOSS PER SHARE:
Continuing Operations $ (.02) $ (.03)
Discontinued Operations .0 (.03)
----------- -----------
Net Loss $ (.02) $ (.06)
=========== ===========
Weighted average number of common and
Common equivalent shares outstanding 7,258,649 3,264,702
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
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Laminaire Corporation
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1999 and 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (689,384) $(1,384,978)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
(Income) Loss from discontinued operations (95,082) 1,152,504
Depreciation and amortization 234,981 213,164
Decrease in net operating assets 458,029 901,570
----------- -----------
Net cash provided (used) by continuing operations (91,456) 882,260
Net cash(used by) discontinued operations (677,476)
----------- -----------
Net cash used by all operating activities (91,456) (204,784)
----------- -----------
Cash flows (used in )investing activities:
Purchase of property and equipment 0 (78,681)
----------- -----------
Cash flows from financing activities:
New borrowings 102,000
Repayment of debt (146,745) (265,107)
Issuance of securities 85,000 60,000
Deferred financing costs (92,500)
----------- -----------
Total 40,255 (297,607)
----------- -----------
Net increase (decrease) in cash (51,201) (171,504)
Cash and cash equivalents - beginning 79,785 299,179
----------- -----------
Cash and cash equivalents - ending $ 28,584 $ 127,695
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
Laminaire Corporation
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPT. 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Paid-in Accumulated Deficit Note Receivable
Capital Total
------------ ------------------- ------------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 3,855 $ 6,681,117 $(5,288,983) $ (160,000) $ 1,235,989
Issuance of equity securities 3,403 84,895 88,298
Net loss (689,384) (689,384)
----------- ----------- ----------- ----------- -----------
Balance, Sept. 30, 1999 $ 7,258 $ 6,766,012 $(5,978,367) $ (160,000) $ 634,903
=========== =========== =========== =========== ===========
</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, 1999 and 1998 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.
Laminaire Corporation (formerly Thermo-Mizer Environmental Corp.) (the
"Company" or "Laminaire"), a Delaware corporation based in Rahway, New Jersey,
designs, assembles and sells a family of products and systems used in cleanroom
facilities. On October 16, 1997, the Company acquired all of the outstanding
shares of Common Stock of Laminaire Corporation ("Old Laminaire"), a New Jersey
corporation, from Garay LLC for a purchase price of $3,228,000. 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 Old 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.
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. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue for product sales is recognized in the period in which the product
is shipped. Contract revenues and profits are recognized on a
percentage-of-completion basis using the cost-to-cost method under which sales
and profits are recorded based on the ratio of costs incurred through the
measurement date to estimated total costs at completion. At September 30, 1999,
unbilled receivables were de minimis.
9
<PAGE>
Revisions to contract estimates of revenue and profits are reflected in the
earnings of the period in which the revisions are made. Anticipated losses on
contracts-in-progress are charged to earnings when identified.
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, 1999,
inventories consist of:
Raw Materials $ 85,550
Work-in-process 269,426
Finished Goods 104,464
--------
Total $459,440
========
Finished goods represent products purchased from outside vendors for
distribution to customers (see Note 6).
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
10
<PAGE>
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 nine months ended September 30, 1999 was
approximately $220,102. 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.
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.
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 on 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.
Reclassifications
Certain 1998 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.
11
<PAGE>
NOTE 3--ACQUISITION OF OLD LAMINAIRE
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.
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.
12
<PAGE>
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.
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 12% 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 or sells
such building and uses the proceeds therefrom to satisfy the First Note.
Through September 30, 1999, an aggregate of $1,410,000 of the principal
amount of the debentures has been converted into Common Stock.
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, 1999.
Other Borrowings - In August 1999, the Company borrowed $102,000 from an entity
affiliated with one of its directors. The proceeds were used to pay obligations
due under the First Note described above. The note is due on demand, bears
interest at the rate of nine percent per
13
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annum and is convertible into the Company's Common Stock at a price equivalent
to 70% of the bid price on the date of the note.
NOTE 4--INCOME TAXES
The Company has established reserves for the entire benefit associated with
the unused Federal income tax loss carryforwards.
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 or product
groups - Cleanroom Manufacturing ("CM"), Cleanroom Distribution ("CD"),
Electronic Manufacturing ("EM"), and TCS. 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 or product group for the nine months ended
September 30, 1999. 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.
<TABLE>
<CAPTION>
CM CD EM Total
<S> <C> <C> <C> <C>
Revenues $ 1,317,376 $ 1,036,840 $ 504,018 $ 2,858,234
Cost of revenues 1,028,280 832,432 451,573 2,312,285
Gross profit 289,096 204,408 52,445 545,949
Direct selling 172,915 90,935 63,851 327,701
Contribution 116,181 113,473 (11,406) 218,248
Joint overhead costs 270,187 209,054 236,909 716,150
Operating loss $ (154,006) $ (95,579) $ (248,315) $ (497,900)
Corporate 66,464
Net Loss (564,364)
</TABLE>
No individual customer made up ten percent or more of revenue during the
period.
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:
Revenues $961,799
Cost of revenues 1,021,270
Gross profit (59,471)
Operating expenses (481,463)
Operating loss (540,934)
14
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The Income from Discontinued Operations in 1999 relates to a revision of
the estimated closedown costs of the TCS business.
NOTE 6 -- OTHER MATTERS
In August 1999, the Company sold the customer and vendor lists of its
distribution product group to The SL Group, Inc. The purchase price consisted of
100,000 shares of common stock, notes payable to the Company in the aggregate
principal amount of $500,000 and the assumption of accounts payable and accrued
expenses of up to approximately $125,000. The notes payable bear interest at
eight percent per annum. One of the notes in the principal amount of $200,000 is
payable in 12 equal quarterly installments, and the other note in the principal
amount of $300,000 is payable in 20 equal quarterly installments. The SL Group,
Inc. has the right to offset the principal amount of a $102,000 demand note that
it made to Laminaire, in whole or in part, against any payment due to Laminaire
under these note agreements. In addition, The SL Group, Inc. guaranteed payments
due by Laminaire to certain vendors in an amount of approximately $300,000 and
can offset any amounts paid to satisfy such amounts due by Laminaire to its
vendors against any amount due to Laminaire under the note agreements. The first
installments due under the note agreements are payable at the earlier of our
completion of a public offering or March 31, 2000. For financial reporting
purposes this transaction gives rise to a gain of approximately $1,300,000 which
has been deferred until the completion of the SL Group's initial public
offering. All of the assets acquired are included in the caption "Other Assets."
One of the Company's directors is also a director and officer of The SL Group,
Inc. This director did not participate in the Board of Directors vote on this
transaction.
The Company has the right to continue in various areas of the distribution
business but may lack the financial resources to do so. A decision will be made
during the fourth quarter of 1999. If the Company does not continue in any area
of the distribution business, all previous revenues related to the distribution
business will be reclassified and reported in discontinued operations.
The Company has also entered into a contract to sell its building to an
unrelated party for a selling price of $2,100,000. The closing is scheduled for
December 1999 or January 2000. The sale, if completed as set forth in the
contract, will give rise to a gain for financial reporting purposes of
approximately $250,000. The proceeds will be used to repay the First Note and
certain other indebtedness.
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 in October 1997, 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 by the
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. Old Laminaire was acquired 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:
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<PAGE>
o Combining all operations into a single facility in Rahway, New Jersey.
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
and the ultimate benefit to be derived therefrom remained highly uncertain.
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.
Old Laminaire reported profitable operations 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; (ii) the costs associated with being a public company; and (iii)
interest and debt service costs. In addition, the Company received significantly
fewer sales orders in the period September 1998 to September 1999 than it had
received in previous periods. It is not certain as to the reason for this
decline but believes that the industry has gotten more price competitive
resulting in numerous bids being lost on a price basis. Old Laminaire also had
been considered a "minority owned" business prior to its acquisition by the
Company. There is no way to measure fully the impact of the loss of that
designation in the bidding process. The decrease in sales during the period
resulted in the Company having to "stretch" vendor payables that, in turn, has
created some delivery problems. Accordingly, the Company believes that it needs
a greater volume of revenue over which to spread fixed costs or a plan to reduce
the interest and fixed facilities' costs. The Company has instituted a
three-step plan to rectify the situation:
o Management decided to sell the Company's building in Rahway, NJ and will
use the proceeds therefrom to reduce indebtedness.
o The Company established a new incentive plan for its salesmen. Overall
sales order volume increased thereafter bringing the backlog to $2,813,075
at October 31, 1999.
17
<PAGE>
The Company will have to work with its vendors to be able to obtain the
materials necessary to produce and deliver this backlog on a timely basis.
o The Company has and will continue to reduce payroll costs.
In addition, the Company will vigorously pursue (i) increasing its network of
independent sales representatives and (ii) review and, where appropriate, change
its purchasing policies. The Company has also entered into a contract to sell
its building to an unrelated party for a selling price of $2,100,000. The
closing is scheduled for December 1999 or January 2000. The sale, if completed
as set forth in the contract, will give rise to a gain for financial reporting
purposes of approximately $250,000. The proceeds will be used to repay
indebtedness. Following the sale of the building, the Company will lease a
portion of it back from the new owner at a rental expense significantly below
its current facility costs. In addition, management will actively pursue an
outsourcing program for as much manufacturing as possible. This program, if
implemented as planned, will reduce fixed costs and better match cash flow with
cash expenditures.
No assurances can be given that the Company will be successful in these
undertakings.
Operations
Prior to the acquisition of Old Laminaire, the Company had one business,
the controls system business. Immediately 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 results of each division
and product group for the nine months ended September 30, 1999. 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.
<TABLE>
<CAPTION>
CM CD EM Total
<S> <C> <C> <C> <C>
Revenues $ 1,317,376 $ 1,036,840 $ 504,018 $ 2,858,234
Cost of revenues 1,028,280 832,432 451,573 2,312,285
Gross profit 289,096 204,408 52,445 545,949
Direct selling 172,915 90,935 63,851 327,701
Contribution 116,181 113,473 (11,406) 218,248
Joint overhead costs 270,187 209,054 236,909 716,150
Operating loss (154,006) (95,579) (248,315) (497,900)
Corporate 66,464
Net Profit (Loss) $ (564,364)
</TABLE>
18
<PAGE>
The Company sold the vendor and customer lists associated with its CD
Product Group but has the right to continue in various areas of the distribution
business. However, it may lack the financial resources to do so. A decision will
be made during the fourth quarter of 1999. If the Company does not continue in
any area of the distribution business, all previous revenues related to the
distribution business will be reclassified and reported in discontinued
operations.
The corresponding information for 1998 follows:
<TABLE>
<CAPTION>
EM CD CM Total
<S> <C> <C> <C> <C>
Sales $ 1,172,481 $ 1,859,218 $ 1,740,167 $ 4,723,066
Cost of Sales 1,143,121 1,859,218 1,619,911 4,622,252
Gross Profit 29,360 (48,800) 120,256 100,814
Percentage 2.50% (2.6%) 6.9% 2.1%
</TABLE>
(1) The LM products represent "Low Margin" products that were sold to certain
large customers. The Company phased out of that business in 1998 when it became
apparent that most contracts would not be renewed when the Company was no longer
considered to be "minority-owned."
Revenues from Continuing Operations decreased by $1,864,832 during the nine
months ended September 30, 1999 compared with the corresponding period in 1998
because the level of new orders received were down in all divisions. The
downturn in orders, in some instances, appears to have been a function of timing
and in others may have resulted in the Company no longer being considered a
"disadvantaged" or "minority-owned" business. However, the Company is unable to
determine the reason for not receiving other orders. While there are significant
proposals outstanding, there can be no assurances given that the negative trend
in sales will not continue.
Many of the Company's costs are fixed. Therefore, a decrease in sales
results in a significant decrease in gross profit percentage.
General and administrative expenses for the nine months ended September 30,
1999 increased because ongoing operations assumed various functions previously
performed by employees of the discontinued business and certain functions were
redefined.
No net benefit was recognized for the benefit of Federal income tax loss
carryforwards because of the uncertainty of utilization of such carryforwards.
19
<PAGE>
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 follows:
Revenues $961,799
Cost of revenues 1,021,270
Gross profit (59,471)
Operating expenses (481,483
Operating loss (540,934)
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 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.
20
<PAGE>
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.
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.
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 12% 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.
21
<PAGE>
Through September 30, 1999, an aggregate of $1,410,000 of the principal
amount of the convertible debt has been converted into Common Stock.
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, 1999.
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.
Other Borrowings - In August 1999, the Company borrowed $102,000 from The SL
Group, Inc., an entity affiliated with one of its directors. The proceeds were
used to pay obligations due under the First Note described above. The note is
due on demand, bears interest at the rate of nine percent per annum and is
convertible into the Company's Common Stock at a price equivalent to 70% of the
bid price on the date of the note.
Lack of Credit Facilities - Laminaire does not have any working capital or other
credit facilities. Laminaire is dependent on revenue from operations and
recently has had difficulties satisfying 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 Laminaire.
Plans - The Company believes that it needs a greater volume of revenue over
which to spread fixed costs and a plan to reduce the interest and fixed
facilities' costs. The Company has instituted a plan to rectify the situation:
o In August 1999, the Company sold the customer and vendor lists of its
distribution product group to the SL Group, Inc. The purchase price
consisted of 100,000 shares of common stock, notes payable to the Company
in the aggregate principal amount of $500,000 and the assumption of
accounts payable and accrued expenses of up to approximately $125,000. For
financial reporting purposes this transaction gives rise to a gain of
approximately $1,300,000 which has been deferred until the completion of
The SL Group's initial public offering. If the Company realizes the
potential gain from this transaction, it will use the proceeds to satisfy
trade debt and for general working capital purposes.
o The Company has also entered into a contract to sell its building to an
unrelated party for a selling price of $2,100,000. The closing is scheduled
for December 1999 or January 2000. The sale, if completed as set forth in
the contract, will give rise to a gain for financial reporting purposes of
approximately $250,000. The proceeds will be used to repay the First Note
and certain other indebtedness.
o The Company will reduce fixed costs by reducing its facilities costs
following the sale of the building and by outsourcing various manufacturing
functions currently performed in-house.
22
<PAGE>
o The Company will seek to obtain financing for its accounts receivable
following the satisfaction of the First Note.
No assurances can be given that the Company will be successful in these
undertakings.
The Company also modified its systems such that it now qualifies to receive
progress payments for certain contracts with the Defense Department. Contracts
aggregating $1,713,275 (out of a total backlog of $2,813,075) are included in
backlog at October 31, 1999 and are now subject to the receipt of progress
payments.
Securities Listing - The National Association of Securities Dealers, Inc.
advised Laminaire that it was not in compliance with the maintenance
requirements for continued listing and, accordingly, delisted Laminaire's
securities from the NASDAQ SmallCap Market in July 1998. Trading in Laminaire's
securities now takes place in the over-the-counter market in what are commonly
referred to as the "Electronic Bulletin Board" or the "OTC." 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, Laminaire may experience
greater difficulty in obtaining financing
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.
Year 2000 Issues
Management has initiated a company-wide program and has developed a formal
plan of implementation to prepare the Company for the Year 2000. This includes
taking actions designed to ensure that the Company's information technology
("IT") systems, products and infrastructure are Year 2000 compliant and that its
customers, suppliers and service providers have taken similar action. The
Company is in the process of evaluating its internal issues - all of its IT
systems, products, equipment and other facilities systems. At this time,
Management believes that the Company does not have any internal problem other
than to upgrade some of its software to available new releases that are Year
2000 compliant. With respect to its external issues - customers, suppliers and
service providers, the Company is surveying them primarily through written
correspondence. Despite the efforts to survey customers, suppliers and service
providers, Management cannot be certain as to the actual Year 2000 readiness of
these third parties. To the extent any of its suppliers or service providers are
not Year 2000 ready, the Company believes that it will be able to obtain other
suppliers or service providers without a significant interruption to its
business. To date, the
23
<PAGE>
Company has not formulated a Year 2000 contingency plan. Based upon responses to
its inquiries, the Company is not aware of any significant problems but is
installing new accounting software.
Management currently believes that the costs related to the Company's
compliance with the Year 2000 issue should not have a material adverse effect on
its consolidated financial position, results of operations or cash flows.
24
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Laminaire is not a party to any litigation that, in its opinion, could
have a material adverse effect on it or its business. Laminaire is a defendant
in several cases involving collection of payables and employment matters.
Item 2 Changes in Securities
See Note 3 to the Condensed Financial Statements
Item 3 Defaults on Senior Securities
None
Item 4 Submission of Matters to a Vote of Shareholders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
25
<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/ Antonio Garay
------------------
ANTONIO GARAY
President
Date: November 29, 1999
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 28,584
<SECURITIES> 0
<RECEIVABLES> 409,335
<ALLOWANCES> (19,307)
<INVENTORY> 459,400
<CURRENT-ASSETS> 960,363
<PP&E> 4,016,457
<DEPRECIATION> (1,938,476)
<TOTAL-ASSETS> 6,144,819
<CURRENT-LIABILITIES> 1,991,698
<BONDS> 0
0
0
<COMMON> 7,258
<OTHER-SE> 630,645
<TOTAL-LIABILITY-AND-EQUITY> 6,144,819
<SALES> 2,858,234
<TOTAL-REVENUES> 2,858,234
<CGS> 2,312,284
<TOTAL-COSTS> 1,110,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220,102
<INCOME-PRETAX> (784,466)
<INCOME-TAX> 0
<INCOME-CONTINUING> (784,466)
<DISCONTINUED> 95,082
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (689,384)
<EPS-BASIC> (.14)
<EPS-DILUTED> 0
</TABLE>
