SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended Commission File Number
March 31,1999 33-87284-N4
Laminaire Corporation
(Formerly Thermo-Mizer Environmental Corp.)
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 May 14, 1999, the latest practicable date, there were 3,855,267 shares of
Common Stock outstanding, $.001 par value.
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Laminaire Corporation
INDEX
PAGE
----
PART I.
FINANCIAL INFORMATION
Item 1. :
Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations 6
for the three months ended March 31, 1999 and 1998
Condensed Statements of Consolidated Cash Flows
for the three months ended March 31, 1999 and 1998 7
Condensed Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 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
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,1999 December 31, 1998
(unaudited)
Current Assets:
Cash $ 67,048 $ 79,785
Accounts receivable-net of
allowance of $72,539 and $68,039 519,428 656,886
Inventories 545,773 534,982
Prepaid expenses and other 119,341 125,052
---------- ----------
Total Current Assets 1,256,590 1,396,705
Property and Equipment-net 2,144,000 2,190,898
Other Assets, principally goodwill 1,913,274 1,930,092
---------- ----------
Total Assets $5,308,864 $5,517,695
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,1999 December 31,
(unaudited) 1998
Current Liabilities:
Notes payable and current
Installments of long-term debt $ 418,712 $ 460,373
Accounts payable 789,128 796,292
Accrued expenses and other 270,765 336,118
Net current liabilities of discontinued operation 265,523 303,347
----------- -----------
Total Current Liabilities 1,744,128 1,896,135
----------- -----------
Long-Term Debt 2,239,532 2,250,519
----------- -----------
Other Liabilities 88,278
Stockholders' Equity:
Common Stock, $.001 par value,
25,000,000 shares authorized;
________ and 3,855,267 shares issued 3,855 3,855
Additional paid-in capital 6,756,117 6,681,117
Deficit (5,363,046) (5,153,931)
----------- -----------
Total 1,396,926 1,531,041
Less - Note receivable (160,000) (160,000)
----------- -----------
Stockholders' Equity-net 1,236,926 1,371,041
----------- -----------
Total Liabilities and Stockholders' Equity $ 5,308,864 $ 5,517,695
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
CONTINUING OPERATIONS:
Sales $ 996,432 $ 1,607,386
Cost of Sales 771,903 1,284,065
----------- -----------
Gross Profit 224,529 323,321
Selling and administrative expenses 415,329 384,293
----------- -----------
Operating loss (190,800) (60,972)
Other-net (principally interest) (75,507) (62,036)
----------- -----------
Loss from continuing operations (266,307) (123,008)
----------- -----------
DISCONTINUED OPERATIONS:
Loss from operations (170,694)
Loss from disposal and close down 57,192
-----------
Loss from discontinued operation 57,192 (170,694)
----------- -----------
NET LOSS $ (209,115) $ (293,702)
=========== ===========
BASIC LOSS PER SHARE:
Continuing Operations $ (.07) $ (.09)
Discontinued Operations .02 (.11)
----------- -----------
Net Loss $ (.05) $ (.20)
=========== ===========
Weighted average number of common
Shares outstanding 3,855,267 1,491,197
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(209,115) $(293,702)
Adjustments to reconcile net earnings
to net cash provided by operating
Activities:
Loss from discontinued operations (57,192) 170,694
Depreciation and amortization 78,327 153,329
Decrease in net operating assets 132,891 155,280
--------- ---------
Net cash provided by
continuing operations (55,089) 185,601
---------
Net cash (used by) discontinued
Operations 20,000 (170,694)
--------- ---------
Net cash provided (used) by all operating
activities (35,089) 14,907
--------- ---------
Cash flows (used in )investing activities:
Purchase of property and equipment (78,681)
Cash flows from financing activities:
Repayment of debt (52,648) (47,662)
Capital received 75,000
---------
Net 22,352 (47,662)
--------- ---------
Net (decrease) in cash (12,737) (111,436)
Cash and cash equivalents - beginning 79,785 299,179
--------- ---------
Cash and cash equivalents - ending $ 67,048 187,743
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
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Laminaire Corporation
(Formerly THERMO-MIZER ENVIRONMENTAL CORP.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Common Additional Accumulated Note
Stock Paid-in Capital Deficit Receivable Total
----- --------------- ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $3,855 $6,681,117 $ (5,153,931) $ (160,000) $1,371,041
Capital received 75,000 75,000
Net loss (209,115) (209,115)
---------
Balance, March 31, 1999 $3,855 $6,756,117 $ (5,363,046) $ (160,000) $1,236,926
====== ========== ============ ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1--BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements for
the three-month periods ended March 31, 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 March 31, 1999,
unbilled receivables amounted to $60,000, all of which is expected to be billed
during the three months ending June 30, 1999.
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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 March 31, 1999,
inventories of continuing operations consist of:
Raw Materials $249,169
Work-in-process 215,864
Finished Goods 80,740
--------
Total $545,773
========
Finished goods represent products purchased from outside vendors for
distribution to customers.
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
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of the asset's carrying value over its fair value. Long-lived assets to be sold
are reported at the lower of carrying amount or fair value reduced by estimated
disposal costs.
Statement of Consolidated Cash Flows
Interest paid for the three months ended March 31, 1999 was approximately
$75,507. 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. Advertising costs charged to Continuing Operations
amounted to $22,319 and $1,306 for the three months ended March 31, 1999 and
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.
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.
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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 generated 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
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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 March 31, 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 March 31, 1999.
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 - Cleanroom
Manufacturing ("CM"), Cleanroom Distribution ("CD"), Electronic Manufacturing
("EM"), and TCS. The LM business represents Low Margin
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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 three months ended March 31, 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.
CM CD EM Total
Revenues $484,192 $373,822 $138,418 $996,432
Cost of revenues 308,576 324,847 138,480 771,903
Gross profit 175,616 48,975 (25,062) 224,529
Direct selling 71,329 38,692 23,311 133,332
Contribution 104,287 10,283 (23,373) 91,197
Joint overhead costs 281,997
Operating loss (190,800)
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 three months ended March 31, 1998:
1998
Revenues $625,536
Cost of revenues 502,197
Gross profit 123,339
Operating expenses 294,033
Operating loss (170,694)
The Income from Discontinued Operations relates to a revision of the
estimated closedown costs of the TCS business.
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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:
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
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 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;
(ii) the costs associated with being a public company; and (iii) interest and
debt service costs. Accordingly, the Company believes that it needs a greater
volume of revenue over which to spread these and other fixed costs or a plan to
reduce the interest and fixed facilities' costs. Management is considering the
sale or refinancing of the Company's building in Rahway, NJ as a means of
accomplishing certain of these objectives. No assurances can be given that The
Company will be successful in this undertaking.
In general, the Company believes that it is now positioned to compete in
niche markets on the basis of service and a willingness to customize. As a rule,
it is not competing based on technology. Management believes that controls are
in place to minimize the risk of incurring significant losses on individual
contracts or projects, although no assurances can be given that no such losses
will occur. The Company believes that operating losses are likely to continue
throughout the first half of 1999.
Operations
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
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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
for the three months ended March 31, 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.
CM CD EM Total
Revenues $484,192 $373,822 $138,418 $996,432
Cost of revenues 308,576 324,847 138,480 771,903
Gross profit 175,616 48,975 (62) 224,529
Direct selling 71,329 38,692 23,311 133,332
Contribution 104,287 10,283 (23,323) 91,197
Joint overhead costs 281,997
Operating loss (190,800)
The corresponding information for 1998 follows:
EM CD LM (1) CM Total
Sales $388,550 $342,408 $344,626 $531,802 $1,607,386
Cost of Sales 281,667 285,866 323,393 393,139 1,284,065
Gross Profit 106,883 56,542 21,233 138,663 323,321
Percentage 27.51% 16.51% 6.16% 26.07% 20.11%
(1) The LM products represent "Low Margin" products that were sold to certain
large customers. The Company phased out of that business in 1998.
Revenues from Continuing Operations decreased by $610,954 during the three
months ended March 31, 1999 compared with the corresponding period in 1998
because the level of new orders received were down in all divisions, especially
EM. 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. Although the
percentages reported from year-to-year did not vary from 20%, the amounts in
1998 included $344,000 in "low margin" sales. There were no such sales in 1999.
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General and administrative expenses for the three months ended March 31,
1999 increased because ongoing operations assumed various functions previously
performed by employees of the discontinued business and certain functions were
redefined. In addition, advertising expenses increased by approximately $20,000.
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 three months ended March 31, 1998 follows:
1998
Revenues $625,536
Cost of revenues 502,197
Gross profit 123,339
Operating expenses 294,033
Operating loss (170,694)
Plans
As indicated above, the rate of new orders received from customers slowed
down during the last quarter of 1998 and through the first quarter of 1999. EM
and CM, in particular, experienced a sharp decrease in new orders from their
larger customers. In part to address this situation, the Company is undertaking
a significant new initiative by participating in the establishment of a new
entity, eSafety, a business-to-business E-Commerce solution for distributors and
users of disposable safety equipment and garments for all applications. eSafety
will seek to include products from a wide array of manufacturers on its site and
will incorporate state-of-the-art technology and software. The target date to
open the new company is the summer of 1999. The Company, which is teaming with a
leading developer of E-Commerce software and marketing tools and others to
assist it in this effort, intends to commit a significant portion of its
resources to the formation and development of eSafety.
In addition, CM, which sells its products through its own salesmen,
augmented by independent sales representatives, will attempt to increase its use
of independent sales representatives by developing and offering attractive
commission plans.
No assurances can be given that these plans will result in the Company
becoming profitable.
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
17
<PAGE>
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 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
18
<PAGE>
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.
Through March 31, 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 March 31, 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.
Lack of Credit Facilities - Laminaire does not have any working capital or other
credit facilities. Laminaire 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 Laminaire.
Plans - Laminaire is exploring options to reduce its debt service obligations.
These options include, but are not limited to, a possible refinancing or sale 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.
19
<PAGE>
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 if and when needed
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 Company has not formulated a Year 2000 contingency plan.
Based upon responses to its inquiries, the Company will determine the need for a
contingency plan by the end of the second quarter of 1999. The Company
anticipates completing its Year 2000 project in mid 1999
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.
20
<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.
In 1998, the Company terminated its former president for cause. He has
indicated that he may bring a cause of action against the Company as a result of
such termination, although no such action has been initiated to date. The
Company believes, based on its own investigation and discussion with counsel,
that any claims that the former president may bring are substantially without
merit.
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
21
<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: May 20, 1999
22
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