SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-23900
IDM ENVIRONMENTAL CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2194790
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
396 Whitehead Avenue, South River, New Jersey 08882
---------------------------------------------------
(Address of principal executive offices)
(908) 390-9550
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of October 31, 1997, 14,279,701 shares of Common Stock of the issuer
were outstanding.
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -September 30, 1997 and
December 31, 1996............................................. 1
Consolidated Statements of Operations - For the nine
months ended September 30, 1997 and September 30, 1996........ 2
Consolidated Statements of Operations - For the three
months ended September 30, 1997 and September 30, 1996........ 3
Consolidated Statements of Cash Flows - For the nine
months ended September 30, 1997 and September 30, 1996....... 4
Notes to Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................... 12
Item 6. Exhibits and Reports on Form 8-K.......................... 12
SIGNATURES.............................................................. 13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
======================== ==================
<S> <C> <C>
Current Assets:
Cash and cash equivalents $5,248,370 $1,001,254
Accounts receivable, net of allowance for doubtful accounts of $200,000 6,589,390 5,626,208
Stock subscription receivable 784,483 775,862
Notes receivable - current 1,279,553 1,274,773
Inventory 1,182,517 1,182,517
Costs and estimated earnings in excess of billings 647,431 2,595,107
Bonding deposits 8,998 55,472
Deferred income taxes 3,609,000 2,609,000
Due from officers 251,769 208,676
Prepaid expenses and other current assets 1,017,373 945,624
Total Current Assets 20,618,884 16,274,493
Investment in Affiliate, at cost 1,300,000 1,300,000
Notes Receivable - long term 1,597,851 1,572,238
Unamortized Debt Discount 4,511,901 -
Deferred Issuance Costs, net 444,318 -
Property, Plant and Equipment, net 2,358,482 2,742,650
Other Assets 660,880 313,246
------------------------ ------------------
$31,492,316 $22,202,627
======================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $589,362 $351,127
Accounts payable and accrued expenses 4,328,631 7,105,827
Billings in excess of costs and estimated earnings 160,064 86,496
------------------------ ------------------
Total Current Liabilities 5,078,057 7,543,450
Long-Term Debt 389,992 164,034
7% Convertible Note 3,025,000 -
Minority Interest 1,034,483 1,034,483
------------------------ ------------------
Total Liabilities 9,527,532 8,741,967
------------------------ ------------------
Commitments and Contingencies
Stockholders' Equity:
Convertible preferred stock, authorized 1,000,000 shares
$1.00 par value, issued and outstanding 270 shares in 1997
stated at conversion value of $10,000 per share 2,700,000 -
Common stock, authorized 20,000,000 shares $.001 par value, issued
and outstanding 13,946,254 13,946 9,603
Additional paid-in capital 37,165,906 25,359,465
Retained earnings (deficit) (17,915,068) (11,908,408)
21,964,784 13,460,660
$31,492,316 $22,202,627
======================== ==================
</TABLE>
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The accompanying notes are an integral part of these financial statements.
1
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
Revenue:
Contract Income $13,163,032 $15,055,754
Sale of Equipment 28,550 196,805
13,191,582 15,252,559
--------------- -------------
Cost of Sales:
Direct job costs 12,311,445 15,768,793
Cost of equipment sales 22,413 81,933
12,333,858 15,850,726
--------------- -------------
Gross Profit (Loss) 857,724 (598,167)
--------------- -------------
Operating Expenses:
General and administrative expenses 5,835,451 5,945,932
Depreciation and amortization 539,412 560,057
6,374,863 6,505,989
--------------- -------------
Income (Loss) from Operations (5,517,139) (7,104,156)
Other Income:
Interest income (expense) (252,674) 23,095
--------------- -------------
Income (Loss) before Provision (Credit)
for Income Taxes (5,769,813) (7,081,061)
Provision (Credit) for Income Taxes (1,000,000) (1,190,000)
--------------- -------------
Net Income (Loss) (4,769,813) (5,891,061)
Preferred Stock Dividends including
amortization of beneficial conversion
feature of $1,109,589 being amortized
over 180 days 1,236,847 -
--------------- -------------
Net Income (Loss) on Common Stock ($6,006,660) ($5,891,061)
=============== =============
Earnings (Loss) per Share:
Primary earnings (loss) per share ($0.59) ($0.77)
=============== =============
Fully diluted earnings (loss) per share ($0.59) ($0.77)
=============== =============
Primary common shares outstanding 10,173,582 7,635,416
=============== =============
Fully diluted common shares outstanding 10,173,582 7,635,416
=============== =============
</TABLE>
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The accompanying notes are an integral part of these financial statements.
2
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Revenue:
Contract Income $5,368,831 $3,976,763
Sale of equipment - 44,005
5,368,831 4,020,768
---------------- -------------
Cost of Sales:
Direct job costs 4,931,358 4,393,869
Cost of equipment sales - 9,089
4,931,358 4,402,958
---------------- -------------
Gross Profit (loss) 437,473 (382,190)
---------------- -------------
Operating Expenses:
General and administrative expenses 1,804,723 2,355,922
Depreciation and amortization 163,571 177,812
1,968,294 2,533,734
---------------- -------------
(Loss) from Operations (1,530,821) (2,915,924)
Other Income (Expense):
Interest income (expense) (290,208) 7,224
---------------- -------------
Income (Loss) before Provision (Credit)
for Income Taxes (1,821,029) (2,908,700)
Provision (Credit) for Income Taxes (320,000) (490,000)
---------------- -------------
Net Income (Loss) (1,501,029) (2,418,700)
Preferred Stock Dividends including
$265,068 amortization of beneficial
conversion feature of $1,109,589
being amortized over 180 days 312,785 -
---------------- -------------
Net Income (Loss) on Common Stock ($1,813,814) ($2,418,700)
================ =============
Earnings (Loss) per Share:
Primary earnings (loss) per share ($0.16) ($0.27)
================ =============
Fully diluted earnings (loss) per share ($0.16) ($0.27)
================ =============
Primary common shares outstanding 11,296,671 8,879,023
================ =============
Fully diluted common shares outstanding 11,296,671 8,879,023
================ =============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1997 1996
---------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) ($4,769,813) ($5,891,061)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Deferred Taxes (1,000,000) (1,164,392)
Depreciation and amortization 539,412 560,058
Decrease (Increase) In:
Accounts receivable (963,182) (1,342,466)
Inventory - -
Notes receivable (39,014) (279,869)
Costs and estimated earnings in excess
of billings 1,947,676 3,168,692
Prepaid expenses (150,446) 103,344
Bonding Deposits 46,474 883,163
Recoverable income taxes - 959,459
Other current assets (347,634) (15,742)
Debt Discount 206,849 -
Increase (Decrease) In:
Accounts payable and accrued expenses (2,768,679) (1,734,714)
Billings in excess of costs and
estimated earnings 73,568 (765,058)
-------------- -----------
Net cash (used in) operating
activities (7,224,789) (2,833,654)
-------------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (39,820) (687,592)
Proceeds from disposal of property, plant
and equipment 22,368 -
Acquisition of other assets - (1,768,160)
Increase (decrease) of loans and advances
to officers (43,093) (261,282)
------------- -----------
Net cash (used in) investing activities (60,545) (2,717,034)
------------- ----------
Cash Flows from Financing Activities:
Preferred stock dividends (127,258) -
Long-term debt borrowing 938,993 -
Net proceeds from convertible notes issuance 2,780,000 -
Net proceeds from convertible preferred
stock issuance 2,722,500 -
Principal payments and current maturities
of long-term debt (474,800) (272,998)
Proceeds from exercise of stock options
and warrants 5,693,015 8,713,299
------------- -----------
Net cash provided by financing activities 11,532,450 8,440,301
------------- -----------
Increase (Decrease) in Cash and Cash Equivalents 4,247,116 2,889,613
Cash and Cash Equivalents, beginning of period 1,001,254 83,286
------------- -----------
Cash and Cash Equivalents, end of period $5,248,370 $2,972,899
============= ===========
Supplementary Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest expense $231,707 $42,911
============== ===========
Income taxes - -
============== ===========
Supplemental Disclosure of Noncash Investing
and Financing Activities:
Property, plant and equipment financing - $163,605
============== ===========
Conversion of convertible notes to common stock $300,000 $2,828,037
============== ===========
Beneficial conversion feature-debt discount $4,718,750 -
============== ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of IDM Environmental Corp. and all of its wholly owned and
majority owned subsidiary companies. The December 31, 1996 balance sheet
data was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The
interim financial statements and notes thereto should be read in
conjunction with the financial statements and notes included in the
Company's Form 10-K for the year ended December 31, 1996. In the opinion of
management, the interim financial statements reflect all adjustments of a
normal recurring nature necessary for a fair statement of the results for
the interim periods presented. The current period results of operations are
not necessarily indicative of results which ultimately will be reported for
the full year ending December 31, 1997.
2. CONTINGENCIES
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration ("OSHA") issued a willful citation and notification
of penalty in the amount of $147,000 on the Company in connection with the
accidental death of an employee of one of the Company's subcontractors on
the United Illuminating Steel Point Project job site in Bridgeport,
Connecticut. A complaint was filed against the Company by the Secretary of
Labor, United States Department of Labor on September 30, 1996. The Company
is contesting the Citations and Notification of Penalty.
In November of 1996, a shareholder filed a class action lawsuit against the
Company and certain directors and officers of the Company. The suit, filed
in the Superior Court of New Jersey, Middlesex County, alleges that the
Company disseminated false and misleading financial information to the
investing public between March 27, 1996 and November 18, 1996 and seeks
damages in an unspecified amount to compensate investors who purchased the
Company's common stock between the indicated dates as well as the
disgorgement of profits allegedly received by the individual defendants
from sales of common stock during that period. The Company believes this
action is without merit and intends to vigorously contest this matter.
On February 11, 1997 the Company was served with a lawsuit naming the
Company as a co-defendant in a wrongful death cause of action arising out
of the accidental death of an employee of a subcontractor. The suit, filed
in the Federal District Court for the Northern District of Indiana, is
based on the same facts as gave rise to the aforementioned administrative
proceeding instituted by OSHA. Management believes that the suit, as it
relates to the Company, is without merit, and intends to vigorously contest
this claim. In addition the Company has insurance in place to protect
against such events.
3. EARNINGS PER SHARE
The Company is calculating earnings per share to comply with the recent SEC
staff position on accounting for securities issued with beneficial
conversion features. This accounting requires that the Company reflect the
difference between the market price of the company's common stock and the
applicable conversion rate on the convertible preferred stock as a dividend
at the issue date (the beneficial conversion feature was $1,109,589) and
was amortized as a dividend over a 180 day period from February 12, 1997,
the issue date of the convertible preferred stock.
4. CONVERTIBLE NOTES
On August 13, 1997, the Company completed a private placement of $3,025,000
of 7% Convertible Notes (the "Convertible Notes") and 2,675,000 three year
Warrants (the "Three Year Warrants").
The Convertible Notes are convertible into Common Stock at the lesser of
(i) $2.75 per share or (ii) 75% of the average closing bid price of the
Common Stock during the five trading days prior to conversion. The Three
Year Warrants are exercisable for a three year period at the lesser of
$3.00 per share or the lowest conversion price of the Convertible Notes.
Conversion of the Convertible Notes and exercise of the Three Year Warrants
was subject to the issuance of a maximum of 1,997,130 shares of Common
5
<PAGE>
Stock on conversion unless the shareholders of the Company approved
issuances beyond that level upon conversion. Shareholder approval of
issuances beyond 1,997,130 shares was received on November 4, 1997.
Further, the Company has the right, upon notice to the holders, to redeem
any Convertible Notes submitted for conversion at a price of $2.75 or less
at 125% of the principal amount of such Convertible Notes. The Convertible
Notes pay interest at 7% payable quarterly and on conversion or at
redemption in cash or Common Stock, at the Company's option. In the event
that a registration statement covering the shares underlying the
Convertible Notes has not been declared effective within 90 days or 180
days after the issuance of the Convertible Notes, the interest rate on the
Convertible Notes shall be increased to 18% and 24%, respectively, from
those dates until such a registration statement becomes effective.
The value, totaling $4,718,750, of the discounted conversion feature on the
notes and the value of the warrants has been accounted for as additional
interest via a debit to debt discount and a credit to paid-in-capital. The
debt discount has been calculated as the fixed discount from the market at
the date of sale based upon the common stock's trading price of $4 per
share on August 13th. This interest is being amortized over the three year
life of the debt. During the third quarter $206,849 was amortized and
recorded as interest expense.
5. REVENUE RECOGNITION AND USE OF ESTIMATES
The consolidated financial statements have been prepared on the basis of
the percentage of completion method of accounting. Under this method
contract revenue is determined by applying to the total estimated income on
each contract, a percentage which is equal to the ratio of contract costs
incurred to date to the most recent estimate of total costs which will have
been incurred upon the completion of the contract. Costs and estimated
earnings in excess of billings represents additional earnings over
billings, based upon percentage completed, as outlined above. Similarly,
billings in excess of costs and estimated earnings represent excess of
amounts billed over income recognized. Actual results can differ from the
estimates. Losses anticipated on contracts, excluding period costs, should
be charged to operations as soon as they are evident. In the first quarter
of 1997, the Company recognized revenues equivalent to its costs incurred
on its Davy contract based on approximately one million dollars in
unapproved change orders. The Company originally reversed these revenues in
the second quarter when it became aware that the change orders had not been
approved. The Company is aggressively pursuing its claims. Future revenues
will be recognized when this claim is finally settled. Also, in the first
quarter the Company recorded revenue of $3.5 million dollars for the sale
of four generators on a sale agreement dated March 28, 1997. Based on the
Company's discussions with the SEC accounting staff, the Company has agreed
to restate its quarterly financial statements for the first two quarters
"because recognizing change orders as revenues was tantamount to
recognizing gain contingencies which is expressly prohibited by SFAS 5";
and, "because the revenue on the sale of the four generators should not be
recognized until the period they are shipped." The disclosure requirements
of the APB opinion number 20 of earnings (loss) per share, net income
(loss), and income tax (credit) are as follows:
6
<PAGE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
First Second Six
Quarter Quarter Months
-------------- ----------------- ----------------
<S> <C> <C> <C>
Income (Loss) before Provision (Credit)
for Income Taxes 1,722,311 (1,936,487) (214,176)
Change (4,306,608) 572,000 (3,734,608)
-------------- ----------------- ----------------
Amount Restated (2,584,297) (1,364,487) (3,948,784)
Provision (Credit) for Income Taxes 300,000 (340,000) (40,000)
Change (750,000) 110,000 (640,000)
-------------- ----------------- ----------------
Amount Restated (450,000) (230,000) (680,000)
Net Income (Loss) 1,422,311 (1,596,487) (174,176)
Change (3,556,608) 462,000 (3,094,608)
-------------- ----------------- ----------------
Amount Restated (2,134,297) (1,134,487) (3,268,784)
Net Income (Loss) on Common Stock 1,105,544 (2,203,782) (1,098,238)
Change (3,556,608) 462,000 (3,094,608)
-------------- ----------------- ----------------
Amount Restated (2,451,064) (1,741,782) (4,192,846)
Earning (Loss) Per Share $0.12 ($0.23) ($0.11)
Change ($0.38) $0.05 ($0.34)
-------------- ----------------- ----------------
Amount Restated ($0.26) ($0.18) ($0.45)
</TABLE>
Also, the Company has or will take the following steps to improve its accounting
controls for contract revenue and cost reporting.
1. The Company will not recognize any revenues on unapproved change orders.
2. The Company will add another CPA to its accounting staff to manage the
contract revenue and cost reporting systems.
3. The Company has implemented a new contract revenue and cost reporting
system whereby standardized reports on detail job costs incurred to date
and revenues billed are provided to project directors for all contracts on
a weekly basis. Additionally, standardized contract cost summaries are
being prepared weekly by project directors which include costs incurred to
date and estimated costs to completion . These reports will be reviewed at
weekly meetings.
4. The Company's Audit Committee has requested our independent public
accountants to review the Company's current contract revenue and cost
reporting systems and to make recommendations to improve the systems and to
assist in implementing those recommendations. The accountants started this
review the week ended November 14th and anticipate completion before the
end of the year.
The Company provided a reserve of $350,000 for the current period
associated with accounting for potential cost overruns on existing
contracts. The Company is currently reviewing with its independent
accountants various methods to modify its present method of recording costs
under the percentage of completion method to report on a more conservative
basis. It is anticipated that the final agreed upon method will recognize
little if any gross margin early in the job until sufficient progress has
been made to verify the probable accuracy of cost estimates prepared during
the bidding process. A contingency factor based on total estimated costs
will be provided. The Company anticipates that probably half of this factor
would be reversed after the contract is 75% complete and the balance when
the contract is completed.
The Company's management believes that the successful implementation of all
of the procedures above will improve the accuracy of the financial
reporting and help to eliminate the prior problem of cost overruns being
reported late in a contract's life cycle.
7
<PAGE>
Item 2. Management's Discussion and Analysis Of Financial Condition And Results
Of Operations.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in this
report.
Third Quarter of 1997 Compared with Third Quarter of 1996
The Company's total revenues increased by approximately 33.5% from $4,021,000
for the quarter ended September 30, 1996 to $5,369,000 for the quarter ended
September 30, 1997. Contract service income increased during the quarter by
35.0% from $3,977,000 in 1996 to $5,369,000 in 1997. The increase in contract
service income and total revenues is attributable to lower volume in 1996.
Surplus equipment revenues decreased 100% from $44,000 in 1996 to none in 1997.
Direct job costs increased by approximately 12.2% from $4,394,000 for the
quarter ended September 30, 1996 to $4,931,000 for the same period in 1997. The
primary elements of such increase in job costs were job salaries and material
and supplies. The increase in job costs was attributable to the increase in
contract service revenues during the quarter. Cost of equipment sales decreased
from $9,000 in 1996 to none in 1997.
General and administrative expenses decreased 23.4 % from $2,356,000 during the
quarter ended September 30, 1996 to $1,805,000 during the same period in 1997.
The decrease in general and administrative expense was attributable to audit
refunds on workers compensation insurance.
In addition to its operating income and expenses, the Company reported net
interest income/(expense) of ($290,000) for the quarter ended September 30, 1997
as compared to net interest income/(expense)of $7,000 for the same period in
1996. The decrease in net interest income/(expense) was primarily attributable
to $206,000 in interest expense for the amortization of the beneficial
conversion feature on the convertible notes which is being treated as additional
interest over the life of the debt.
As a result of the foregoing, the Company reported a loss before taxes of
$1,821,000 and a net loss of $1,501,000 for the quarter ended September 30, 1997
as compared to a loss before taxes of $2,909,000 and a net loss of $2,419,000
for the same quarter in 1996. The net loss attributable to common stock was
increased by the preferred stock dividends ($48,000) and an accounting "deemed
dividend" ($265,000) arising from the amortization of the beneficial conversion
feature of the Company's Series B Preferred Stock. The Company is calculating
earning per share to comply with the recent SEC staff position on accounting for
securities issued with beneficial conversion features. This accounting requires
that the Company reflect the difference between the market price of the
company's common stock and the applicable conversion rate on the convertible
preferred stock as a dividend at the issue date (the beneficial conversion
feature totaling $1,109,589) and has amortized the dividend over a 180 day
period from February 12, 1997, the issue date of the convertible preferred
stock.
Nine Months Ended September 30, 1997 Compared with Nine Months Ended September
30, 1996
Total revenues decreased by approximately 13.5% from $15,253,000 for the nine
months ended September 30, 1996 to $13,192,000 for the same period in 1997.
Contract service income decreased during the period by 12.6% from $15,056,000 in
1996 to $13,163,000 in 1997 due to lower volume in the first half of 1997.
Surplus equipment revenues decreased 85.3% from $197,000 in 1996 to $29,000 in
1997 on lower volume.
Direct job costs decreased by approximately 22% from $15,769,000 for the nine
months ended September 30, 1996 to $12,311,000 for the same period in 1997. The
decrease was attributable to lower volume and the primary elements were job
salaries and materials and supplies.
Cost of equipment sales decreased from $82,000 in 1996 to $22,000 in 1997 on
lower volume.
General and administrative expenses decreased 1.9% from $5,946,000 during the
nine months ended September 30, 1996 to $5,835,000 during the same period in
1997. The decrease was primarily attributable to audit refunds on workers
compensation insurance.
8
<PAGE>
The Company reported a decrease in net interest income/(expense) from $23,000
for the nine months ended September 30, 1996 to ($253,000) for the same period
in 1997. See the quarterly comparison for the discussion of the factor
contributing to the decrease.
As a result of the foregoing, the Company reported a loss before taxes of
$5,770,000 and a net loss after tax of $4,770,000 for the nine months ended
September 30, 1997 as compared to a loss before taxes of $7,081,000 and a net
loss after taxes of $5,891,000 for the same period in 1996.
The net loss attributable to common stock was increased by $127,000 in preferred
stock dividends and $1,110,000 amortization of the beneficial conversion
feature.
Material Changes in Financial Condition, Liquidity and Capital Resources.
At September 30, 1997, the Company had a backlog totaling approximately $43
million compared to a backlog of approximately $42 million at September 30,
1996. The largest component of the Company's backlog at September 30, 1997 was
$15 million for the East Dam project.
In addition to its existing backlog, the Company is presently bidding on, and
intends to bid on numerous projects to replace revenues from projects which will
be completed during 1997 and to increase the total dollar volume of projects
under contract. Management anticipates that the Company's efforts to bid on and
secure new contracts will focus on projects which can be readily serviced from
the three regional offices opened by the Company during 1994 and 1995. In
addition, the Company has submitted proposals on several large international
plant relocation projects. The Company's regional offices, particularly the Oak
Ridge, Tennessee, Los Alamos, New Mexico, and Boston, Massachusetts offices are
strategically located in areas having a high concentration of prospective public
and private remediation sites. While bidding to perform services at such sites
is expected to be highly competitive, management believes that the Company's
existing presence on projects at these locations combined with its proven
expertise and resources will enhance the Company's chances of successfully
bidding on substantial new projects.
The Company had working capital of $15,541,000, including cash and cash
equivalents balances of $5,248,000 at September 30, 1997. This compares to
working capital of $8,731,000 and a cash balance of $1,001,000 at December 31,
1996. The increase in working capital is primarily attributable to $5.7 million
in proceeds from exercise of stock options and warrants, $3 million sale of
Series B Convertible Preferred Stock in February 1997, the $3.025 million
issuance of convertible notes in August 1997, less the $4.8 milion net loss for
the nine months.
Quarter-end receivables as a percentage of third quarter revenue was 122.7% in
1997 compared to 134.9% in the same period of 1996. Year-end receivables as a
percentage of fourth quarter revenue increased substantially from 53.0% in 1994
to 103.5% in 1995 and 157% in 1996. This ratio was 82% at December 31, 1993. The
ratio dropped to 53% at December 31, 1994 because the Company received a
$4,184,000 payment on a major contract on December 23, 1994. If this payment had
been received after year end, the ratio would have been a more comparable 98.4%.
Unbilled revenue as a percentage of quarterly contract income was 0% at December
31, 1993, 31% at December 31, 1994, 56% at December 31, 1995, and 27% at
December 31, 1996 and 12% at September 30, 1997. Also, accounts payable have
constantly decreased since 1994 whereas accounts receivable and unbilled
revenues have increased substantially during this period. Prior to going public
in April 1994, most of the Company's revenues were generated in the private
sector. Many of these contracts had substantial initial mobilization payments
and generated positive cash flow during the life of the contract. Since then the
company has been successful, as a result of its growth strategy, in obtaining a
number of government contracts at major Department of Energy and Department of
Defense sites. This work was obtained as a direct result of opening three new
regional offices. The experience with these contracts has been negative cash
flows until we near contract completion. This is due to the requirement that we
submit a schedule and a schedule of values at the beginning of the job and bill
according to the percent complete of each item in the schedule of values - not
the costs we have incurred. Our jobs of any size are at a risk of being front
end cost loaded when there is little progress to report (i.e., we cannot bill
until the structure is demolished). The Company is aware of this problem and is
trying to remedy it by maximizing mobilization costs in the schedule of values,
requiring subcontractors to bill on the same basis and aggressively negotiating
better (less front end cost loaded) schedule of values.
9
<PAGE>
Initially the Company tried to increase payment terms to vendors by paying them
after the Company received our payment. This method was unsuccessful. Many
vendors put the Company on a COD basis and its D&B rating weakened because D&B's
file showed "increased slowness in the company's payment record." This lower
rating hurt the Company in attempts to establish credit with new vendors.
Because IDM is a growing company and trying to establish good relationships with
its vendors, the company is now paying its vendors within terms to fifteen days
late and attempting to improve its D&B "paydex rating." The paydex rating of 60
is much worse than the average of the lower quartile for the industry of 68
(median for the industry is 75).
Inventory of $1,182,000 at September 30, 1997 remains unchanged from December
31, 1996.
The Company's inventory consists of nineteen (19) generator sets with a total
electrical capacity of 242,500 kilowatts per hour (KWH). The estimated market
price of the Company's generator inventory is twelve million dollars. Twelve
(12) of the generators are steam driven and range in size from 12,500 kilowatts
to 33,000 kilowatts (KW). Seven (7) of the generators are diesel driven and
range in size from 1,000 to 9,000 kilowatts (KW). These generator sets should
not be considered as obsolete or outdated inventory since its design and
technology has not changed much over the years. They are very long lead items
(15-18 months), experience and project specific and as such they are not to be
compared with disposable items. It is the Company's intent to incorporate two
(2) 15,000 KW generator sets (steam driven) in the Company's pending El Salvador
waste to energy project. In future projects, the Company will try to use the
balance of the 15,000 KW generator sets and the 12,500 KW and 33,000 KW sets.
The Company had available at December 31, 1996, approximately $11,575,000 of
operating loss carry-forwards that may be applied against future taxable income.
$2,350,000 of such losses expire in the year 2010 and the balance the following
year. Based on the reported loss to date it will take approximately $10.6
million dollars in future taxable income to recover the reported deferred tax
asset.
At September 30, 1997, the Company's only long term debt was $390,000 in
installment debt secured by job equipment.
During the quarter ended September 30, 1997, the Company made additional loans
of $370,000 repayable upon demand with interest at 9.25% to its ninety percent
owned subsidiary, Global Waste & Energy, Inc. ("Global Delaware"). In addition,
IDM, through a wholly-owned subsidiary of Global Delaware ("Global Alberta")
loaned $160,000 (Canadian) to Continental Waste Conversion, Inc. ("CWC")
repayable in 18 consecutive installments commencing January 1, 1997 with
interest at 7.5% per annum. As of the date of this report, CWC has made no
payment and the loan is delinquent. On April 1, 1997 CWC commenced litigation
against the Company and two of its subsidiaries, Global Delaware and Global
Alberta, and the two principal officers of Global Alberta. CWC alleges that the
agreements entered into whereby CWC granted to Global Delaware the exclusive
world wide rights (excluding Canada) to the proprietary Kocee Gas Generator
waste treatment technology in exchange for a 10% interest in Global Delaware
should be voided because amongst other claims CWC did not obtain proper
approvals and the transaction was not consummated on an arms length basis. Their
claim alleges the loss of revenues estimated at $30 million. The Company
believes this claim is without merit and intends to vigorously contest this
claim. On September 19, 1997, the Company was awarded interim judgement with
regard to the CWC claims.
Other than funding the Company's power generating projects, bonding and other
job costs the Company does not anticipate any substantial demands on the
liquidity or capital resources of the Company during the following twelve
months.
Since 1994, the Company has consistently generated negative operating cash
flows. The primary reason for this was due to the Company's policy of
successfully bidding new work at lower than normal margins in order to penetrate
strategic markets serviced by the Company's newly opened regional offices. Now
that the Company is established in these markets, the Company has been bidding
work at normal margins. Management of the Company believes, based on the current
backlog of work and expected work to be awarded based on bids outstanding, that
future operating cash flows will be positive.
10
<PAGE>
As a result of the Company's negative operating cash flows, the Company has,
from time to time, sought additional capital to support operations and growth.
During the first half of 1997, the Company sold 300 shares of Series B
Convertible Preferred Stock for $3.0 million. The Series B Preferred Stock is
convertible into Common Stock at a price based on the lesser of a predetermined
percentage of the market price at closing or a predetermined discount to the
market price of the Common Stock over the five trading-day period preceding
conversion. The current conversion price of the Series B Preferred Stock is the
lesser of $2.225 or 73% of the average closing price of the Common Stock over
the five trading-day period preceding conversion. The Series B Preferred Stock
pays a 7% dividend payable on conversion or at redemption in cash or Common
Stock, at the Company's option. Conversions are subject to the Company's right
to redeem at $12,200 per share any Series B Preferred Shares submitted for
conversion at a price of $1.80 per share or less. In conjunction with the sale
of the Series B Preferred Stock, the Company undertook to file a registration
statement covering the resale by the holders of Common Stock issuable pursuant
to the terms of the Series B Preferred Stock. Pursuant to the terms of such
undertaking, the Company is obligated to pay to the holders two percent of the
face amount of the preferred stock per month, payable in cash or in Common
Stock, commencing approximately May 15, 1997 until the required registration
statement becomes effective. As of November 19, 1997, the registration statement
had not yet been declared effective.
On August 13, 1997, the Company completed a private placement of $3,025,000 of
7% Convertible Notes (the "Convertible Notes") and 2,675,000 three year Warrants
(the "Three Year Warrants"). The Convertible Notes are convertible into Common
Stock at the lesser of (i) $2.75 per share or (ii) 75% of the average closing
bid price of the Common Stock during the five trading days prior to conversion.
The Three Year Warrants are exercisable for a three year period at the lesser of
$3.00 per share or the lowest conversion price of the Convertible Notes.
Conversion of the Convertible Notes and exercise of the Three Year Warrants was
subject to the issuance of a maximum of 1,997,130 shares of Common Stock on
conversion unless the shareholders of the Company approved issuance beyond that
level upon conversion. At a special shareholders' meeting on November 4, 1997,
the shareholders approved the issuance of shares in excess of 1,997,130.
Further, the Company has the right, upon notice to the holders, to redeem any
Convertible Notes submitted for conversion at a price of $2.75 or less at 125%
of the principal amount of such Convertible Notes. The Convertible Notes pay
interest at 7% on conversion or at redemption in cash or Common Stock, at the
Company's option. In the event that a registration statement covering the shares
underlying the Convertible Notes has not been declared effective within 90 days
or 180 days after the issuance of the Convertible Notes, the interest rate on
the Convertible Notes shall be increased to 18% and 24%, respectively, from
those dates until such a registration statement becomes effective. As of
November 19, 1997, the registration statement had not yet been declared
effective.
Management believes that the Company's working capital following its August 1997
Convertible Note placement is sufficient to meet the Company's anticipated needs
for at least the following twelve months, including the performance of all
existing contracts of the Company. However, as the Company is presently pursuing
bids on multiple large projects, the Company may be required to seek new bank
lines of credit or other financing in order to facilitate the performance of
jobs if the volume and size of projects being performed by the Company increases
substantially. While the Company is conducting ongoing discussions with various
potential lenders with a view to establishing available bank lines of credit if
and when needed to support future growth, the Company presently has no
commitments from any bank or other lender to provide financing if such financing
becomes necessary to support growth.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
11
<PAGE>
Item 1. Legal Proceedings
On April 1, 1997 Continental Waste Conversion, Inc. ("CWC") commenced
litigation against the Company and two of its subsidiaries, Global Waste &
Energy, Inc., Delaware and Global Waste & Energy, Inc., Alberta, and the
two principal officers of Global Alberta. CWC alleges that the agreements
entered into whereby CWC granted to Global Delaware the exclusive world
wide rights (excluding Canada) to the proprietary Kocee Gas Generator waste
treatment technology in exchange for a 10% interest in Global Delaware
should be voided because amongst other claims CWC did not obtain proper
approvals and the transaction was not consummated on an arms length basis.
Their claim alleges the loss of revenues estimated at $30 million. On
September 19, 1997, the Company was awarded an interim injunction with
regard to CWC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IDM ENVIRONMENTAL CORP.
Dated: November 19, 1997 By: /s/ Joel Freedman
------------------------------------
Joel Freedman, President
Dated: November 19, 1997 By: /s/ Michael B. Killeen
------------------------------------
Michael B. Killeen, Principal
Financial and Accounting Officer
13
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,248,370
<SECURITIES> 0
<RECEIVABLES> 6,789,390
<ALLOWANCES> 200,000
<INVENTORY> 1,182,517
<CURRENT-ASSETS> 20,618,884
<PP&E> 2,358,482
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,492,316
<CURRENT-LIABILITIES> 5,078,057
<BONDS> 3,414,992
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2,700,000
<COMMON> 13,946
<OTHER-SE> 19,250,838
<TOTAL-LIABILITY-AND-EQUITY> 31,492,316
<SALES> 13,191,582
<TOTAL-REVENUES> 13,191,582
<CGS> 12,333,858
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252,674
<INCOME-PRETAX> (5,769,813)
<INCOME-TAX> (1,000,000)
<INCOME-CONTINUING> (4,769,813)
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