SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File No. 0-23900
IDM ENVIRONMENTAL CORP.
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(Name of registrant as specified in its charter)
New Jersey 22-2194790
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
396 Whitehead Avenue, South River, New Jersey 08882
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (908) 390-9550
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Class A Warrants
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(Title of Class)
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 (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 ninety (90) days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 10, 1997, 9,602,730 shares of common stock of the Registrant
were outstanding. As of such date, the aggregate market value of the voting
stock held by non-affiliates, based on the average bid and asked price on the
Nasdaq National Market, was approximately $21,841,809.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended December 31, 1996 are
incorporated by reference into Part III.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS................................................ 1
ITEM 2. PROPERTIES.............................................. 11
ITEM 3. LEGAL PROCEEDINGS....................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS..................................... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS......................... 12
ITEM 6. SELECTED FINANCIAL DATA................................. 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................. 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 27
ITEM 11. EXECUTIVE COMPENSATION.................................. 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 27
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K................................................ 27
SIGNATURES........................................................... 29
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PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 23 of this Form 10-K.
ITEM 1. BUSINESS
General and Development of Business
IDM Environmental Corp. (the "Company") is a New Jersey corporation
originally formed under the name International Dismantling & Machinery Corp. in
1978 to provide specialized contract services with an emphasis on plant
decommissioning, dismantlement, deconstruction and environmental remediation. In
April of 1994, the Company completed an initial public offering (the "Offering")
of common stock and warrants which provided approximately $12 million of net
proceeds to the Company.
The Company has developed expertise in the fields of plant dismantling,
plant deconstruction and relocation, asbestos abatement, hazardous waste
remediation and radiological remediation. Unlike many architectural,
construction and engineering firms which have entered the environmental services
field, the Company does not offer diverse design, construction, consulting and
engineering services. Instead, the Company has concentrated its efforts on
providing hands-on specialized contracting services. To that end, the Company
has devoted substantial funding and resources to training its work force, many
of whom have been with the Company since inception, in each of the major
environmental fields, being asbestos, radioactive and hazardous waste
remediation. Management believes that the Company is one of the few, if not the
only, company having an entire full time workforce trained in all three such
areas. As the danger of performing remediation services becomes more apparent
and the emphasis on safety increases, management believes that the demand for
thoroughly trained and skilled labor, such as that offered by the Company, has
grown and will continue to grow. See "Services Offered" and "Employees."
In addition to providing remediation and abatement services, as an integral
part of the Company's business, the Company is involved in the purchase and sale
of surplus equipment and process plants, including the relocation and
reinstallation of such facilities. Such surplus equipment purchases and sales
are integrated with the offering of services by the Company; thus, allowing the
Company to bid contracts more aggressively where surplus equipment revenues are
available to supplement service revenues. See "Surplus Equipment Sales."
During 1996, the Company secured two strategic licenses which further
broadened the range of services offered by the Company. The first such license
was acquired from, and an equity interest was purchased in, Life International
Products ("Life") pursuant to which the Company began to market and employ
Life's patented superoxygenation process for enriching water with oxygen for
long term bioremediation of contaminated groundwater. The second such license
was acquired from Continental Waste Conversion, Inc. ("CWC") pursuant to which
the Company was granted the sole and exclusive rights to use and otherwise fully
exploit CWC's proprietary gasification technology worldwide, except in Canada.
Through those licenses, the Company now offers state-of-the-art groundwater
remediation services in North America and state-of-the-art solutions to
municipal waste and energy concerns worldwide.
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Environmental Services Industry
The "hands-on" environmental services industry is a diverse and rapidly
growing industry. While the industry was virtually nonexistent prior to the
mid-1970's, according to industry publications, the overall worldwide market for
environmental services was estimated at $300 billion for 1996, including
approximately $140 billion in the United States, and is expected to continue to
grow at a 4% to 6% pace. Included within such industry are numerous specialty
areas with the largest markets being in solid waste handling and disposal,
hazardous waste treatment and disposal, air pollution control, water supply and
wastewater treatment and analytical and environmental consulting services.
The tremendous growth within the environmental services industry has been
driven by growing public concern for and awareness of environmental issues which
has been accompanied by extensive legislation and governmental regulation aimed
at protecting the environment and requiring responsible parties to clean up
existing environmental hazards. Since the enactment of the Resource Conservation
and Recovery Act ("RCRA") in 1976, the federal government and the various state
governments have significantly increased the scope of governmental regulation
relating to the environment. See "Regulation."
As a result of the growing public concern for environmental issues and
extensive government regulation, virtually every industry must now address
environmental issues, both with respect to future operations as well as prior
operations. While significant resources are being devoted to reducing pollution
and the discharge of hazardous waste into the environment, many industries have
devoted, or are facing the prospect of devoting, even greater resources to the
clean up of existing hazards created by prior operations, some of which may have
been terminated years earlier. Such clean up obligations extend to the
remediation of so called "superfund" sites, including removal of structures on
such sites, the decommissioning, dismantling and clean up of chemical plants,
nuclear facilities, utility plants and other facilities where hazardous
materials are generated and the clean up of facilities which do not produce but
may use environmentally hazardous materials which may be spilled or otherwise
discharged into the environment, as well as to asbestos abatement and other
forms of environmental clean up. See "Services Offered - Hazardous Waste
Remediation."
In addition to private companies which utilize environmental services to
close or clean facilities on a voluntary basis or as a potential responsible
party under government compulsion, governmental agencies, and facilities
operated by such agencies, particularly the Department of Defense ("DOD") and
the Department of Energy ("DOE"), are becoming larger consumers of "hands-on"
environmental services. Spending by the federal government for "hands-on"
environmental programs is expected to increase as a percentage of total funding.
Total funding for these programs in 1996 was approximately $5.6 billion by DOE
and $2.5 billion by DOD. State and local spending, as well as spending by
universities and other research institutions, on "hands-on" environmental clean
up is also expected to increase.
As the environmental services industry has grown and matured, the nature of
the services provided and the nature of the service providers has evolved.
Through the late 1980's, the industry was largely focused on early stage
activities, including site assessment, identification of hazards and hazardous
sites, and identification and establishment of responsible parties. While actual
remediation activities took place at various sites, a significant portion of the
resources devoted in the environmental field went to consultants and attorneys
and the number of sites requiring remediation continued to grow. Company
management believes that the industry has evolved to the point that actual
remediation or site clean up will command a significant portion of the
environmental resources through the end of the 1990's and beyond.
While the rapid growth in demand for environmental services has attracted
many entrants into the environmental services market, a significant portion of
the market is still controlled by larger architectural engineering firms. Such
firms have typically been called in as consultants on large jobs to plan and
oversee environmental operations but continue to subcontract out asbestos and
hazardous waste remediation, dismantling and demolition operations. See
"Competition."
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The Company believes that it is widely recognized within the engineering
and industrial world for its expertise in decontamination, decommissioning and
dismantling services. The Company has worked with numerous top engineering firms
as well as Fortune 500 companies providing specialty environmental services in
the areas of decontamination and decommissioning.
Services Offered
The Company offers a variety of specialized environmental services with an
emphasis on plant decontamination and decommissioning. The Company's services
are generally offered on a "lump sum" basis wherein the Company bids to perform
a complete job for a predetermined price or on a "time and material" basis
wherein the Company is paid certain predetermined hourly or per day rates for
its services plus a charge for materials used. The Company also provides
services on a fixed fee basis where the Company is paid for all costs incurred
plus a predetermined fee or profit margin without regard to the time required to
perform the job. While the Company has substantial experience in planning and
bidding lump sum projects and generally will not bid on such projects without an
in-depth understanding of the scope of such projects, the Company generally
attempts to perform jobs on a "time and materials" basis.
Many contracts awarded to the Company require the Company to provide a
surety bond. The Company's ability to obtain bonding and the amount of bonding
required is determined by the Company's net worth, annual revenues and liquid
working capital and the number and size of jobs being performed. The larger the
project and/or the more projects in which the Company is engaged, the greater
the Company's bonding, net worth and liquid working capital requirements. The
bonding requirements which the Company must satisfy vary depending upon the
nature of the job to be performed. The Company generally pays a fee to bonding
companies which typically averages three to four percent of the amount of the
contract to be performed with the percentage decreasing as the Company's net
worth increases. Because such fees are generally payable at the beginning of a
job, the Company must maintain sufficient working capital reserves to permit the
Company to pay such fees and secure bonding prior to commencing work on a
project. Additionally, bonding companies will require the Company to provide as
security for the bonding company liquid working capital, consisting of cash and
accounts receivable, in amounts based on the size of the contract in question.
For projects not involving radiological remediation, the Company must generally
have available liquid working capital in an amount equal to 12.5% of the
contract amount in order to secure bonding. With respect to jobs involving
radioactive materials, the total bonding available to the Company is generally
based on having available liquid working capital in an amount equal to 20% of
the contract amount.
Where the Company has adequate bonding capacity to perform a job, an
experienced member of the Company's management team will analyze the project in
question and develop preliminary plans, schedules and cost estimates in order to
prepare a bid. If the Company obtains a contract to perform the job being bid
on, the management team, working from the preliminary plans, schedules and cost
estimates, will develop detailed work plans, schedules and cost estimates to
perform the job. Such planning will include securing proper equipment and
materials and staffing the jobs with properly trained and experienced personnel
to perform the job in a safe, efficient, competent and timely manner.
Actual on-site services are supervised by Company employees pursuant to the
detailed plans developed by management. Work is subcontracted to third parties
based upon a large number of factors including safety, efficiency, competency
and scheduling.
In order to assure the safety, quality and timeliness of the Company's
projects and to assure the Company's ability to perform projects, the Company
provides extensive training to its entire full-time workforce and goes to great
efforts to retain its trained workforce, many of whom have been with the Company
since inception. By maintaining an experienced workforce and cross-training its
dismantlers, riggers, ironworkers, equipment operators, laborers,
superintendents and foremen in OSHA 1910.120 hazardous waste procedures,
asbestos abatement, radiological remediation and other related skills, the
Company's workforce can address virtually every situation which may arise in a
remediation project. Management believes this level of training and expertise in
each of the major areas of remediation is unique to the Company.
In addition to stringent safety and performance standards and procedures
implemented by the Company to assure safety, quality and timeliness, the Company
has established strict guidelines for the handling and disposal of hazardous
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materials. Such guidelines, which are intended to protect the Company from
potential liability as a generator or transporter of hazardous materials,
include strict policies that the Company contract only as an agent for
generators to remediate sites, that the Company never signs any waste manifest
and that all transportation of hazardous materials from remediation sites be
subcontracted to qualified transportation companies with extensive insurance
coverage. See "Regulation."
While the Company provides consulting services and feasibility studies in
conjunction with its projects, the Company's services are primarily provided on
a project basis in the areas of plant dismantling, decommissioning and
relocation, asbestos abatement, hazardous waste remediation and radiological
remediation.
Plant Dismantling, Decommissioning and Relocation. Plant dismantling and
decommissioning is the historical core of the Company's operations and serves as
a foundation for each of the Company's other specialty services. Since its
inception, the Company has provided deconstruction services for numerous Fortune
500 companies with the bulk of such services being provided in connection with
the closure of chemical process plants. Where facilities have been closed or
abandoned due to age, safety conditions or other factors, the Company has been
called upon to disassemble such facilities on a piece by piece basis. Unlike the
traditional destruction of buildings using wrecking balls and explosives, the
potential release of toxic chemicals or other hazardous substances produced or
present in such facilities requires custom dismantling services in order to
assure safety and proper identification and disposal of contaminated materials
as well as the safety of the laborers involved. Only skilled craftsmen can
safely dismantle contaminated tanks and structures in government mandated and
regulated personal protective equipment. The scope and nature of deconstruction
services provided is carefully planned based on the nature of the subject
facility and the contents thereof as well as the desires of the owner of the
facility. Such services range from dismantling single buildings and small
unenclosed chemical process facilities to the complete deconstruction of large
manufacturing facilities including multiple buildings and all equipment and
machinery within such buildings or on the site.
In addition to its dismantling services, in many instances the Company is
called upon to not only dismantle a plant but also to relocate and re-assemble
such plant. The Company has developed proprietary techniques and extensive
expertise for dismantling, matchmarking, relocation engineering, packaging,
documentation and re-erection of entire plants.
With the growth in the economies of numerous third-world countries and
other countries which were historically non-industrialized, the Company believes
significant opportunities are available in the world-wide plant relocation and
re-assembly market. Because of the time and cost savings associated with
relocating existing plants as compared to purchasing and starting-up new plants,
the Company believes that growing industrial concerns in South and Central
America and Pacific Rim countries will view the acquisition and relocation of
existing plants as the preferred method of expanding operations. Typical of such
opportunities was the Company's completion during 1996 of the acquisition,
relocation and refurbishing of a 1,400-ton-per-day ammonia plant from Lake
Charles, Louisiana to Karachi, Pakistan, a site of the largest fertilizer
producer in Pakistan.
Asbestos Abatement. Based principally upon the authority granted under the
federal Clean Air Act, the United States Environmental Protection Agency ("EPA")
has enacted rules and regulations governing the emission of asbestos during the
renovation or demolition of facilities as well as during manufacturing and waste
disposal operations. Additionally, most, if not all, states have enacted
regulations at least as stringent as federal regulations and are regulating
certain matters not covered by the federal regulations. These regulations have
effectively required inspection for and/or abatement of asbestos prior to or in
conjunction with the renovation or demolition of buildings. Requirements imposed
by real estate lenders and practical considerations as well as disclosure laws
relating to real estate transactions have effectively resulted in asbestos
inspection and, where appropriate, abatement as a condition of most conveyances
of real estate.
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The Company provides site assessment, planning and asbestos abatement
services to property owners desiring to remodel or sell properties or abate
existing asbestos on site for health and liability reasons. Additionally, the
Company offers such services in conjunction with its dismantling and
decommissioning services when appropriate.
Because the handling and risk associated with the presence of asbestos
varies depending upon the use, volume and nature of the asbestos present, the
Company will evaluate the appropriate means of abatement called for and develop
a detailed plan based on such evaluation. The abatement process may range from
encapsulation of exposed asbestos to the actual physical removal and disposal of
some or all of the asbestos containing materials on the site. Such materials may
include thermal insulation used on boilers, tanks, hot and cold water systems
and heating, ventilation and air conditioning systems, surfacing materials used
for acoustical, decorative or fireproofing purposes (asbestos sprayed or trawled
on walls, ceiling and structural members) and other materials such as floor
tiles, ceiling tiles, roofing felt, concrete pipe, outdoor siding and fabrics.
Upon development of a plan of abatement in compliance with applicable state
and federal regulations, the Company's work crew wearing protective clothing,
head gear and breathing apparatuses will physically remove asbestos-containing
materials from the building. The building areas in which abatement work is being
performed are sealed off and blowers or ventilation equipment are utilized to
create negative pressure in the building to prevent the escape of airborne
asbestos from the building. Upon completion of the abatement process, the
asbestos removed is disposed of in accordance with applicable regulations by
transportation and disposal companies.
Hazardous Waste Remediation. Hazardous waste remediation encompasses the
clean up of a broad range of hazardous materials. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and the
Resource Conservation and Recovery Act ("RCRA") broadly define "hazardous
substances" which, if released, may trigger reporting and clean up obligations.
The list of "hazardous substances" covered by these laws is extensive and
includes a large number of chemicals, metals, pesticides, radiological
materials, biological agents, explosives, toxic pollutants and other materials
which may produce health concerns if released into the environment. Both CERCLA
and RCRA impose stringent reporting, liability and clean up obligations on
owners and operators (including, in some cases, former owners and operators) of
sites where specified levels of hazardous substances have been released. The
most serious of these sites have been designated as "superfund sites" under
CERCLA.
Under CERCLA, the owners and operators of superfund sites at the time of a
release into the environment, and the transporters of hazardous substances, may
be designated as Potential Responsible Parties ("PRP"), many of whom are Fortune
500 companies, and, as such, may be liable for all or part of the clean up cost
at such site without regard to fault or the legality of the PRP's actions. While
PRP's may undertake clean up activities at superfund sites voluntarily or under
government compulsion, the federal government and the EPA may undertake the
clean up of some sites on its own and subsequently seek to identify and impose
liability for the cost of such clean up on PRP's. Additionally, most states have
environmental regulations comparable to, or supplementing, EPA regulations
wherein private parties can be compelled to clean up hazards or the state can
undertake the clean up of such hazards and seek reimbursement from private
parties.
The Company has extensive experience working with PRP's, including
Allied-Signal, Exide, NL Industries, Johnson Controls, AT&T and others, in the
clean up of hazardous waste sites, including superfund sites. The Company's
services at such sites have entailed a combination of the dismantling of
facilities and actual implementation of remediation techniques to the subject
hazards. Many of the projects undertaken by the Company at such sites are
specialty jobs wherein major architectural engineering firms contract to have
the Company perform complex dismantling and deconstruction jobs and to perform
actual remediation of hazardous materials in conjunction with the dismantling
process. While the Company maintains existing relations with numerous private
sector industrial PRP's and has performed site assessment and actual remediation
at various sites, the Company has established, and is seeking to strengthen,
relations with the major architectural engineering firms which control a
significant portion of the larger government projects, including many superfund
sites. Because of the general lack of expertise and experience in dismantling
and deconstruction at most of the major engineering firms, and a growing
reputation with such firms, the Company has been called on to serve on
remediation teams with the Company handling all aspects of dismantling and
deconstruction at hazardous waste remediation sites.
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Additionally, beginning with the Company's formation of a strategic
alliance with Solucorp Industries Ltd. ("Solucorp") during the third quarter of
1995, the Company offers soil remediation services which enhances the Company's
hazardous waste remediation services. Prior to formation of the alliance with
Solucorp, the Company offered soil remediation services on a limited basis
because of the Company's belief that existing soil remediation technologies were
unproven and not cost-effective. Solucorp has developed a Molecular Bonding
System ("MBS") soil remediation technology utilized in the stabilization of
hazardous heavy metal contaminated soils, sludges and other media.
Radiological Remediation. Radiological remediation services consist
primarily of the decontamination and dismantling of facilities employing or
producing radioactive materials and the removal and disposal of radioactive
materials. Typically, such services are utilized by utility companies which
operate nuclear plants, universities and other research facilities which utilize
radioactive isotopes in a variety of research projects, and the DOE and DOD
which oversee nuclear weapons production.
Utility companies have now operated nuclear plants for more than 30 years.
Because of a combination of special interest pressure, strict government
oversight and high operating costs, many nuclear generating facilities have been
prematurely closed. As other nuclear facilities continue to age and public
skepticism as to the safety of such facilities remains high, additional plants
are expected to close. Due to the nature of such facilities, utility companies
are expected to seek experienced dismantling and remediation specialists to
decontaminate, dismantle and decommission such facilities and to assure proper
handling and disposal of radioactive waste.
Universities and other research facilities also operate nuclear reactors
and utilize radioactive isotopes in research and teaching. With a decline in the
enrollment in nuclear engineering departments in recent years the utilization of
nuclear reactors and related materials in teaching has declined to the point
that some programs may be dropped or significantly curtailed. Even where
research is continuing at universities and in industry, the use of isotopes over
extended periods has created, and is expected to continue to create concerns
with respect to the disposal of radioactive materials and the decontamination of
facilities. In order to safely deal with inactive reactors and radioactive
contamination, industry and universities, sometimes under government direction,
are seeking experienced specialists to remove, decontaminate and/or dispose of
abandoned facilities and contaminated materials in and around abandoned or
functional facilities.
Finally, the DOD and DOE oversee the operations and are responsible for the
clean up of weapons facilities across the country. Extensive remediation
activities are expected to be required as many of such facilities are closed as
a result of sharply reduced nuclear weapons production following the end of the
Cold War. As with other owners and operators of facilities having radioactive
waste and contamination, the federal government has sought, and is expected to
continue to seek, experienced specialists to decontaminate and dismantle such
facilities and to remediate and dispose of radioactive waste in a safe manner.
The Company has skilled personnel with the necessary experience and training to
dismantle these structures in government mandated and regulated personal
protective equipment.
Proprietary Technologies
During 1996, the Company made two strategic investments which further
broadened the range of services offered by the Company and provided the Company
with the right to utilize certain proprietary technologies in its business.
The first such investment involved the acquisition of a license from, and
equity interest in, Life International Products, Inc. ("Life") pursuant to which
the Company began to market and employ Life's patented superoxygenation
technology for long term bioremediation of contaminated groundwater. Life holds
patents on an oxygenation process which it believes results in higher levels of
oxygen being retained in fluids for longer periods of time than other existing
oxygenation processes. Life's patented process has a broad array of potential
applications. Life has granted the Company the exclusive license to utilize the
Life oxygenation process in the United States, Canada and Mexico for purposes of
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bioremediation of contaminated groundwater. The Company's license runs through
September 2001 subject to renewal for successive five year terms provided that
certain minimum revenue requirements are met by the Company. Bioremediation
involves the introduction of a bacteria culture, nutrients and oxygen into
contaminated groundwater. The bacteria culture feeds on organic pollutants
rendering the contaminated waters harmless. An essential element in the
bioremediation process is the introduction and maintenance of high levels of
oxygen into the contaminated water. The bacteria culture consumes massive
quantities of oxygen in the bioremediation process and low levels of oxygen or
the dissipation of oxygen from the water slows the bioremediation process.
Traditional bioremediation processes have involved the injection of oxygen into
water using an aerator. Management believes that application of Life's
superoxygenation process enhances bioremediation of contaminated groundwater by
increasing the oxygen content and the time such oxygen will remain in water as
compared to traditional methods of oxygen injection. As a result of more
effective and longer lasting oxygen injection, the Company believes that Life's
superoxygenation process will increase the rate of bioremediation substantially
when compared to existing industry practices.
In addition to its acquisition of the license to utilize the Life
superoxygenation process, the Company acquired a 10% equity interest in Life.
The second investment in technology during 1996 involved the license
received from Continental Waste Conversion, Inc. ("CWC") pursuant to which the
Company was granted the exclusive worldwide rights (excluding Canada) to CWC's
proprietary gasification technology that can convert municipal solid waste into
electrical energy. Through that investment, the Company now offers
state-of-the-art solutions to municipal waste and energy concerns worldwide.
Management believes that this gasification technology offers a number of
significant advantages over existing waste-to-energy or other gasification
technologies, including the production of substantially reduced volumes of
secondary waste ash and compliance with the most stringent international clean
air standards.
Surplus Equipment Sales
In addition to offering a broad array of specialty environmental services,
the Company was previously engaged in the direct purchase and sale of surplus
equipment. The Company in conducting its dismantling and plant relocation
operations has developed extensive expertise in identifying and purchasing
equipment. Frequently, where plants are being dismantled but not relocated, the
Company has been able to acquire equipment, with no future value to the owner,
at favorable prices. Because of the nature and cost of acquiring, transporting
and storing such equipment pending the sale thereof, historically, the Company
would frequently enter into joint venture arrangements with sellers or other
persons having available storage capacity wherein the Company would take a fifty
percent interest in the equipment and the equipment would be held at the joint
venture partner's facilities until such time as the Company identified a
purchaser for such equipment.
In September of 1995, the Company entered into an alliance with Universal
Process Equipment ("UPE") to carry on all future surplus equipment purchase and
sales operations. UPE is one of the world's largest marketers of new and used
process equipment. Pursuant to an Agreement for Commissions and Joint Ventures,
the Company directs all inquiries to buy or sell used process equipment to UPE.
UPE, in turn, will utilize its marketing resources to satisfy such inquiries and
will pay prescribed commissions to the Company based on the nature of each
transaction. Where UPE chooses not to, or is unable to, acquire items, the
Company will continue to be able to acquire such equipment for its own account.
In conjunction with the formation of the strategic alliance with UPE, the
Company sold substantially all of its inventory of glass lined equipment and
process equipment to UPE and an affiliated company. The Company retained its
inventory of generators and other selected items.
Marketing
The Company, in marketing its services, relies principally on the efforts
of its operating and executive management team who regularly call upon existing
and prospective customers. The Company, through the efforts of its management,
has established working relationships with numerous Fortune 500 industrial
concerns as well as major national architectural engineering firms, the DOD and
the DOE and many smaller and medium size industrial and engineering firms. The
Company supplements the efforts of its management by regular advertising in
international trade publications, direct mailings to selected industrial and
engineering firms, strategic telemarketing, and regular participation in
industry conferences and trade shows.
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As noted above, marketing efforts with respect to MBS soil remediation
applications is handled jointly by the Company, through its management team, and
Solucorp while surplus equipment marketing is now handled principally by UPE
pursuant to the Company's strategic alliance with UPE.
Regulation
The Company and, in particular, its clients, are subject to extensive and
evolving environmental laws and regulations. These laws and regulations are
directly related to the demand for many of the services offered by the Company
and often subject the Company to stringent regulation in the conduct of its
operations. The principal environmental legislation affecting the Company and
its clients is described below.
Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA regulates the
treatment, storage and disposal of hazardous and solid wastes. RCRA has,
therefore, created a need generally for some of the types of services provided
by the Company. The 1984 Hazardous and Solid Waste Amendments to RCRA ("HSWA")
expanded RCRA's scope by providing for the listing of additional wastes as
"hazardous" and lowering the quantity threshold of wastes subject to regulation.
HSWA also imposes restrictions on land disposal of certain wastes, prescribes
more stringent management standards for hazardous waste disposal sites, sets
standards for underground storage tanks and provides for "corrective" action
procedures. Under RCRA, liability and stringent management standards are imposed
on a person who is an RCRA permit holder, namely, a "generator" or "transporter"
of hazardous waste, or an "owner" or "operator" of a waste treatment, storage or
disposal facility. Both the EPA and states with authorized hazardous waste
programs can bring several types of enforcement actions under RCRA, including
administrative orders and actions seeking civil and criminal penalties. RCRA
also provides for private causes of action as an additional enforcement tool.
Comprehensive Environmental Response, Compensation and Liability Act of
1980. CERCLA , also known as the Superfund Act, addresses cleanup of sites at
which there has been or may be a release of hazardous substances into the
environment. CERCLA assigns liability for costs of cleanup and damage to natural
resources to any person who, currently or at the time of disposal of a hazardous
substance, owned or operated any facility at which hazardous substances were
deposited, to any person who by agreement or otherwise arranged for disposal or
treatment, or arranged with a transporter for transport of hazardous substances
owned or possessed by such person for disposal or treatment, and to any person
who accepted hazardous substances for transport to disposal or treatment
facilities or sites from which there is a release or threatened release of
hazardous substances. CERCLA authorizes the Federal government either to clean
up these sites itself or to order persons responsible for the situation to do
so. CERCLA created a fund to be used by the Federal government to pay for the
cleanup efforts. Where the Federal government expends money for remedial
activities, it must seek reimbursement from the potentially responsible parties.
Where the EPA performs remedial work with superfund dollars, it frequently sues
potentially responsible parties for reimbursement under the "cost recovery"
authority of section 107 of CERCLA. The EPA may also issue an administrative
order seeking to compel potentially responsible parties to perform remedial work
with their own funds under the "abatement" authority of Section 106 of CERCLA.
In lieu of instigating such actions, the EPA may also seek through negotiations
to persuade such parties to perform and/or pay for any and all stages of
remedial action at a site in discharge of their liabilities under CERCLA.
CERCLA provides that transporters and persons arranging for the disposal of
hazardous waste may be jointly and severally liable for the costs of remedial
action at the site to which the hazardous waste is taken. While the Company
attempts to minimize such exposure by contracting only with qualified hazardous
waste transporters meeting certain minimum insurance requirements and by having
the generator select the disposal site and method there can be no assurances
that the Company will be successful in so limiting such exposure. Under Section
101(20)(B) of CERCLA, when a common or contract carrier delivers a hazardous
substance to a site selected by the shipper, the carrier is not considered to
have caused or contributed to any release at such disposal facility resulting
from circumstances or conditions beyond its control.
The Superfund Amendments and Reauthorization Act ("SARA") was enacted in
1986 and authorized increased Federal expenditure and imposes more stringent
cleanup standards and accelerated timetables. SARA also contains provisions
which expand the enforcement powers of the EPA.
8
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While there can be no assurance, management believes that, even apart from
funding authorized by RCRA and CERCLA, industry and governmental entities will
continue to try to resolve hazardous waste problems due to their need to comply
with other statutory requirements and to avoid liabilities to private parties.
Although the liabilities imposed by CERCLA are more directly related to the
Company's clients, they could under certain circumstances apply to some of the
activities of the Company, including failure to properly design or implement a
cleanup, removal or remedial action plan or to achieve required cleanup
standards and activities related to the transport and disposal of hazardous
substances. Such liabilities can be joint and several where other parties are
involved.
Clean Air Act and 1990 Amendments. The Clean Air Act requires
compliance with ambient air quality standards and empowers the EPA to establish
and enforce limits on the emission of various pollutants from specific types of
facilities. The 1990 amendments modify the Clean Air Act in a number of
significant areas. Among other things, they establish emissions allowances for
sulfur and nitrogen oxides, establish strict new requirements applicable to
ozone emissions and other air toxics, establish a national permit program for
all major sources of pollutants and create significant new penalties, both civil
and criminal, for violations of the Clean Air Act.
Included within the scope of the Clean Air Act are rules issued by the EPA
known as National Emissions Standards for Hazardous Air Pollutants ("NESHAP").
NESHAP specifically regulates the emission of asbestos during manufacturing and
waste disposal operations and the renovation and demolition of certain
facilities. Authority to implement and enforce NESHAP standards has been
delegated to the various states which have implemented licensing requirements,
notice requirements and procedures with respect to asbestos abatement and other
rules governing the handling and disposal of asbestos.
Clean Water Act of 1972 ("CWA"). Originally enacted as the Federal Water
Pollution Control Act, but renamed as the Clean Water Act in 1977, CWA regulates
the discharge of pollutants into the surface waters of the United States. CWA
established a system of minimum national efficiency standards on an
industry-by-industry basis, water quality standards, and a discharge permit
program. It also contains special provisions addressing accidental or
unintentional spills of oil and hazardous substances into waterways.
Other Federal and State Environmental Regulations. The Company's services
are also used by its clients in complying with, among others, the following
Federal laws: the Toxic Substances Control Act, the Safe Drinking Water Act, the
Occupational Safety and Health Act, the Hazardous Materials Transportation Act
and the Oil Pollution Act of 1990. In addition, many states have passed
superfund-type legislation and other regulations and policies to cover more
detailed aspects of environmental impairment and the remediation thereof. This
legislation addresses such topics as air pollution, underground storage tanks,
water quality, solid waste, hazardous materials, surface impoundments, site
cleanup and wastewater discharge. Most states also regulate the transportation
of hazardous wastes and certain flammable liquids within their borders by
requiring that special permits be obtained in advance of such transportation.
Competition
The environmental services industry is highly competitive and fragmented.
Because of the diverse nature of the industry, there are many competitors, both
large and small. Many segments of the industry, including a significant portion
of superfund and other large projects, are dominated by large national
architectural engineering firms such as Bechtel, Flour, Westinghouse, Foster
Wheeler and Haliburton. Additionally, many smaller engineering firms,
construction firms, consulting firms and other specialty firms have entered the
industry in recent years and additional firms can be expected to enter the
industry in the future. Many of the firms competing in the environmental
services industry have significantly greater financial resources and more
established market positions than the Company.
While many firms are active in the environmental services industry
providing site assessment, consulting and engineering services, management
believes that the number of firms having expertise in, and offering,
dismantling, decommissioning and deconstruction services within the
environmental services industry is limited. The Company maintains a highly
trained and qualified workforce and has extensive experience in planning and
implementing decontamination and decommissioning projects in a safe manner. Such
9
<PAGE>
expertise and experience has allowed the Company to successfully compete within
the industry and to secure contracts from industrial firms as well as
engineering firms which lack experience in environmental decontamination and
deconstruction. Because the Company, unlike most engineering firms, is staffed
by experienced and skilled decontamination/deconstruction personnel, the
involvement of engineering firms is often limited to project management with
actual hands-on services being provided by the Company's personnel. Because of
the need for certain permits and licenses, specialized equipment, OSHA-trained
employees and the need to be knowledgeable of and to comply with federal, state
and local environmental laws, regulations and requirements, the Company believes
there are significant barriers to entry into the environmental dismantling,
decommissioning and deconstruction business. There can be no assurance, however,
that other firms, including the major engineering firms which control a
significant portion of superfund and government contracts, will not expand into
or develop expertise in the areas in which the Company specializes, decreasing
any competitive advantage which the Company may enjoy. The Company believes that
its expertise and its utilization of state-of-the-art remediation techniques,
such as the Life oxygenation process and the Solucorp soil remediation process,
will continue to allow it to compete effectively in the environmental services
industry.
As with the Company's other services, the asbestos abatement services
offered by the Company are offered in competition with a large number of
competitors. While there are numerous firms which offer asbestos abatement
services, including a number of firms which are larger than the Company,
management believes that no single firm dominates such industry but that the
Company is among a number of firms which are widely recognized for their
expertise in asbestos abatement. Management believes that the Company enjoys a
number of competitive advantages in offering asbestos abatement services,
including the Company's ability to offer asbestos abatement services as a part
of a broad range of services in virtually any environmental setting without the
need to subcontract with outside firms and the fact that all of the Company's
full time work force is asbestos trained and licensed.
Competition within the equipment and scrap sales segment of the Company's
operations also is fragmented. While many companies engage in various aspects of
the equipment and scrap sales market, competition within such market is
generally dominated by a handful of national firms, including the Company's
marketing partner, UPE. While there are other firms which are larger and sell
more equipment than the Company, management believes that the Company, with UPE,
is one of the primary competitors within such market. Unlike most of the
competitors in such market which are engaged in scrap purchase and sales
exclusively, the Company's equipment and scrap sales operations are an integral
part of the Company's service operations. Management believes that the Company's
ability to dismantle machinery and its ability to deal directly with sellers of
scrap in connection with providing other environmental services provides the
Company with a competitive advantage in acquiring equipment and scrap at
favorable prices which in turn allows the Company to price such equipment for
resale at favorable prices.
Finally, unlike the other service aspects of its business, competition
within the plant relocation segment of the Company's business is limited.
Management believes that the Company is one of the dominant firms within such
industry. While demolition and dismantling firms offer such services, the
primary competition within the plant relocation industry is from various
engineering firms which offer such services. However, most firms which offer
relocation services do so as an additional service and not as a primary service.
The Company advertises and markets its relocation services as a primary service.
Employees
At December 31, 1996, the Company employed approximately 191 full-time
employees, 37 of whom were management and administrative personnel, 23 of whom
were clerical personnel and 131 of whom were field personnel. The Company also
employs additional field personnel on a temporary basis when needed to
adequately staff projects. All permanent field personnel employed by the Company
are skilled craftsmen with an average of over ten years service with the
Company, they are OSHA-trained and asbestos trained to perform their respective
duties. Temporary employees are regularly hired on location by the Company to
staff jobs performed away from the immediate vicinity of the Company's
headquarters. The Company carefully reviews the training and qualifications of
all temporary workers to assure that all such workers are qualified to perform
the work in question. In all such instances, Company supervisors and foremen
will plan, supervise and oversee all aspects of work performed by such temporary
workers.
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The Company believes that it enjoys good relations with all of its
employees. Each of the Company's executive officers have entered into
confidentiality and noncompetition agreements with the Company. None of the
Company's permanent full-time employees are unionized or subject to collective
bargaining agreements and the Company has experienced no work stoppages or
strikes. Some of the temporary personnel hired by the Company may be union
members where the job in question and local conditions as a practical matter
require such personnel.
ITEM 2. PROPERTIES
The principal offices of the Company are located on a 7.5 acre site at 396
Whitehead Avenue, South River, New Jersey, in a 6,925 square foot two story
office building and an adjoining 7,600 square foot two story office building.
Also located on such site is a 4,248 square foot one story storage/work area and
a 5,700 square foot warehouse facility. Such facilities are leased by the
Company from L&G Associates, an affiliate of the Company controlled by Joel
Freedman and Frank Falco, pursuant to a fifteen year lease expiring May 31, 2011
and providing for monthly rental installments of $22,500, subject to annual
adjustments based on the Consumer Price Index, plus insurance, taxes and
maintenance costs.
The Company also maintains 5 regional offices which are leased from
third-parties in locations which are adjacent to strategic growth areas and
major environmental projects.
Management believes that the Company's properties are adequate to support
the Company's current and anticipated operations.
ITEM 3. LEGAL PROCEEDINGS
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.
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, styled The Estate
----------
of Percey L. Richard, and Percey D. Richard, a minor by next of friend Patricia
- --------------------------------------------------------------------------------
Cunningham v. American Wrecking Corp. and its successors, IDM Environmental
- --------------------------------------------------------------------------------
Corp. and its successors, SECO Corp. and its successors, all joint and
- --------------------------------------------------------------------------------
individually, and all unknown persons, Case No. 2:97CV filed in the Federal
- ---------------------------------------
District Court for the Northern District of Indiana is based on the same facts
as gave rise to the above referenced administrative proceeding instituted by the
Occupational Safety and Health Administration and seeks damages of $45 million.
Management believes that the suit, as it relates to the Company, is without
merit and intends to vigorously contest the cause of action.
In October of 1996, the Company filed suit in the District Court of Bexar
County, Texas, 166th Judicial District, IDM Environmental Corp. v. H.B. Zachary
---------------------------------------
and Company and Harold B. Cockburn, (Cause No. 96- CI14834). The Company is
- ------------------------------------
seeking additional compensation for services rendered under a subcontract to the
defendant as a result of the defendant's misrepresentations as to the scope of
work, failure to cooperate and active interference with the Company's
performance.
In November of 1996, a shareholder filed a class action lawsuit against the
Company and certain directors and officers of the Company. The suit, Arthur
Goldberg v. Joel A. Freedman, Frank A. Falco, James R. Harrigan, John Klosek and
IDM Environmental Corp., Docket No. L-11783-96 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
11
<PAGE>
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
the cause of action is without merit and intends to vigorously contest such
cause of action.
In April of 1997, the Company and its subsidiary, Global Waste & Energy,
Inc., were named as co-defendents in a cause of action styled Continental Waste
-----------------
Conversion Inc. v. IDM Environmental Corp., Global Waste & Energy, Inc., et al,
- --------------------------------------------------------------------------------
filed in the Court of Queen's Bench of Alberta, Judicial District of Calgary
(Action No. 9701 04774). The plaintiff, CWC, has alleged that the license
granted to the Company to utilize and market CWC's proprietary gasification
technology was granted without proper corporate authority due to the lack of
shareholder approval. The plaintiff has asserted the subsequent employment by
Global Waste & Energy of two former officers of CWC as a basis for its
allegations. CWC is seeking to have the license and all other agreements between
CWC and the Company declared null and void in addition to seeking damages for
alleged lost profits and other amounts. The Company believes the suit is without
merit and intends to vigorously contest the cause of action.
In addition to the foregoing, the Company is periodically subject to
lawsuits and administrative proceedings arising in the ordinary course of
business. Management believes that the outcome of such lawsuits and other
proceedings will not individually or in the aggregate have a material adverse
effect on the Company's financial condition, operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "IDMC." The Company's common stock commenced quotation on the Nasdaq
Small-Cap market following completion of the Company's initial public offering
in April of 1994. Subsequently, on August 31, 1994, the Company's common stock
commenced quotation on the Nasdaq National Market System. The following table
sets forth the high and low sales prices for the Company's common stock for each
quarterly period during the last two fiscal years:
High Low
First Quarter, ended March 1995 $6.500 $4.563
Second Quarter, ended June 1995 7.875 4.625
Third Quarter, ended September 1995 5.875 4.063
Fourth Quarter, ended December 1995 5.500 3.438
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First Quarter, ended March 1996 $8.438 $2.875
Second Quarter, ended June 1996 8.656 5.688
Third Quarter, ended September 1996 7.625 5.250
Fourth Quarter, ended December 1996 6.250 1.938
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 10, 1997, the bid price of the Common Stock was $2-7/16.
Holders
As of March 10, 1997, there were approximately 72 holders of record and
1935 beneficial owners of the Common Stock of the Company.
Dividends
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
Sales of Unregistered Securities
(a) On February 12, 1997, the Company sold 300 shares of Series B
Convertible Preferred Stock at $10,000 per share.
(b) The securities were sold to four accredited investors.
(c) The aggregate sales price of such securities was $3,000,000. A six and
one-half percent (6.5%) commission was paid with respect to such sale in
addition to a $25,000 expense allowance and a five year warrant exercisable to
acquire up to 100,000 shares at $3.32813 per share.
(d) The securities were offered pursuant to Regulation D. The offer was
directed exclusively to accredited investors without general solicitation or
advertising and based on representations from the investors that such investors
were acquiring for investment. The securities bear legends restricting the
resale thereof.
(e) The Series B Preferred Shares are convertible into Common Stock
commencing 91 days after issuance at the lesser of (i) 120% of the average
closing price of the Common Stock over the five trading-day period preceding
closing or 82% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring between the
91st and 120th day following closing, (ii) 110% of the average closing price of
the Common Stock over the five trading-day period preceding closing or 79% of
the average closing price of the Common Stock over the five trading-day period
preceding conversion for conversion occurring between the 121st and 150th day
following closing, (iii) 100% of the average closing price of the Common Stock
over the five trading-day period preceding closing or 76% of the average closing
price of the Common Stock over the five trading-day period preceding conversion
for conversion occurring between the 151st and 180th day following closing, and
(iv) 100% of the average closing price of the Common Stock over the five
trading-day period preceding closing or 73% of the average closing price of the
Common Stock over the five trading-day period preceding conversion for
conversion occurring on or after the 181st day following closing. Conversion of
the Series B Preferred Stock is subject to the issuance of a maximum of
1,915,000 shares of Common Stock on conversion unless the shareholders of the
Company have approved issuance beyond that level upon conversion. In the absence
of shareholder approval of issuances above 1,915,000 shares, all shares of
Series B Preferred Stock remaining outstanding if and when 1,915,000 shares have
been issued will be subject to mandatory redemption by the Company at $11,000
per share. Further, the Company has the right, upon notice to the holders, to
redeem for $12,200 per share any shares of Series B Preferred Stock submitted
for conversion at a price of $1.80 or less. The Series B Preferred Shares pay a
7% dividend payable on conversion or at redemption in cash or Common Stock, at
the Company's option. All Series B Preferred Shares remaining outstanding on
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February 12, 2000 shall be automatically converted into Common Stock. The
Warrants are exercisable for a period of three years at a price equal to 150% of
the price of the Common Stock at closing.
14
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth, for the periods and at the dates indicated,
selected consolidated financial and operating data for the Company. The
financial data was derived from the consolidated financial statements of the
Company and should be read in conjunction with the Company's audited
consolidated financial statements included in the Index to Financial Statements
on page 29 of this report. See also, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues:
Contract revenues...................... $ 20,808 $ 33,866 $ 25,362 $ 14,436 $ 14,601
Equipment and scrap revenues........... 834 5,537 3,150 4,368 4,256
Other.................................. - - 22 342 39
-------- -------- -------- -------- --------
Total operating revenues............. 21,642 39,403 28,534 19,146 18,896
Cost of sales:
Direct job costs....................... 21,492 30,433 20,449 11,539 12,436
Unusual job costs...................... - 3,300 - - -
Cost of equipment...................... 943 2,977 1,651 1,379 1,148
-------- -------- -------- -------- --------
Gross profit (loss)...................... (793) 2,693 6,434 6,228 5,401
Operating expenses:
General and administrative............. 9,567 7,637 5,418 4,514 4,286
Depreciation and amortization.......... 668 653 344 432 390
Settlement expense..................... - - - - 195
-------- -------- -------- -------- --------
Income (loss) from operations............ (5,597) 672 1,282 531
Interest income (expense), net........... 30 200 (36) (233) (306)
Other income............................. - - - 81 -
-------- -------- -------- -------- --------
Income (loss) before income taxes (10,998) (5,397) 636 1,130 225
Provision (credit) for income taxes...... (1,850) (1,530) 312 434 10(1)
-------- -------- -------- -------- --------
Net income (loss)........................ (9,148) $ (3,867) $ 324 $ 696 $ 215(1)
======== ======== ======== ======== ========
Net income (loss) per share.............. $ (1.13) $ (0.67) $ 0.06 $ 0.29 $ 0.09(1)
======== ======== ======== ======== ========
Weighted average shares outstanding...... 8,089,472 5,815,565 5,577,977 2,333,334 2,333,334
========= ========= ========= ========= =========
Balance Sheet Data (at period end):
Working capital.......................... $ 8,731 $ 10,293 $ 12,070 $ 622 $ 1,162
Total assets............................. 22,203 22,028 22,257 9,302 7,608
Long-term liabilities.................... 164 4,004 - 69 10
Minority interest........................ 1,034 - - - -
Shareholders' equity..................... 13,461 10,940 13,829 1,726 1,053
</TABLE>
- ------------------------
(1) Prior to January 1, 1993, the Company was an S Corporation for tax purposes
and, therefore, paid no federal income taxes. Pro forma net income for the
year ended December 31, 1992, assuming the Company were subject to federal
income tax, would have been $147,980, or $0.06 per share, net of federal
income tax expense of $77,000.
15
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 23 of this Form 10-K.
General
The Company was incorporated in 1978 as a dismantling, deconstruction,
demolition and equipment provider and has evolved into a specialty environmental
services company. The Company's revenues are derived primarily from (1) contract
decontamination and decommissioning services in a broad range of industrial and
environmentally sensitive settings, including, but not limited to, plant
dismantlement and relocation services, asbestos abatement services, and
remediation of contaminated soil and groundwater; and (2) equipment and scrap
sales.
The Company's contract decontamination and decommissioning services are
provided as primary contractor or as subcontractor to industrial concerns and
governmental and other entities. Generally, such entities own or operate
manufacturing or process plant facilities which facilities are being abandoned,
relocated or otherwise require varying degrees of dismantling or deconstruction
work or remediation of a variety of environmental hazards. Because of the nature
of the operations at such facilities, the Company's services typically involve
varying environmental concerns which require the application of specialized
deconstruction and/or remediation techniques. In accordance with industry
practice, the Company will typically develop a preliminary work plan for each
project and will enter into a contract to perform the required services. The
Company's projects are performed primarily on a "lump sum" basis wherein the
Company bids to perform a complete job for a predetermined price or on a "time
and material" basis wherein the Company charges predetermined hourly or per day
rates for specified services plus a charge for materials used. Additionally, the
Company provides services pursuant to "fixed fee" contracts wherein the Company
is paid for all costs incurred plus a predetermined fee or profit margin.
Because of the risk associated with lump sum contracts, the Company generally
will not bid on such jobs unless the Company has a thorough understanding of the
scope of the job in question and an established history of performing such jobs
within the price established in the contract or the contract provides for
adjustments to the price based on industry practices and scope of work. While
the Company performs decontamination and decommissioning services directly for
numerous industrial concerns with whom the Company has existing relations and
with other industrial concerns with whom the Company may establish relationships
from time to time, a portion of the Company's services are also provided on a
subcontractor basis for engineering firms which are called in to develop and
implement hazardous waste remediation plans but which lack expertise in
dismantling or deconstruction or specialized remediation processes.
In addition to offering decontamination and decommissioning services to its
customers, in connection with such services, the Company has extensive
experience in, and offers, plant relocation and reconstruction services to its
customers.
Equipment and scrap sales operations are conducted both as a separate
profit center and as an adjunct to the Company's decontamination and
decommissioning operations. Because of the Company's continual involvement with
firms requiring decontamination and decommissioning services as well as plant
relocation and reconstruction services, the Company has developed extensive
expertise in identifying salvageable equipment and scrap and is often able to
acquire equipment on favorable terms from customers who would otherwise have no
ongoing use for such equipment or otherwise lack the knowledge and expertise to
market such equipment. The Company historically maintained an inventory of
surplus equipment and regularly acquired additional equipment and entire plants
from its customers as well as other sources where the Company could acquire such
equipment on favorable terms. The Company conducted ongoing marketing efforts on
a worldwide basis in order to place such equipment. In September of 1995, the
Company sold substantially all of its surplus equipment inventory, other than
generators, to Universal Process Equipment ("UPE") and entered into an alliance
with UPE to jointly carry on all future surplus equipment purchase and sales
operations.
16
<PAGE>
Due to the nature of the Company's service operations, the Company's
ability to generate service revenues is dependent on a number of factors. The
primary factors which have historically affected the Company's decontamination
and decommissioning and remediation service revenues have been the Company's net
worth, liquid working capital and bonding capacity. Because virtually every
major job undertaken by the Company requires the Company to provide bonding, the
number and size of jobs which the Company has historically been, and will in the
future be, able to perform is dependent on the Company's bonding capacity.
Generally, bonding requirements and bonding capacity are a direct function of
the Company's net worth and available liquid working capital, the size of the
job undertaken and the number of jobs being performed, with larger jobs and more
numerous jobs requiring higher net worth, higher liquid working capital and
higher bonding. Prior to the Company's initial public offering in 1994, the
Company was historically limited in the size and number of jobs which it could
perform because of its limited net worth and available working capital. In
addition to net worth, liquid working capital and bonding capacity, the
Company's revenues are influenced by such factors as job pricing, demonstrated
expertise and range of services offered and name recognition. None of these
factors have, in management's opinion, negatively impacted the Company's revenue
producing capability to date. In fact, management believes that the Company
benefits from its surplus equipment and scrap sales operations which permit the
Company to offer favorable job pricing as well as from a favorable reputation as
a provider of expert services in a broad range of areas.
The Company's service revenues exhibit certain seasonal characteristics.
While dismantling and remediation projects arise periodically throughout the
year, many entities requiring the Company's services tend to delay expenditures
until the summer months or until as late as possible in the entities' fiscal
years. Additionally, due to the nature of the various services offered by the
Company, projects are often delayed by inclement weather conditions,
particularly in the northeast. Accordingly, the Company's service revenues tend
to be higher in the summer and fall months and lower in the winter and spring
months.
The Company's job expenses are primarily labor and labor related costs,
including salaries to laborers, supervisors and foremen, out-of-town living
expenses, payroll taxes, training, insurance and benefits. Additionally, the
Company's job expenses include bonding and job related insurance cost, repairs,
maintenance and rental of job equipment, job materials and supplies, and
transportation and dumping costs, among others. Direct job costs tend to vary
proportionally with service revenues.
Cost of surplus equipment sales includes the actual cost of such equipment
as well as freight charges to transport such equipment and costs of refurbishing
certain equipment. Such costs vary with the volume of sales, the nature of the
equipment sold and the Company's ability to acquire such equipment on favorable
terms. The Company generally has no cost for scrap materials as the value of
salvageable scrap is generally factored into the price when bidding on jobs and
no payment is made by the Company for such scrap.
In addition to direct job costs and cost of surplus equipment and scrap
sales, the Company incurs various general and administrative expenses to support
its operations. The largest of such expenses is salaries paid to management and
administrative personnel. Prior to its initial public offering in 1994, the
Company historically paid out substantially all of its net income annually to
Joel Freedman and Frank Falco, the Company's founders and principal officers and
shareholders, as salary. Other significant general and administrative expenses
include rent on the Company's facilities, general insurance, promotional expense
and general office expense.
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. The Company's total revenues decreased by approximately 45.2%
from $39.4 million for the year ended December 31, 1995 to $21.6 million for the
year ended December 31, 1996. Contract service income decreased for the period
by 38.6% from $33.9 million in 1995 to $20.8 million in 1996. The decrease in
contract service income was attributable to a combination of (1) completion in
early 1996 of a contract to dismantle and relocate an ammonia plant to Pakistan
(the FFC Contract"), which accounted for $13.4 million of revenues in 1995, (2)
delays in the commencement of several contracts awarded to IDM in 1996 and (3)
the reversal of $2.1 million in previously accrued revenues and gross margin
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associated with change order claims under negotiation with two customers that
have not been resolved to date. Surplus equipment and scrap sales decreased by
85.4% from $5.5 million from the year ended December 31, 1995 to $0.8 million in
1996 due to the sale in 1995 of $4 million of glass lined and process equipment
in connection with the formation of the Company's marketing alliance with UPE.
Cost of sales. Cost of sales, which includes direct job costs, cost of
equipment sales, unusual job costs, a write-down of the Company's surplus
generator inventory decreased by approximately 39% from $36.7 million for 1995
to $22.4 million for 1996. Direct job costs decreased by 29.4% during 1996 and
increased from 89.9% to 103.3% of contract income. The primary elements of such
decrease in job costs were materials and supplies, job salaries, subcontracting
and disposal expense. The decrease in such job costs was primarily attributable
to the decreased level of activity following completion of the performance of
the FFC Contract. The deterioration in gross margins during 1996 was
attributable to a combination of (1) bidding new contracts at lower than normal
jmargins in order to penetrate strategic markets serviced by the Company's
regional offices and (2) cost overruns on several contracts, including the Los
Alamos project where the Company is presently in negotiations to recover $2.1
million of additional costs incurred as a result of change orders from clients.
Cost of equipment sales decreased 78.6% during 1996 and increased from
53.8% to 77.1% of equipment and scrap sales revenues. The decrease in cost of
equipment sales and the decrease in gross margin was attributable the sale, in a
bulk transaction, of $4,000,000 of surplus equipment to UPE during 1995. The
gross margin on this sale recorded in the third quarter of 1995 was $1,370,000.
This represented 12.2% of the total revenues reported through the first nine
months of 1995 and 29.1% of the total gross profit reported.
In addition to the routine changes discussed above, the Company's cost of
sales reflects one time charges of $3.3 million in unusual job costs during 1995
and a write-down of the Company's surplus generator inventory of $300,000 in
1996.
General and administrative expense. General and administrative expenses
increased by 26.3% from $7.6 million (19.2% of gross revenues) in 1995 to $9.6
million (44.4% of gross revenues) in 1996. The increase in general and
administrative expenses was primarily attributable to a combination of (1) the
general and administrative expenses of Global Waste & Energy, the Company's 90%
owned subsidiary which was established during the year ($665,000), (2) the
write-down of a portion of the Company's notes receivable from UPE ($630,000)
and (3) increased legal fees ($394,000).
Depreciation and amortization. Depreciation and amortization expense stayed
approximately the same $0.7 million in both years.
Loss from operations. Loss from operations increased from $5.6 million in
1995 to $11.0 million in 1996. As a percentage of revenues, loss from operations
increased from 14.2% in 1995 to 50.9% in 1996. The increase in loss from
operations was attributable to the deferral of several large contracts which
were expected to commence in 1996.
Interest income and expense. The Company experienced a decrease in interest
income from $0.3 million in 1995 to $0.2 million in 1996 and an increase in
interest expense from $0.1 million in 1995 to $0.2 million in 1996. The decrease
in interest income and increase in interest expense was attributable to lower
levels of funds available for investment due to the loss sustained during the
year and a full year of interest expense on $0.6 million of equipment financed
in December 1995.
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Income taxes. The Company's credit for income taxes increased from $1.5
million in 1995 to $1.9 million in 1996. The increase in the income tax credit
for 1996 was attributable to the higher operating loss. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible and the net operating losses can be carried
forward. In determining such projected future taxable income, management has
considered the company's historical results of operation, the current economic
environment within the company's core industries and future business activities
which the company has positioned itself. Management believes the company will
realize taxable income in future years. However, based on the company's
substantial losses over the past two years, the current contract commitments in
the backlog, and carry forward limitations governed by state, federal and
foreign tax agencies, management believes it is more likely than not that the
company will not realize its entire net deferred tax asset. A valuation
allowance of $2,945,800 has been established by management as a reduction of the
company's deferred tax assets of $5,554,800. Management believes that the net
deferred asset of $2,609,000 will be realized through future taxable income.
Miscellaneous. During fiscal years 1995 and 1996, the Company provided no
post retirement benefits subject to FAS 106.
As a result of the foregoing, the Company reported a net loss of $9.1
million in 1996 as compared to a net loss of $3.9 in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. The Company's total revenues increased by approximately 38.1%
from $28.5 million for the year ended December 31, 1994 to $39.4 million for the
year ended December 31, 1995. Contract service income increased for the period
by 33.5% from $25.4 million in 1994 to $33.9 million in 1995. The increase in
contract service income was attributable to a combination of the Company's
successfully bidding on and performing a larger number of contracts during 1995
using the proceeds of the Company's initial public offering and the performance
of larger dollar volume contracts during 1995. In particular, services provided
with respect to the "FFC Contract" accounted for $13.4 million of revenues, or
approximately 34% of total revenues, during 1995. The FFC Contract accounted for
$12.8 million of the Company's revenues during 1994.
Cost of sales. Cost of sales, which includes direct job costs, unusual job
costs and cost of equipment sales, increased by approximately 66.1% from $22.1
million for 1994 to $36.7 million for 1995. Direct job costs increased by 48.8%
during 1995 and increased from 80.6% to 89.9% of contract income. The primary
elements of such increase in job costs were materials and supplies, job
salaries, subcontracting and dumping expense. Materials and supplies increased
from $2.6 million (exclusive of a plant purchase) in 1994 to $7.5 million in
1995; job salaries increased from $4.6 million for 1994 to $5.3 million for
1995; and, subcontracting and disposal expense increased from $1.8 million in
1994 to $9.3 million in 1995. The increase in these job costs was primarily
attributable to the increased level of activity following completion of the
Company's initial public offering in 1994, in particular the performance of the
FFC Contract which required the purchase, disassembly and relocation of a plant.
The decrease in the gross margin was attributable to successfully bidding new
work at lower than normal margins in order to penetrate strategic markets
serviced by the Company's newly opened regional offices.
Cost of equipment sales increased 80.3% during 1995 and increased from
52.4% to 53.8% of equipment and scrap sales revenues. The increase in cost of
equipment sales and the decrease in gross margin was attributable the sale, in a
bulk transaction, of $4.0 million of surplus equipment to UPE.
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In addition to the foregoing, included in cost of sales was a one-time
pre-tax charge of $3.3 million in the fourth quarter of 1995 classified as
unusual job costs. This charge arose from a contract interpretation issue with
an international customer with regard to transportation costs. The dispute
specifically relates to the overseas transportation costs which were outside the
ordinary and typical business activities of the Company. The Company does not
anticipate entering into any future contracts that require the Company to have
responsibility for overseas transportation costs. The Company absorbed these
costs to avoid expense and uncertainty of mediation, arbitration and litigation,
and in anticipation of a significant amount of business expected to be awarded
to the Company by the customer in the future. Is was recorded as a separate line
item in the consolidated Statement of Operations because of its "unusual"
nature. The $3.3 million represents 9.7% of contract income for the year.
General and administrative expense. General and administrative expenses
increased by 41.0% from $5.4 million for 1994 to $7.6 million in 1995. The
increase in general and administrative expenses was primarily attributable to
(i) increased marketing expenses associated with bidding on a larger number of
jobs, (ii) the costs of opening and operating three new regional offices to
support ongoing and future jobs, (iii) increased payroll attributable to the
hiring of additional support personnel as well as a restoration of certain
salary reductions implemented in June of 1994, and (iv) the costs associated
with the Company's status as a publicly held corporation. Each of the principal
areas in which general and administrative expense increased during 1995 is
expected to facilitate future revenue growth and the Company's ability to bid on
and perform jobs in strategic growth regions.
Depreciation and amortization. Depreciation and amortization expense
increased from $0.3 million in 1994 to $0.7 million in 1995 as a result of the
acquisition of property, plant and equipment in the amount of $1.3 million
during the year and as a result of amortizing note issuance costs of $0.1
million associated with the Company's placement of $5 million of convertible
notes in September of 1995.
Income (loss) from operations. Income (loss) from operations decreased from
income of $0.7 million in 1994 to a loss of $5.6 million in 1995. As a
percentage of revenues, income (loss) from operations decreased from 2.4% in
1994 to (14.2%) in 1995. The decrease in income from operations, both in total
and as a percentage of revenues, was attributable to the unusual job costs
associated with the FFC Contract (discussed above) and increases in general and
administrative expense accompanying the opening of three regional offices.
Interest income and expense. The Company experienced an increase in
interest income from $0.1 million in 1994 to $0.3 million in 1995 and a decrease
in interest expense from $133,000 in 1994 to $110,000 in 1995. The increase in
interest income and decrease in interest expense was attributable to the receipt
of proceeds from the Company's initial public offering which proceeds were used
in part to pay off all bank debt with the balance of such funds invested in
temporary investments and the receipt of funds from the sale of $5.0 million of
convertible notes ("Convertible Notes") in September of 1995.
Income taxes. The Company's provision (credit) for income taxes decreased
from $0.3 million in 1994 to ($1.5 million) in 1995. The decrease in income tax
expense for 1995 was attributable to the loss incurred in 1995.
Miscellaneous. During fiscal years 1994 and 1995, the Company provided no
post retirement benefits subject to FAS 106.
As a result of the foregoing, the Company reported a net loss of $3.9
million in 1995 as compared to net income of $0.3 million for 1994.
Liquidity and Capital Resources
At December 31, 1996, the Company had approximately $8.7 million of working
capital, including a cash balance of $1 million. This compares to working
capital of $10.3 million and a cash balance of $0.1 million at December 31,
1995. The $1.6 million decrease in working capital and increase in cash is
primarily attributable to the receipt of $9 million from the exercise of
outstanding warrants and options during the year which was offset by the loss
for the year.
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Approximately $0.1 million of the Company's working capital at December 31,
1996 consisted of cash performance bonds and related refundable deposits which
the Company had posted in connection with the performance of various projects
which are expected to be completed within twelve months, at which time such
deposits are expected to be released to the Company. An additional $1.7 million
of working capital consisted of unbilled costs and estimated earnings on ongoing
projects. Again such amounts are expected to be received during 1997 as projects
progress with all such amounts being payable to the Company by the completion of
such projects.
Also included in the Company's working capital balance at December 31, 1996
was $1.2 million of surplus equipment inventory (net of a $0.3 million valuation
reserve) held for sale which gross inventory level was identical to that
reported at December 31, 1995. The inventory reflects the Company's sale of
substantially all of its surplus equipment inventory, other than generators, to
UPE in connection with the formation of a marketing alliance with UPE during
1995. The Company's remaining surplus equipment inventory consists principally
of 15 generators which the Company acquired in a joint venture arrangement with
a major surplus equipment dealer. Management believes that there is a strong
demand for generators such as those which the Company holds in inventory and
that such generators will provide an adequate inventory to meet the anticipated
demand for such generators for at least the next two years. In our third quarter
10-Q, management stated its belief that this inventory of generator sets should
not be considered as obsolete or outdated inventory since its design and
technology had 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 disposal items. During March, 1997, our Vice President of Sales
and Purchasing brought to our attention the fact that in the last two months he
had received complete equipment listing of power generating facilities from
companies such as PSE&G, Central and Southwest Services, Boston Edison Company
and Larson Power Plant. He felt that there was a recent glut on the market of
units between 25MW and 50MW due to deregulation of the power market and pressure
from consumers demanding lower tariffs. To remain competitive he recommended
that we reduce our suggested selling price for our two 33MW units in our
inventory 70% from $2,900,000 each to $900,000 each. Based on this information,
management decided to reduce the inventory carrying cost for these two units 70%
each from $206,650 to $62,000 by recording a $300,000 inventory write down in
the fourth quarter and as such the 9/30/96 10-Q is correct in that the $300,000
write-down represents facts which were subsequent events to the 9/30/96 10-Q.
Management has performed the following procedures to insure that these
inventories have been properly accounted for. Our joint venture partner has
physically inspected each unit and they obtained an insurance policy on all
units naming IDM as co-insured. We have assigned our Vice President of Sales to
work with our partner in reviewing all technical specifications, suggested
selling prices, etc. Included as his responsibility is an ongoing review of
current industry and market trends relating to these generator units. As a spot
verification, we have had an independent third party appraise four of the units
(dated March 17, 1997), which confirmed the values and physical existance.
The Company's accounts receivable decreased by 15.0% from 1995 to 1996.
Such decrease in accounts receivable was attributable to lower levels of
business activity. As a percentage of revenues, accounts receivable increased
from 16.8% in 1995 to 26% in 1996. The increase in accounts receivable as a
percentage of revenues reflects lower sales in the fourth quarter of 1996 versus
1995. Government contracts, and certain private industry contracts, typically
include terms where payment is often deferred for up to 90 days following
completion of work. While the Company attempts to negotiate favorable payment
terms whereby the Company realizes substantial cash flows throughout the life of
a contract, contracts with United States governmental agencies, including
existing projects on which the Company is presently on site and a number of
projects on which the Company is bidding, cannot be expected to include terms
which are considered favorable. Unbilled revenues as a percentage of quarterly
contract income has increased from 31% at December 31, 1994, to 56% at December
31, 1995. At December 31, 1996, the amount was 53%, comparable to the amount at
December 31, 1995. The reason for the increase at year end 1995 to the prior
year was attributable to the Company working on a number of government contracts
at major Department of Energy and Defense sites in 1995 versus commercial sites
in 1994 and prior years. It has been the Company's experience that, in general,
government contracts are at risk of being front end cost loaded when there is
little progress to report (i.e., we cannot bill until the structure is
demolished).
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<PAGE>
Prepaid expenses increased 146% from $766,000 at December 31, 1995 to
$1,885,000 at December 31, 1996. $129,000 of the increase in prepaid expenses
was due to an increase in prepaid insurance and $939,000 was due to the
classification of certain job costs as prepaid expenses due to the fact that we
had incurred the liabilities for these job costs as of December 31, 1996 but IDM
had not commenced work on the contract as of December 31, 1996.
As a result of the loss incurred during 1996, operating activities used
$5.5 million in cash during 1996. The company also used $2.5 million in cash for
investing activities during 1996 for (1) an acquisition of a 10% interest in
Life for $1.3 million, (2) the acquisition of certain property, plant and
equipment and other assets for $888,000 and (3) advances and loans to certain
officers in the amount of $330,768. Cash flows from financing activities totaled
$8.9 million during 1996 and consisted principally of (1) proceeds received from
the exercise various warrants and options, including $6.96 million received from
the exercise of 1,051,000 Class A Warrants and $1.98 million received from the
exercise of the underwriter's option issued in connection with the Company's
initial public offering and (2) subscription proceeds totaling $258,621 as
partial payment for the sale of a 45% equity interest in an El Salvador
subsidiary formed by the Company to carry out the deployment of the Kocee Gas
Generator technology in El Salvador.
In November of 1996, the Company's board of directors approved a
discretionary stock repurchase plan whereby the Company may, from time to time,
repurchase on the open market shares of its common stock in an amount up to
$750,000. Repurchases of 100,000 shares for $216,500 during 1996 partially
offset cash flows from the financing activities discussed above.
In addition to the foregoing items which impacted the Company's cash flows
during 1996, the Company carried out several non-cash transactions and
transactions with subsidiaries not reflected in the Company's cash flow
statements. Among the non-cash transactions entered into during 1996 were (1)
the receipt of a subscription receivable in the amount of $775,862 representing
the balance of the sales price of the minority interest being sold in the
Company's El Salvador subsidiary, (2) the conversion of $3.32 million of
convertible notes into common stock, and (3) the repayment of $670,580 of loans
to officers through the surrender of 92,214 shares of common stock. Transactions
with subsidiaries during 1996 related principally to the capitalization of
various subsidiaries formed to deploy the Company's Kocee Gas Generator
technology. At December 31, 1996, the Company had loaned $1.2 million to its 90%
owned subsidiary, Global Wasted & Energy, Inc. Such loan is repayable on demand
with interest at 9.25%. In connection with the acquisition of the Kocee
technology, the Company also loaned $160,000 (Canadian), or approximately
$116,500 (United States), to Continental Waste Conversion, Inc., the licensor of
the technology.
The Company requires substantial working capital to support its ongoing
operations. As is common in the environmental services industry, payment for
services rendered by the Company are generally received pursuant to specific
draw schedules after services are rendered. Thus, pending the receipt of
payments for services rendered, the Company must typically fund substantial
project costs, including significant labor and bonding costs, from financing
sources within and outside of the Company. As noted, certain contracts, in
particular those with United States governmental agencies, may provide for
payment terms of up to 90 days or more and may require the posting of
substantial performance bonds which are generally not released until completion
of a project.
Prior to the completion of the Company's public offering, operations were
historically funded through a combination of operating cash flow, term notes and
bank lines of credit. Following the public offering, the Company paid off all of
its then existing bank debt. At December 31, 1996, the Company had no bank debt
and no significant long-term debt and was funding its operations entirely
through cash on hand and operating cash flow.
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With the substantial increase in volume and size of jobs on which the
Company performed services during 1995, and as a result of the incurrence of
costs relating to the opening of additional offices and to otherwise support
growth, the Company experienced shortages in working capital during the third
quarter of 1995. In September of 1995, after evaluating various financing
options, the Company sold $5 million of 7% convertible notes (the "Convertible
Notes") to various non-U.S. investors. The Company received net proceeds from
the sale of the Convertible Notes of approximately $4.2 million. The Convertible
Notes were due on September 15, 1997 and accrued interest at the rate of seven
percent per annum payable upon maturity only if the notes have not been
converted into Common Stock. The holders of the Convertible Notes were entitled,
at their option, to convert such notes into shares of the Company's Common Stock
at a conversion price for each share equal to the lessor of the closing bid
price of the Common Stock on September 15, 1995 ($5.00), or eighty-two percent
(82%) of the closing bid price of the Common Stock on the day prior to
conversion. As of December 31, 1995, $1,358,000 of the Convertible Notes had
been converted resulting in the issuance of 453,366 shares of Common Stock.
During 1996, the remaining $3,642,000 of Convertible Notes were converted
resulting in the issuance of 1,143,903 shares of Common Stock.
Subsequent to December 31, 1996, in February of 1997, the Company sold 300
shares, or $3.0 million, of Series B Convertible Preferred Stock to provide
funding for the Company's East Dam project and other projects on which the
Company anticipates commencing work during the first half of 1997. The Series B
Preferred Shares are convertible into Common Stock commencing 91 days after
issuance at the lesser of (i) 120% of the average closing price of the Common
Stock over the five trading-day period preceding closing ($2.67) or 82% of the
average closing price of the Common Stock over the five trading-day period
preceding conversion for conversion occurring between the 91st and 120th day
following closing, (ii) 110% of the average closing price of the Common Stock
over the five trading-day period preceding closing ($2.475) or 79% of the
average closing price of the Common Stock over the five trading-day period
preceding conversion for conversion occurring between the 121st and 150th day
following closing, (iii) 100% of the average closing price of the Common Stock
over the five trading-day period preceding closing ($2.225) or 76% of the
average closing price of the Common Stock over the five trading-day period
preceding conversion for conversion occurring between the 151st and 180th day
following closing, and (iv) 100% of the average closing price of the Common
Stock over the five trading-day period preceding closing ($2.225) or 73% of the
average closing price of the Common Stock over the five trading-day period
preceding conversion for conversion occurring on or after the 181st day
following closing. The Series B Preferred Shares pay a 7% dividend payable on
conversion or at redemption in cash or Common Stock, at the Company's option.
All Series B Preferred Shares remaining outstanding on February 12, 2000 shall
be automatically converted into Common Stock.
Conversion of the Series B Preferred Shares is subject to a cap on total
shares issuable pursuant to conversion to 1,915,000 shares, provided, however,
that the Company will submit a proposal to its shareholders to permit
conversions in excess of such cap in which case such conversions will be
permitted. In the event the shareholders do not approve issuances in excess of
the cap the Company will be required to redeem any remaining shares of Series B
Preferred Stock if the cap is reached at $11,000 per share. Conversions are also
subject to the Company's right to redeem any Series B Preferred Shares submitted
for conversion at a price of $1.80 per share or less. Subject to the Company's
satisfaction of certain notice requirements, the Company may redeem any such
shares of Series B Preferred Stock submitted for conversion at a price of
$12,200 per share.
Other than funds provided by operations and the potential receipt of funds
from the exercise of outstanding warrants, the Company presently has no sources
of financing or commitments to provide financing. A total of 2,399,000 Class A
Warrants issued in connection with the Company's initial public offering were
outstanding and exercisable at December 31, 1996. Such warrants are exercisable
to purchase two shares of common stock each for a price of $9.00, or $4.50 per
share. The warrants are exercisable until April of 1999 unless earlier called.
The Company may call the warrants if the closing bid price of the common stock
equals or exceeds $9.00 for a period of twenty consecutive trading days.
Exercise of the warrants would provide gross proceeds to the Company of
approximately $21.6 million and result in the issuance of 4.8 million shares.
There can be no assurance, however, when, if ever, any or all of the warrants
will be exercised.
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Other than funding the Company's 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.
Management believes that the Company's working capital 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.
Certain Factors Affecting Future Operating Results
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: delays in awarding and commencing
contracts, and payment on contracts occasioned by dealings with governmental and
foreign entities; changes in accepted remediation technologies and techniques;
substantial fluctuations in revenues resulting from completion and replacement
of contracts and delays in contracts; economic conditions affecting the ability
of prospective customers to finance projects; and other factors generally
affecting the timing and financing of projects. In addition to the foregoing,
the following specific factors may affect the Company's future operating
results.
At December 31, 1996, the Company was on-site on projects with a total
value of services yet to be performed of $41 million and the Company had
additional contracts awarded but not yet begun valued at $6 million. The largest
projects on which the Company was on-site at December 31, 1996 were the East Dam
project in Southern California with an approximate value of services to be
performed of $15 million and Manafort and Tonawanda with an approximate value of
services to be performed of $6 million each. All three contracts are expected to
be fully completed by the end of 1997. Included in the projects for which the
Company was on-site at December 31, 1996 was the Los Alamos project for which
the Company's billings for 1996 totaled $1.1 million and management estimates
that as much as $7 million will be billed on such project during 1997. However,
based on the nature of the project and delays experienced in commencing work on
such project, the timing of performing services and total billings with respect
to the Los Alamos project is subject to periodic adjustment. Of the contracts
awarded but not yet begun at December 31, 1996, the largest such project is a
major chemical company facility with an approximate value of $1.5 million which
is expected to commence in the first quarter of 1997.
In addition to its existing contracts, the Company is presently bidding on,
or proposes to bid on, numerous projects in order 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 regional offices opened by the Company during 1994 and
1995 as well as certain large international plant relocation projects which the
Company intends to pursue. The Company's regional offices, particularly the Oak
Ridge, Tennessee and Los Alamos, New Mexico offices are strategically located in
areas having a high concentration of prospective governmental 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 adjacent projects combined with its proven expertise and resources
will allow the Company to successfully bid on and perform substantial additional
projects based out of its regional offices.
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In addition to remediation and plant relocation projects on which the
Company is presently bidding or negotiating, the Company is presently involved
in negotiations with respect to the initial deployment of the Company's recently
acquired Kocee Gas Generator technology in El Salvador. The Company has entered
into a preliminary agreement with a prospective equity partner to install and
operate a waste-to-energy facility in El Salvador with the equity partner
expected to contribute $13.5 million and the Company to contribute $16.5
million. Assuming the Company can successfully consummate a transaction to
install and operate a waste-to-energy facility, management anticipates that the
Company will realize substantial ongoing revenues from operation of such
facility as well as revenues generated in connection with the initial
installation of such facility. Further, management anticipates that a successful
initial installation and operation of the Kocee Gas Generator will lead to
additional opportunities to deploy such technology. There can be no assurance,
however, that the Company will be successful in consummating a transaction to
deploy the Kocee Gas Generator technology in El Salvador or elsewhere or, if
such technology can be deployed, that such facilities can operate profitably. At
April 11, 1997, CWC, the licensor of the Kocee technology was in default in
repayment of the $160,000 (Canadian) loan from the Company and had filed suit
against the Company attempting to void the various agreements with the Company.
While the Company believes CWC's suit is wholly without merit, the pendency of
such suit or an adverse outcome in such suit could materially hinder the
Company's efforts to deploy the Kocee Gas Generator technology. See "Legal
Proceedings."
While management expects operating results to improve during 1997 for the
reasons discussed above, the Company anticipates that it may incur a charge to
earnings in one or more of the years commencing in 1995 and ending in 2005 in
connection with the possible issuance of shares of Common Stock to the Company's
principal officers pursuant to the terms of their employment with the Company.
Under their respective employment agreement Messrs. Freedman and Falco are
entitled to receive certain bonuses in the form of stock of the Company in the
event certain earnings criteria are satisfied. Pursuant to such stock bonus
arrangements, the Company will issue stock to Messrs. Freedman and Falco in an
amount up to 15% of the total issued and outstanding shares of Common Stock of
the Company as measured at the time(s) of issuance. The criteria for issuing
such shares is as follows: (I) if pre-tax net income for any one of the years
from 1994 to 2005 equals or exceeds $2,500,000, shares in an amount equal to 5%
of total issued and outstanding Common Stock of the Company shall be issued;
(ii) if pre-tax net income for any one of the years from 1994 to 2005 equals or
exceeds $3,500,000, shares equal to 5% of total issued and outstanding Common
Stock of the Company shall be issued; and (iii) if pre-tax net income for any
one of the years from 1994 to 2005 equals or exceeds $6,000,000, shares equal to
5% of total issued and outstanding Common Stock of the Company shall be issued.
For purposes of determining satisfaction of the above criteria, each of such
criteria may only be satisfied in one of the measuring years but two or more of
such criteria may be satisfied in the same year (e.g., pre-tax earnings of $6
million in any one year will satisfy each of the three criteria thus resulting
in the issuance of the full 15% but pre-tax earnings of $2.5 million in each of
the years will only satisfy the first criteria for one year thus resulting in
the issuance of only 5% of the possible 15%). Pre-tax net income for each year
shall be determined, and the right to receive shares shall vest, on April 30
following each fiscal year. In computing pre-tax net income for purposes of
determining whether the above criteria has been satisfied, any charges to
earnings arising solely as a result of the issuance of shares pursuant to the
stock bonus arrangement shall be excluded.
Because of the compensatory nature of the stock bonus arrangement, each
issuance of shares pursuant to such arrangement will result in a non-cash charge
to the Company's earnings. The amount of such compensation charge will be equal
to the fair market value of the shares issued at the date of issuance. While the
amount of such future charges to earnings, if any, and the timing of such
charges cannot be estimated at this time due to the uncertainty as to the future
satisfaction of the earnings criteria and the future value of the stock, any
such future charges to earnings can be expected to be substantial.
25
<PAGE>
Finally, the Company's future operating results are also expected to be
materially impacted by the Company's alliance with Universal Process Equipment
("UPE") to market its surplus equipment inventory. Pursuant to such alliance,
the Company sold substantially all of its surplus equipment inventory, other
than generators, to UPE for an aggregate of not less than $4 million. Such
purchase price is payable from one third of the net sales proceeds of such
equipment received by UPE. The unpaid portion of the purchase price of such
equipment shall bear interest at LIBOR and any amounts not previously paid are
payable in full on September 29, 2000. Accordingly, the Company expects to
report higher interest income until such time as the purchase price of the
equipment sold to UPE is paid in full. Additionally, should one-third of the
proceeds from the sale of such equipment exceed $4 million, the Company will
recognize additional income from the sale of such equipment.
With the formation of the alliance with UPE, the Company's surplus
equipment marketing efforts will be substantially reduced as such marketing
efforts will be principally the responsibility of UPE. All future inquiries with
respect to the purchase and sale of surplus equipment will be directed by the
Company to UPE. UPE, in turn, will utilize its marketing resources to satisfy
such inquiries and will pay the Company prescribed commissions based on the
nature of each transaction. Where UPE chooses not to, or is unable to, acquire
items, the Company will continue to be able to acquire such equipment for its
own account.
While the alliance with UPE will reduce the profit margins previously
enjoyed by the Company on the sale of surplus equipment, management believes
that the formation of such alliance will allow the Company to substantially
increase the turnover of surplus equipment, reducing holding costs and inventory
risks and increasing the overall profitability of its surplus equipment
business. Further, formation of such alliance will allow the Company to reduce
its costs associated with marketing such surplus equipment and allow management
to focus on the Company's core business.
Historically, the Company generally acquired its surplus inventory items in
connection with the performance of jobs, which the Company believes allowed it
to acquire such items on generally favorable terms allowing the Company to enjoy
substantial profit margins on the resale of such items. Because of the specialty
nature of much of the surplus equipment inventory which the Company sold, the
turn-over of such inventory was typically limited to 50% per year and the mix of
such inventory sold substantially impacted the Company's equipment sales
revenues and profit margins in any particular year. While the Company has turned
over the majority of its surplus equipment marketing efforts to UPE pursuant to
their joint marketing alliance, the Company will continue to seek strategic
opportunities to acquire and sell surplus equipment inventory so as to maximize
profits from such activities.
We previously reported in our third quarter report, filed on November 19,
1996, that management does not believe there is a major risk of inventory
obsolescence due to the fact that the design and technology of the major
inventory items have not changed much over the years. We also stated that we
were not aware of any adverse factors which could adversely impact the ability
of UPE to satisfy the notes. On March 17, 1997, we received a letter from UPE
where in they requested an adjustment "to the original purchase price, the
guaranteed portion of the purchase price, and the interest accrued." They claim
among other items that they expend 28% of the gross sales price for repair
costs, loading or rigging costs, freight costs and commissions to third party
dealers versus an average of 13% for other inventories they have acquired. They
also claim that the inventory they acquried from IDM has an average realized
sales price of 72% as opposed to 85% achieved by other inventories.
Based on preliminary conversations with UPE and consideration of the
Company's marketing alliance with UPE, management felt it was prudent to record
a reserve of $630,000 or approximately 70% of the difference between the
original and revised amounts that UPE expected to pay IDM under the inventory
purchase agreement. Management is currently negotiating with UPE to settle this
matter.
The Company is involved in a number of legal and administrative matters
which may affect the Company's operations and financial condition. These matters
are more fully discussed in Item 4 above and in the notes to the Consolidated
Financial Statements. While the Company does not expect to suffer significant
adverse effects from such legal and administrative matters, the nature of such
proceedings is unpredictable and there can be no assurance that the outcome of
such may not have a material adverse effect on the Company.
26
<PAGE>
Impact of Inflation
Inflation has not been a major factor in the Company's business since
inception. There can be no assurances that this will continue. However, it is
anticipated that any increases in costs to the Company can be passed on to its
customers in the form of higher prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Samuel Klein and Company, appears on
pages F-1 through F-28 of this report. See Index to Financial Statements on page
30 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements:
See Index to Financial Statements on page 29 of this report for
financial statements and supplementary data filed as part of this
report.
(2) Financial Statement Schedules
None
27
<PAGE>
(3) Exhibits
Exhibit
Number Description of Exhibit
-------- ----------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of IDM Environmental Corp. (1)
3.2 Bylaws, as amended, of IDM Environmental Corp. (3)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Class A Warrant Certificate (1)
4.3 Form of Warrant Agreement (1)
4.4 Certificate of Designation fixing terms of Series A Junior
Participating Preferred Stock (2)
4.5**Certificate of Designation fixing terms of Series B Preferred Stock
4.6**Warrant Agreement dated January 12, 1997
10.1 Lease Agreement between International Dismantling & Machinery
Corporation and L&G Associates dated March 1, 1993 for site in South
River, New Jersey (1)
++10.2 1993 Incentive Stock Option Plan, as amended (3)
++10.3 1995 Incentive Stock Option Plan (3)
++10.4 Employment Agreement between the Company and Joel Freedman, as
amended, dated February 1, 1996 (3)
++10.5 Employment Agreement between the Company and Frank Falco, as
amended, dated February 1, 1996 (3)
10.6 Form of Agreement regarding confidential information and competition
by by employees (1)
10.7 Form of Severance Agreement (3)
10.8 Teaming Agreement, dated November 20, 1991 between the Company and
Ebasco Environmental relating to the Rocky Mountain Arsenal project
(1)
10.9 Voting Agreement (1)
10.10 Share Rights Agreement dated April 1, 1996 (2)
10.11 License Agreement dated June 30, 1996 with Life International
Products (4)
10.12 Agreement dated July 19, 1996 with Continental Waste Conversion, Inc.
(4)
10.13 License Agreement dated July 18, 1996 with Continental Waste
Conversion, Inc. and Continental Waste Conversion International, Inc.
(4)
10.14 Promissory Note in the amount of $160,000 (Canadian) dated July 22,
1996 from Continental Waste Conversion, Inc. to Continental Waste
Conversion International, Inc. (4)
10.15 Pledge and Security Agreement dated July 19, 1996 between Continental
Waste Conversion, Inc. and Continental Waste Conversion International,
Inc. (4)
22.1**List of subsidiaries
23.1* Consent of Samuel Klein and Company
27* Financial Data Schedule
- ------------------------
++ Compensatory plan or management agreement.
* Filed herewith
** Previously filed
(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-66466) declared effective by the Securities and Exchange Commission on
April 20, 1994
(2) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated April 1, 1996
(3) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10-KSB for the year ended December 31,
1995
(4) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IDM ENVIRONMENTAL CORP.
By: /s/ Joel Freedman
------------------------------------
Joel Freedman
President
Dated: July 10, 1997
29
<PAGE>
IDM ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Number
------
Independent Auditor's Report............................................ F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995............ F-2
Consolidated Statements of Operations for the Years ended
December 31, 1996, 1995 and 1994...................................... F-3
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 1996, 1995 and 1994................................ F-4
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994...................................... F-5
Notes to Consolidated Financial Statements.............................. F-7
30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
IDM Environmental Corp. and Subsidiaries
South River, New Jersey
We have audited the accompanying consolidated balance sheets of IDM
Environmental Corp. and Subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDM Environmental
Corp. and Subsidiaries as of December 31, 1996 and 1995, and the results of
operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Samuel Klein and Company
-------------------------------------------
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
April 4, 1997
F-1
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
=========== ===========
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,001,254 $ 83,286
Accounts receivable 5,626,208 6,616,130
Stock subscription receivable 775,862 -
Notes receivable - current 1,274,773 1,596,559
Inventory 1,182,517 1,482,517
Costs and estimated earnings in
excess of billings 1,655,754 3,634,052
Bonding deposits 55,472 883,163
Deferred income taxes 2,609,000 652,600
Recoverable income taxes - 1,114,442
Due from officers 208,676 548,488
Prepaid expenses and other
current assets 1,884,977 765,944
----------- -----------
Total Current Assets 16,274,493 17,377,181
Investment in Affiliate, at cost 1,300,000 -
Notes Receivable - long term 1,572,238 1,596,559
Deferred Issuance Costs - 506,586
Property, Plant and Equipment 2,742,650 2,547,406
Other Assets 313,246 -
----------- -----------
$22,202,627 $22,027,732
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 351,127 $ 327,974
Accounts payable and accrued expenses 7,105,827 5,836,510
Billings in excess of costs and
estimated earnings 86,496 919,575
----------- -----------
Total Current Liabilities 7,543,450 7,084,059
Long-Term Debt 164,034 4,004,142
Minority Interest 1,034,483 -
----------- -----------
Total Liabilities 8,741,967 11,088,201
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, authorized 20,000,000
shares $.001 par value, issued
and outstanding 9,602,730 in 1996
and 6,200,079 in 1995 9,603 6,200
Additional paid-in capital 25,359,465 13,693,895
Retained earnings (deficit) (11,908,408) (2,760,564)
----------- -----------
13,460,660 10,939,531
----------- -----------
$22,202,627 $22,027,732
=========== ============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Contract income $20,807,491 $33,865,680 $25,362,286
Sale of equipment 834,355 5,131,504 2,659,459
Sale of scrap - 406,187 490,469
Miscellaneous - - 21,565
----------- ----------- -----------
21,641,846 39,403,371 28,533,779
----------- ----------- -----------
Cost of Sales:
Direct job costs 21,491,328 30,432,547 20,448,617
Unusual job costs - 3,300,000 -
Cost of equipment sales 643,242 2,977,484 1,651,205
Write-down of inventory surplus 300,000 - -
----------- ----------- -----------
22,434,570 36,710,031 22,099,822
----------- ----------- -----------
Gross Profit (Loss) (792,724) 2,693,340 6,433,957
----------- ----------- -----------
Operating Expenses:
General and administrative expenses 9,567,435 7,637,621 5,418,243
Depreciation and amortization 668,227 653,273 343,732
----------- ----------- -----------
10,235,662 8,290,894 5,761,975
----------- ----------- -----------
Income (Loss) from Operations (11,028,386) (5,597,554) 671,982
Other Income (Expense):
Interest income (expense) 30,542 200,141 (36,342)
----------- ----------- -----------
Income (Loss) before Provision (Credit)
for Income Taxes (10,997,844) (5,397,413) 635,640
Provision (Credit) for Income Taxes (1,850,000) (1,530,000) 312,000
----------- ----------- -----------
Net Income (Loss) $(9,147,844) $(3,867,413) $ 323,640
=========== =========== ===========
Earnings (Loss) per Share:
Primary earnings (loss) per share $ (1.13) $ (0.67) $ 0.06
=========== =========== ===========
Fully diluted earnings (loss) per share $ (1.13) $ (0.67) $ 0.06
=========== =========== ===========
Primary common shares outstanding 8,089,472 5,815,565 5,577,977
=========== =========== ===========
Fully diluted common shares outstanding 8,089,472 5,815,565 5,577,977
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Additional Retained
=================== Paid-in Earnings
Shares Amount Capital (Deficit)
========= ====== =========== ============
<S> <C> <C> <C> <C>
Balances - January 1, 1994 2,333,334 $2,333 $ 927,243 $ 797,178
Net Proceeds from Initial Public Offering 3,450,000 3,450 11,789,138 -
Net Income for the Year Ended December 31, 1994 - - - 323,640
Less Dividends - - - (13,969)
--------- ------ ----------- -----------
Balances - December 31, 1994 5,783,334 5,783 12,716,381 1,106,849
Surrender and Retirement of Common Stock by Officer (36,621) (37) (192,223) -
Conversion of Convertible Notes to Common Stock 453,366 454 1,169,737 -
Net Loss for the Year Ended December 31, 1995 - - - (3,867,413)
--------- ------ ----------- ------------
Balances - December 31, 1995 6,200,079 6,200 13,693,895 (2,760,564)
Surrender and Retirement of Common Stock by Officer (92,214) (92) (670,488) -
Conversion of Convertible Notes to Common Stock 1,143,903 1,144 3,319,108 -
Class A Warrants Exercised 2,102,000 2,102 6,954,348 -
Private Placement Warrants 7,500 8 33,742 -
Exercise of Underwriters Options 300,000 300 1,979,700 -
Common Stock Options Exercised 41,462 41 55,248 -
Issuance of Non Qualified Options, pursuant to a
consulting agreement - - 210,312 -
Retirement of Common Stock, pursuant to a stock
repurchase plan (100,000) (100) (216,400) -
Net Loss for the Year Ended December 31, 1996 - - - (9,147,844)
--------- ------ ----------- ------------
Balances - December 31, 1996 9,602,730 $9,603 $25,359,465 $(11,908,408)
========= ====== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(9,147,844) $(3,867,413) $ 323,640
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Deferred taxes (1,956,400) (400,000) (165,600)
Depreciation and amortization 668,227 653,273 343,732
Write-down of surplus inventory 300,000 - -
Provision for loss on notes receivable 630,000 - -
Decrease (Increase) In:
Accounts receivable 989,922 (1,947,644) (230,774)
Inventory - 2,972,875 (1,979,506)
Notes receivable (283,893) (3,193,118) -
Costs and estimated earnings in
excess of billings 1,978,298 (1,008,812) (2,625,240)
Prepaid expenses and other current assets (1,119,033) (149,181) (265,581)
Bonding deposits 827,691 1,510,494 (2,368,850)
Recoverable income taxes 1,114,442 (1,088,005) (26,437)
Increase (Decrease) In:
Accounts payable and accrued expenses 1,361,671 (1,845,521) 3,400,835
Billings in excess of costs
and estimated earnings (833,079) 853,584 (1,142)
Income taxes payable - (477,600) (35,400)
----------- ---------- ----------
Net cash used in operating activities (5,469,998) (7,987,068) (3,630,323)
----------- ---------- ----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (574,832) (639,417) (479,543)
Investment in affiliate (1,300,000) - -
Acquisition of other assets (313,246) - -
Loans and advances to officers (330,768) (349,632) (283,096)
----------- ----------- -----------
Net cash used in investing activities (2,518,846) (989,049) (762,639)
----------- ----------- -----------
Cash Flows from Financing Activities:
Net proceeds from convertible bond issuance - 4,185,000 -
Decrease in deferred offering costs - - 183,247
Repayment of notes payable - bank - - (2,054,000)
Principal payments on long-term debt (371,109) (193,922) (90,446)
Redemption of redeemable preferred stock - - (500,000)
Net proceeds from public offering - - 11,792,588
Dividends paid - - (13,969)
Purchase and retirement of common stock (216,500) - -
Contribution from minority interest 258,621 - -
Proceeds from exercise of stock
options and warrants 9,235,800 - -
----------- ----------- -----------
Net cash provided by financing activities 8,906,812 3,991,078 9,317,420
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 917,968 (4,985,039) 4,924,458
Cash and Cash Equivalents, beginning of year 83,286 5,068,325 143,867
----------- ----------- -----------
Cash and Cash Equivalents, end of year $ 1,001,254 $ 83,286 $ 5,068,325
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Supplementary Disclosures of
Cash Flow Information:
Cash paid during the year for:
Interest $ 65,694 $ 35,550 $124,945
========== ========== ========
Income taxes $ - $ 488,802 $641,158
========== ========== ========
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Property, plant and equipment financing $ 195,821 $ 693,324 $132,772
========== ========== ========
Repayment of officer's loan through
surrender of common stock $ 670,580 $ 192,260 $ -
========== ========== ========
Conversion of convertible promissory
notes to common stock $3,320,252 $1,170,191 $ -
========== ========== ========
Sale to minority stockholder with stock
subscription receivable $ 775,862 $ - $ -
========== ========== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
IDM Environmental Corp. (collectively with its subsidiaries referred to herein
as the "Company") is a national provider of contract environmental services
specializing in plant decontamination and decommissioning. The Company serves
private industry, utilities and governmental entities in the areas of plant
dismantling, plant deconstruction and relocation, asbestos abatement,
radiological remediation and hazardous waste remediation, among others. In
addition to offering environmental services, the Company buys and sells
equipment and entire plants and offers relocation and reinstallation services
with respect to such plants and equipment. In 1995 the Company formed two
subsidiaries to conduct business in specific regions which required domiciled
entities. During 1996 the Company formed two subsidiaries and acquired through
assignment the rights, title and interest of certain contracts and agreements
and two inactive corporations in order to conduct business in specific regions
of North and South America and East Asia.
Principals of Consolidation and Basis of Presentation
The accompanying financial statements consolidate the accounts of the parent
company and all of its wholly owned and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Investments in affiliates representing 20% to 50% of the
ownership of such companies are accounted for under the equity method.
Investments in affiliates representing less than 20% of the ownership of such
companies are accounted for under the cost method.
Translation of Foreign Currencies
Assets and liabilities of foreign operations, where the functional currency is
the local currency, are translated into U.S. dollars at the fiscal year end
exchange rate. The related translation adjustments are required to be recorded
as cumulative translation adjustments, a separate component of shareholders'
equity. Revenues and expenses are required to be translated using average
exchange rates prevailing during the year. Foreign currency transaction gains
and losses, as well as translation adjustments for assets and liabilities of
foreign operations where the functional currency is the dollar, are included in
net income (loss). Foreign currency realized and unrealized gains and losses for
the years presented were not material.
Revenue Recognition
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.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Billings on long-term contracts are done on
a monthly basis. Unbilled amounts on long-term contracts include amounts
recognized in revenues under the percentage of completion method of accounting,
but not billed to the customer at year end. It is expected that such billings
will be made as contracts are completed. Unbilled amounts on long-term contracts
are not separately stated as they are not material. Retentions on long-term
contracts are balances billed but not paid by customers which, pursuant to
retainage provisions in contracts, are due upon completion of the contract and
acceptance by the customer. Substantially all retentions are deemed collectible
within one year.
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
For financial statement purposes, short-term investments with a maturity of
ninety days or less and highly liquid investments are considered cash
equivalents.
Inventory
Inventory consists of used equipment and is stated at the lower of cost
(specific identification) or market.
Deferred Issue Costs
Costs in connection with the issuance of the 7% Convertible Notes were amortized
and charged to operations using the straight line method over the term of the
notes. Upon conversion, any unamortized costs were charged to additional paid in
capital net of tax effect.
Property, Plant and Equipment
Property plant and equipment are recorded at cost. Depreciation has been
calculated using the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the term of the related lease or
the estimated useful lives of the assets. The depreciation method and estimated
useful lives of the assets are generally as follows:
Estimated Method of
Asset Useful Life Depreciation
- ------------------------ ----------- ------------
Office equipment 3 - 10 Straight-line
Furniture and fixtures 3 - 10 Straight-line
Leasehold improvements 5 - 31.5 Straight-line
Transportation equipment 3 - 5 Straight-line
Job equipment 7 - 10 Straight-line
Costs of repairs and maintenance are charged to operations as incurred and
additions and betterments are capitalized. Upon retirement or disposition of
assets, the cost and accumulated depreciation are eliminated from the accounts
and any gain or loss is reflected in the statement of operations.
Income Taxes
Income taxes have been provided for based on the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
F-8
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation," which is effective for the year
ending December 31, 1996. As permitted by the new standard, the Company has
continued to apply accounting prescribed by APB Opinion No. 25 and include
additional footnote disclosures.
Earnings (Loss) Per Share
Primary earnings (loss) per common share and common equivalent share are
computed on the basis of the weighted average number of common shares
outstanding during each year and include shares assumed issued on the exercise
of all common stock equivalents, such as, dilutive stock options and warrants
and the purchase of treasury stock with the proceeds at the average market price
for the period. Fully diluted earnings per share assumes the exercise of all
dilutive common stock equivalents and all other potentially dilutive securities
and the purchase of treasury stock at the higher of the market price at the end
of the year or the average market price during the year. If the number of shares
of common stock that can be purchased with the exercise of common stock
equivalents exceeds twenty percent (20%) of the then common stock outstanding,
the Company utilizes the modified treasury stock method which calls for net
income to be adjusted for interest expense on reduction of debt and interest
income from short-term investments, net of related tax effect, for the unused
proceeds.
Reclassifications
Certain reclassifications have been made to the prior year balances to conform
to the current year presentation.
2. ACQUISITIONS AND INVESTMENTS IN AFFILIATES
On July 11, 1996, effective June 30, 1996, the Company, pursuant to a license
agreement entered into between the Company and Life International Products
("Life"), acquired a 10% interest in Life for $1,300,000. The Company has
recorded its investment at cost. In addition to acquiring a 10% interest, the
Company entered into an exclusive licensing agreement with Life pursuant to
which the Company shall market and employ Life's patented environmental
remediation technology for long term bioremediation of contaminated ground water
throughout North America.
Pursuant to such agreement, the Company agreed to fund the operation and
expenses associated with the marketing plan and allocate revenues from such
agreement for (1) repayment of Life's cost in connection with manufacturing and
(2) any actual expenses of both the Company and Life regarding the sale and
marketing of this technology. The balance (the "Net Revenues") shall be shared
between the Company and Life, 20% and 80% respectively, with a minimum net
revenue payment of $400,000 due to Life. This agreement, as amended November 1,
1996, provides that Life is to be paid this minimum net revenue relating to and
for the period of amendment to October 1, 1998. Subsequent to such time, the
Company and Life agree to negotiate in good faith as to future minimum revenues
and agreement terms. For the year ended December 31, 1996, no revenues have been
recognized.
On July 19, 1996 the Company, through a newly formed 90% owned subsidiary,
Global Waste & Energy, Inc. ("Global Delaware"), a Delaware corporation,
entered into an agreement with Continental Waste Conversion, Inc. ("CWC").
Pursuant to this agreement, Global Delaware acquired, in exchange for a 10%
interest in Global Delaware and a loan through a wholly owned subsidiary of
Global Delaware of $160,000 (Canadian) or approximately $116,550 (U.S.), the
exclusive worldwide rights (excluding Canada) to CWC's proprietary Kocee Gas
Generator waste treatment technology that converts municipal solid waste,
including tires and plastics into electrical energy. In addition, the Company
committed to loan up to $1,350,000 over a four month period to Global Delaware
to carry on this newly acquired waste-to-energy business.
F-9
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. ACQUISITIONS AND INVESTMENTS IN AFFILIATES (continued)
At closing the Company made an initial loan of $600,000 to Global Delaware
repayable upon demand with interest at 9.25%. As of December 31, 1996 the
Company had loaned a total of $1,200,000 to Global Delaware. The consolidated
financial statements include results of operations of Global Delaware and its
subsidiaries from July 19, 1996, and therefore all intercompany loans and
transactions have been eliminated within the consolidated financial statements
of the Company.
In conjunction with the July 19, 1996 agreement, Global Delaware formed a wholly
owned Alberta, Canada subsidiary, Global Waste & Energy, Inc. ("Global Alberta")
and through this company acquired from CWC through assignment the rights, title
and interest of certain contracts and agreements and two inactive corporations
domiciled in El Salvador and East Asia. These companies were acquired to market
and develop systems relating to the disposal of domestic, industrial and
agricultural waste and generation of electrical energy by means of gas generator
technology.
On October 18, 1996, Global Alberta entered into a subscription agreement with a
minority investor, pursuant to which the minority investor has committed to
purchase a 45% interest in the El Salvador corporation for approximately
$1,000,000 U.S. As of December 31, 1996, $258,621 has been received from the
minority investor. The balance of the commitment is reflected as stock
subscription receivable.
As further discussed in Note 16, CWC has filed a claim disputing the agreements
against the Company.
3. UNUSUAL JOB COSTS
The Company recorded a one-time pre-tax charge of $3,300,000 in the fourth
quarter of 1995. This charge arose from a contract interpretation issue with one
of its international customers with regard to transportation costs. The dispute
specifically related to the overseas transportation costs which were outside the
ordinary and typical business activities of the Company. The Company does not
anticipate entering into any future contracts that require the Company to have
responsibility for overseas transportation costs. The Company absorbed these
costs to avoid the expense and uncertainty of mediation, arbitration and
litigation, and in anticipation of a significant amount of business expected to
be awarded to the Company by the customer in the future. It was recorded as a
separate line item in the Consolidated Statement of Operations for the year
ended December 31, 1995, because of its "unusual" nature.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31,
1996 1995
---------- ----------
Trade accounts receivable $5,826,208 $6,816,130
Allowance for doubtful accounts (200,000) (200,000)
---------- ----------
$5,626,208 $6,616,130
========== ==========
F-10
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. NOTES RECEIVABLE
On September 29, 1995, the Company entered into two agreements for the sale of
equipment inventory with Universal Process Equipment, Inc. and their affiliate,
Bethlehem Corporation (collectively "UPE"), a non-public company with principle
operations in North America, and one of the world's largest marketers of new and
processed equipment. Pursuant to the terms of such agreements, the Company sold
substantially all of its glass lined equipment and process equipment for an
aggregate minimum consideration of $4 million. The purchase price of such
equipment is payable from one third of the net sales proceeds of such equipment
received by UPE, which amount may exceed $4 million. The unpaid portion of the
purchase price of such equipment shall bear interest at the average LIBOR base
rate over the previous twelve month period and any amounts not previously paid
under the agreement shall be payable in full on September 29, 2000. At December
31, 1996 the average twelve month rate was 5.53%. At December 31, 1996 and 1995,
$3,144,476 and $3,193,118, respectively, was outstanding (including interest).
During the fourth quarter of 1996 management provided a $630,000 reserve against
the outstanding balance and expects that approximately 50% of the aggregate
minimum consideration will be received within the following year, net of such
reserve.
On June 7, 1996, the Company loaned $250,000 to Solucorp Industries, Ltd.
("Solucorp"), an environmental company with which the Company had entered into a
September 7, 1995 Joint Marketing and Operation Agreement relating to the cross
marketing of Solucorp's soil remediation process and the Company's products and
services. The note executed June 7, 1996 (and further amended October 4, 1996),
is secured by shares of Solucorp's common stock. The terms of the note as
amended require the repayment of principal with interest at 10.25% per annum in
eleven consecutive monthly payments of $22,448 commencing November 1, 1996, with
an initial payment of $23,202 due upon the signing of the amended agreement. At
December 31, 1996, $215,985 remains outstanding (including interest) and is
included within current portion of Note Receivable.
On July 19, 1996, a subsidiary of the Company, in connection with the agreement
with CWC (described in Note 2), loaned to CWC $160,000 Canadian ( approximately
$116,550 U.S.). The loan is secured by the 10% interest in Global Delaware held
by CWC, and provides repayment terms of 18 consecutive installments commencing
January 2, 1997. As of the date of this report CWC has made no payment and the
loan is delinquent.
Total interest income earned from these notes for the years ended December 31,
1996, 1995 and 1994 was $184,394, $44,523 and $0, respectively.
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to the billing status of uncompleted contracts is as
follows:
December 31,
1996 1995
------------- --------------
Costs incurred on uncompleted contracts $ 15,683,597 $ 34,608,617
Estimated earnings (loss) (1,917,659) 3,310,624
------------- --------------
13,765,938 37,919,241
Less: Billings to date 12,196,680 35,204,764
------------- --------------
$ 1,569,258 $ 2,714,477
============= ==============
F-11
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (continued)
Included in the accompanying balance sheets under the following captions:
December 31,
1996 1995
------------- -------------
Costs and estimated earnings
in excess of billings $ 1,655,754 $ 3,634,052
Billings in excess of costs
and estimated earnings (86,496) (919,575)
------------- -------------
$ 1,569,258 $ 2,714,477
============== =============
7. INVENTORY
Inventory consists of the following:
December 31,
1996 1995
-------------- --------------
Purchased equipment ready for sale $ 1,182,517 $ 1,482,517
============== ==============
During the fourth quarter of 1996, management provided a $300,000 write-down
against the Company's inventory of surplus power generating equipment.
Management believes the write-down was necessary due to the lack of sales
activity and delays in the utilization of this equipment within projects
currently being negotiated by the Company.
The profitability of the Company's surplus equipment and scrap sales may be
impacted in the future by potential inventory related uncertainties. Because of
the nature of the inventory items purchased and sold by the Company, ownership
of such inventory items is not evidenced by documents of title. Further, because
of the Company's practice of acquiring surplus equipment from customers in
connection with the performance of jobs and because of the expense of relocating
and storing such items, many inventory items are held pursuant to joint venture
arrangements at the joint venture partner's site pending the sale of such items.
Because such inventory practices do not lend themselves to typical inventory
control procedures, the Company may be susceptible to incurring inventory
related losses arising from fraud, theft or claims of third parties. The Company
is aware of no such losses to date and would assert its rights against the party
from whom any items of inventory were purchased in the event of third party
claims with respect to title to inventory items. Accordingly, no additional
valuation reserves with respect to potential inventory losses have been
established.
F-12
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31,
1996 1995
---------- ----------
Office equipment $ 401,771 $ 370,937
Furniture and fixtures 398,377 347,584
Leasehold improvements 1,150,853 912,840
Transportation equipment 795,719 706,819
Job equipment 3,704,740 3,198,127
---------- ----------
6,451,460 5,536,307
Less: Accumulated depreciation
and amortization 3,708,810 3,133,401
---------- ----------
2,742,650 2,402,906
Construction in progress - 144,500
---------- ----------
$2,742,650 $2,547,406
========== ==========
9. LONG-TERM DEBT
During the quarter ended September 30, 1995, the Company completed a $5,000,000
private placement offering of 7% convertible notes pursuant to Regulation S
under the Securities Act of 1933, as amended. The notes were due September 15,
1997. The holders of the notes were entitled, at their option, to convert on or
after November 15, 1995 one third of the original principal amount of the notes
into the shares of common stock of the Company at a conversion price for each
share equal to the lessor of the closing bid price of the common stock on
September 15, 1995 ($5.00) or 82% of the market price of the common stock at the
date of conversion. The remaining two thirds of the principal amount of notes
could be converted on the same terms, one third after December 15, 1995 and one
third after January 15, 1996, respectively. In the event the notes are converted
within one year of their issuance, no interest shall be payable on the converted
portion of such shares. As of December 31, 1996, all the notes had been
converted into 1,597,269 shares of the Company's common stock.
Due to the lack of a fixed conversion price or other mechanism to limit the
total number of shares exercisable upon conversion of the debt, an inadvertent
violation of the rules applicable to NASDAQ National Market Securities was
determined to have occurred during the first quarter of 1996. To remedy such
problem, the Company imposed a cap on conversions which could not be exceeded
unless the shareholders of the Company first approved the issuance of shares on
conversion in an aggregate amount exceeding 20% of the outstanding shares on the
date of the convertible note issuances. Consequently, the balance of the
Convertible Notes outstanding at March 31, 1996 amounting to $1,750,000 were
subject to a cap on conversions imposed by the Company to assure compliance with
NASDAQ rules. The Company submitted a proposal to its shareholders at its 1996
annual shareholders meeting to permit the conversion of the remaining
Convertible Notes. The proposal was approved and the remaining Notes became
convertible with the conversion price being reduced from 82% of the closing bid
price to 80% of such price and all interest accrued on such Convertible Notes
being payable in shares of common stock.
F-13
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. LONG-TERM DEBT (continued)
In connection with the issuance of the convertible notes, the Company paid total
offering costs of approximately $815,000. Such costs have been capitalized as
deferred issuance costs and are being amortized over the term of the notes. To
the extent the notes were converted, all or an allocable portion of such costs
were charged against paid in capital net of tax effect. As of December 31, 1996,
$201,775 was amortized and $613,225 of unamortized deferred issuance costs and
($103,668) in accrued interest (net of the tax effect of $69,117) was charged
(credited) to paid in capital in connection with the conversion of the
$5,000,000 of convertible notes.
Long-term debt consists of the following:
December 31,
1996 1995
-------- ----------
Debentures:
7% convertible notes, due September 1997 $ - $3,641,667
Notes Payable:
Note, payable in monthly installments
of $2,650 through February 1997,
secured by equipment 5,300 -
Note, payable in monthly installments
of $1,476 including interest at
approximately 8.25% per annum through
September 2000, secured by equipment 55,528 68,806
Note, payable in monthly installments
of $5,770 plus interest at approximately
7.35% per annum through January 1996,
secured by equipment - 5,790
Note, payable in monthly installments of
$27,316 including interest at approximately
7.9% per annum through November 1997,
secured by equipment 277,040 604,450
Note, payable in monthly installments of
$547 including interest at approximately
11.9% per annum through February 1998,
secured by equipment 5,930 11,403
Capital Lease Obligations:
Capital lease, payable in monthly
installments of $3,569 including interest
at approximately 11.15% per annum through
May 2000, secured by equipment 144,517 -
Capital lease, payable in monthly
installments of $1,508 including interest
at approximately 11.4% per annum through
September 1998, secured by equipment 26,846 -
-------- ----------
515,161 4,332,116
Less: Current portion 351,127 327,974
-------- ----------
$164,034 $4,004,142
======== ==========
F-14
<PAGE>
9. LONG-TERM DEBT (continued)
At December 31, 1996, maturities of long-term debt (including capital lease
obligations) are as follows:
1997 $ 351,127
1998 58,401
1999 47,207
2000 44,792
2001 13,634
---------
$ 515,161
=========
10. PROVISION (CREDIT) FOR INCOME TAXES
Provision (Credit) for income taxes is as follows:
December 31,
1996 1995 1994
------------- ------------- -------------
Current:
Federal $ - $ (940,200) $ 370,800
State - (189,800) 106,800
Foreign - -
------------- ------------- -------------
- (1,130,000) 477,600
------------- ------------- -------------
Deferred:
Federal (1,530,000) (273,700) (131,300)
State (205,000) (126,300) (34,300)
Foreign (115,000) - -
------------- ------------- ------------
(1,850,000) (400,000) (165,600)
------------- ------------- ------------
$ (1,850,000) $ (1,530,000) $ 312,000
============= ============= ============
F-15
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. PROVISION (CREDIT) FOR INCOME TAXES (continued)
The Company's effective tax rate was (16.8%) in 1996 and (28.3%) in 1995.
Reconciliation of these rates and the U.S. statutory rates are summarized as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---- ---- ----
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Taxes at
Statutory rate $(3,739,000) (34.0%) $(1,835,100) (34.0%) $216,100 34.0%
State taxes net of
federal tax effect (135,000) (1.2) (211,800) (3.9) 48,600 7.6
Foreign tax loss
carryforward 291,000 2.6 - - - -
Increase in valuation
allowance 1,725,000 15.7 418,700 7.8 - -
Other 8,000 0.1 98,200 1.8 47,300 7.5
----------- ------ ----------- ------ -------- -----
$(1,850,000) (16.8%) $(1,530,000) (28.3%) $312,000 49.1%
=========== ====== =========== ====== ======== =====
</TABLE>
Certain items of income and expense are recognized in different years for
financial reporting and income tax purposes. Deferred income taxes are provided
in recognition of these temporary differences. The components of these deferred
income tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deferred Tax Assets:
Accounts and notes receivable allowances $ 351,000 $ 84,000 $ 84,000
Inventory allowance 126,900 - -
Other inventory cost 19,800 19,800 160,000
Net operating loss carryforward 5,143,900 967,500 -
Fixed assets (131,300) - -
Other 44,500 - 8,600
----------- ---------- --------
5,554,800 1,071,300 252,600
Valuation allowance (2,945,800) (418,700) -
----------- ---------- --------
Total deferred tax assets $ 2,609,000 $ 652,600 $252,600
=========== ========== ========
</TABLE>
F-16
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. PROVISION (CREDIT) FOR INCOME TAXES (continued)
The Company has available at December 31, 1996 approximately $11,575,000
operating loss carry-forwards that may be applied against future taxable income.
$2,350,000 expires in the year 2010 and the balance the following year.
11. COMMITMENTS AND CONTINGENCIES
Employment Contracts and Agreements
On February 1, 1996, and effective January 1, 1996, Joel A. Freedman and Frank
A. Falco each entered into employment agreements, superseding their prior
employment agreements, with the Company on substantially identical terms.
Pursuant to such agreement, Mr. Freedman and Mr. Falco each receive (i) a base
salary of $250,000 per year plus 2% of operating profits; (ii) bonuses as
determined by the Board of Directors; and (iii) participation in any employee
benefit plans and fringe benefit arrangements generally available to the
Company's employees. For purposes of computing the salary of Messrs. Freedman
and Falco, operating profits are defined as net income from operations before
deduction of interest expense, income taxes, depreciation and amortization and
other non-cash charges to income. Such salary, including the incentive portion,
is paid pursuant to a draw schedule based on annual forecasts of operating
income with any difference in actual salary and draw paid being added or
subtracted from the following year's draw. For each of the calendar years 1994,
1995 and 1996, Messrs. Freedman and Falco's draws, based on forecasted operating
profits were $360,000, $277,500 and $360,000, respectively.
In addition to their cash compensation, Messrs. Freedman and Falco will receive
certain bonuses in the form of common stock of the Company (the "Stock Bonus")
if the Company meets certain earnings criteria. Pursuant to such Stock Bonus
arrangements, the Company will issue stock to Messrs. Freedman and Falco in an
aggregate amount of up to 15% of the total issued and outstanding shares of
common stock of the Company as measured at the time(s) of issuance. The criteria
for issuing such shares is as follows: (i) if pre-tax net income for any one of
the years from 1994 to 2005 equals or exceeds $2,500,000, shares in an amount
equal to 5% of total issued and outstanding common stock of the Company shall be
issued; (ii) if pre tax net income for any one of the years from 1994 to 2005
equals or exceeds $3,500,000, shares equal to 5% of total issued and outstanding
common stock of the company shall be issued; and (iii) if pre-tax net income for
any one of the years from 1994 to 2005 equals or exceeds $6,000,000, shares
equal to 5% of total issued and outstanding common stock of the Company shall be
issued. For purposes of determining satisfaction of the above criteria, each of
the criteria may only be satisfied in one of the measuring years but two or more
of such criteria may be satisfied in the same year (e.g. pre-tax earnings of $6
million in any one year will satisfy each of the three criteria thus resulting
in the issuance of the full 15%, but pre-tax earnings of $2.5 million in each of
the years will only satisfy the first criteria for one year thus resulting in
the issuance of only 5% of the possible 15%). Pre-tax net income for each year
shall be determined, and the right to receive shares shall vest, on April 30
following each fiscal year. In computing pre-tax net income for purposes of
determining whether the above criteria has been satisfied, any charges to
earnings arising solely as a result of the issuance of shares pursuant to the
stock bonus arrangement shall be excluded.
For the years ended December 31, 1996, 1995 and 1994 the compensation expense
for the two officers, including board approved bonuses, was $507,750, 250,000
and $250,000 each, respectively. For 1996, the board approved bonuses to be paid
to Mr. Freedman and Mr. Falco to increase their minimum guaranteed cash
compensation to $480,000 each. The balance of $55,500 will be applied to reduce
1997 compensation.
The employment agreements prohibit Mr. Freedman and Mr. Falco from competing,
directly or indirectly, with the Company or disclosing confidential matters with
respect to the Company for two years after termination of employment. Each of
such agreements expires on March 31, 2005 and are thereafter automatically
extended for one-year periods unless there is a notice of termination from
either the Company or the employee.
F-17
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
In the event of their disability, Messrs. Freedman and Falco are entitled to
continue their full salary at the date of disability for a period of one year
after which time the Company may terminate the employment of such disabled
employee without further compensation. In the event of death during the term of
employment, the estate of Mr. Freedman and Mr. Falco, as appropriate, shall be
entitled to three months salary. In the event of the termination of Mr.
Freedman's or Mr. Falco's employment within one year of the occurrence of
various change in control events, or in the event of termination of their
employment by the Company for any reason other than death or disability, the
Company must pay or provide to Mr. Freedman and/or Mr. Falco, as appropriate;
(i) a lump sum payment equal to 2.99 times his average annual gross income from
the company for the five tax year period ending before the date of such
termination; (ii) a lump sum payment equal to three times the value of all
"in-the-money" stock options held by such persons at the date of termination;
and (iii) continued participation in all employee benefit programs for a period
of three years, provided that the employee may, at his election, receive a lump
sum cash payment equal to the value of such benefits in lieu of continued
participation in such benefit plans. Additionally, in the event of a change in
control during the term of their contracts, Messrs. Freedman and Falco will be
deemed to have earned in full the Stock Bonuses provided for in their employment
contracts. As used in the employment agreements of Messrs. Freedman and Falco, a
"change in control" is defined to be (i) the acquisition of 15% of the Company's
common stock; (ii) a change in majority composition of the Board of Directors
within any two year period; or (iii) a failure to elect either of such employees
to the Board when such employee is standing for election; provided, however,
that such events shall not constitute a change in control if a majority of the
Directors immediately prior to such "change in control" approve the transaction
or event otherwise constituting a "change of control."
On July 19, 1996, Global Alberta entered into employment agreements with the two
principle officers of Global Alberta for terms through June 30, 1999. Pursuant
to such agreement, the two officers each are to receive an annual salary of
$240,000 (Canadian) through the term of the agreement. The annual salary in U.S.
dollars is approximately $173,760, utilizing the exchange rate existing at
December 31, 1996.
On February 11, 1996, the Company entered into agreements with its executive
employees pursuant to which such employees have agreed to maintain the
confidentiality of certain information and have agreed to not compete with the
Company within 250 miles of the Company's principal places of business for a
period of three years following the termination of such persons' employment with
the Company. Additionally, the Company has entered into agreements with each of
its executive officers, other than Messrs. Freedman and Falco, which provide
that such officers shall be entitled to; (i) a lump sum payment equal to 2.99
times his average annual gross income from the company for the three tax-year
period ending before the date of such termination; (ii) a lump sum payment equal
to three times the value of all "in-the-money" stock options held by such
persons at the date of termination; and (iii) continued participation in all
employee benefit plans or programs for a period of three years, provided that
the employee may, at his election, receive a lump sum cash payment equal to the
value of such benefits in lieu of continued participation in such benefit plans.
For purposes of such agreements, a change in control is defined in the same
manner as in the employment agreements of Messrs. Freedman and Falco, except
that failure of either Mr. Freedman or Mr. Falco to be elected when standing for
election as a director shall not constitute a "change in control" for purposes
thereof.
In addition to the foregoing employment and change of control arrangements, the
Company's 1993 and 1995 Stock Option Plans provide that all outstanding options
shall become fully vested and exercisable in the event of a change in control.
Litigation
The Company is periodically subject to lawsuits and administrative proceedings
arising in the ordinary course of business. Management believes that no pending
lawsuits or administrative proceeding is likely to have a material adverse
effect on the financial condition or results of operations of the Company.
F-18
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
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.
Operating Leases
The Company currently leases its office and warehouse facilities from L&G
Associates ("L&G"), a related partnership owned by the principal shareholders of
the Company, as further discussed in Note 13, Related Parties. The Company has
also entered into leases for other facilities outside of New Jersey under
operating lease agreements with terms ranging from two to five years.
A schedule of the future minimum payments under operating leases is as follows:
Related Other
Year ending December 31, Party Operating
- ------------------------ ----- ---------
1997 $ 295,032 $ 218,290
1998 295,032 191,310
1999 295,032 183,986
2000 295,032 177,108
2001 295,032 123,237
Thereafter 2,950,320 -
-------------- ---------------
$ 4,425,480 $ 893,931
============== ===============
As further discussed in Note 13, the Company incurred renovation and
construction cost at their New Jersey facility which premises are leased from a
related party. The cost of these improvements, totaling approximately $448,000,
by agreement entered into in 1994 and amended May 16, 1996, will be charged over
fifteen (15) years, through May 31, 2011, in lieu of lease payments. The cost
allocation is reflected as amortization at a rate equal to the lease terms.
Other
The Company is contingently liable to sureties under general indemnity
agreements. The Company agrees to indemnify the sureties for any payments made
on contracts of suretyship, guaranty or indemnity. The Company believes that all
contingent liabilities will be satisfied by their performance on the specific
bonded contracts involved.
F-19
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. RETIREMENT SAVINGS PLAN
In July of 1992, the Company amended an existing profit sharing plan to convert
such plan to a retirement savings plan (the "401(k) Plan") under section 401(k)
of the Internal Revenue Code. The 401(k) Plan generally covers all employees of
the Company who have completed two years of service with the Company. Employees
may elect to defer, in the form of contributions to the 401(k) Plan, up to 15%
of their annual compensation, subject to the federal maximum limit. The Company
may, at its own discretion, contribute to the plan. The Company did not
contribute to the 401(k) Plan during the years ended December 31, 1996, 1995 and
1994.
13. RELATED PARTIES
Officer Loans and Advances
From time to time the Company has made loans and advances to the two principal
shareholders, directors and officers of the Company.
On September 1, 1995, Joel Freedman, the President and Chief Executive Officer
of the Company, surrendered to the Company 36,621 shares of his common stock of
the Company at $5.25 per share, the average closing market price for the
previous month, as payment in full of loans from the Company in the amount of
$192,260. Such shares have been canceled.
At December 31, 1995, the Company had a receivable due from Frank Falco,
chairman of the Board of Directors and Chief Operating Officer of the Company,
of $552,479 including interest at 7% per annum. On April 1, 1996, Mr. Falco
surrendered to the Company 92,214 shares of his common stock of the Company at
$7.272 per share, the average closing market price for the previous month, as
payment in full of loans from the Company in the amount of $670,580, the then
current balance. Such shares have been canceled.
At December 31, 1996, the company has receivables due from Mr. Freedman and Mr.
Falco for $5,636 and $203,040, respectively, including interest at 7% per annum,
which is expected to be repaid during 1997.
Leases
The Company leases its offices and yard storage facilities from L & G
Associates, a related partnership owned by the principal stockholders of the
Company.
On March 1, 1993, the Company entered into a five year lease agreement on such
property, which includes two additional parcels of land. Pursuant to such lease,
the Company will pay base rent of $270,000 annually subject to annual
adjustments based on the consumer price index, plus costs of maintenance,
insurance and taxes.
In 1994, the Company and L&G Associates ("L&G") entered into an agreement
regarding the construction and/or renovation of expanded facilities on the
premises presently leased by the Company from L&G and the renovation and leasing
of an adjoining property. The expanded facilities were needed to support current
operations and anticipated future growth. The Board of Directors formed the
Building Committee to review the terms and fairness of such proposed expansion.
In November of 1994, the parties agreed in principal with respect to the terms
of the proposed expansion and the Building Committee determined that such
expansion met the Company's needs and was on terms which were fair to the
Company. Based on such agreement and determination, the Company in November of
1994 commenced renovation and construction on such sites of which one facility,
office space (7,600 square feet), was completed during the third quarter of
1995, and the second facility, warehouse space (5,700 square feet), was
completed during the third quarter of 1996. Renovation of such office space by
the company at an approximate cost of $303,000 constitutes payment in full of
rent for the initial term of the lease of such office space. The Company,
however, shall be responsible for all taxes, utilities, insurance and other
costs of occupying the office space during the initial term. Construction of
such warehouse space by the Company at an estimated cost of $145,000.
F-20
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. RELATED PARTIES (continued)
Leases (continued)
constitutes payment in full of rent for the initial term of the lease of such
warehouse space. The Company, however, shall be responsible for all taxes,
utilities, insurance and other costs of occupying the warehouse space during the
initial term. The total cost of the renovations was to be amortized over the
initial terms of the lease. On May 16, 1996 the leases were amended and extended
15 years to May 31, 2011. The amortization associated to the cost of the
renovation was extended through the terms of the modified lease. Amortization
expense related to these costs for the years ended December 31, 1996, 1995 and
1994 was $42,014, $24,991 and $0, respectively. For the years ended December 31,
1996, 1995 and 1994 the rent paid was $292,884, $285,050 and $276,750,
respectively. Future minimum rental payments are reflected in Note 11,
Commitments and Contingencies.
14. MAJOR CUSTOMERS, EXPORT SALES AND CONCENTRATIONS OF CREDIT RISK
The Company earned more than 10% of its revenue from a different customer in
each year. For the years ended December 31, 1996, 1995 and 1994 the revenues
were $2,745,000, $12,900,000 and $3,494,000, respectively.
Early in 1996, the Company completed a contract to dismantle and relocate an
ammonia plant to Pakistan which accounted for export sales of $2.0, $13.4 and
$12.8 million in the years ended December 31, 1996, 1995 and 1994 respectively.
Concentrations of credit risk with respect to trade receivables is limited due
to the large number of customers comprising the Company's customer base. As
discussed in Note 5 the Company has a note receivable from UPE which is not
expected to be fully collected within the coming year, therefore there is a
concentration of credit risk.
15. STOCKHOLDERS' EQUITY
Preferred Stock
In July of 1993, the Company offered and sold ten units at $50,000 per unit, or
an aggregate of $500,000. Each unit consisted of 500 shares of Series A
Preferred Stock, 6,000 shares of common stock and 5,000 warrants, exercisable to
purchase one share of common stock at $5 per share until July 31, 1996. The
preferred stock had a 9% per annum cumulative dividend, payable quarterly. The
holders of the Series A Preferred Stock had the right to "put" such shares to
the Company at a price of $100 per share after the Company attained a net worth
of $3,000,000 or more or at any time after January 15, 1994. The Company had the
right to redeem the Series A Preferred Stock at $100 per share on or after
August 1, 1995. The Company had also agreed to include the shares underlying the
warrants included in such units in any registration statement filed by the
Company following the Company's initial public offering at no cost to such unit
holders. On April 29, 1994, the Company redeemed all of the outstanding
Preferred Stock at the request of the preferred shareholders.
Common Stock
On June 22, 1993, the Company filed an amended and restated Certificate of
Incorporation to give effect to a 30,000 for 1 stock split and to simultaneously
reduce the post-split authorized shares of common stock to 20,000,000 shares,
$.001 par value and to authorize 1,000,000 shares of preferred stock, $1.00 par
value. All references to number of shares, except shares authorized, and to per
share information in the financial statements, have been adjusted to reflect the
stock split on a retroactive basis.
In January of 1994, the principal shareholders of the Company surrendered for
cancellation an aggregate of 666,666 shares of common stock. All references to
number of shares, except shares authorized, and to per share information in the
financial statements, have been adjusted to reflect the surrender and
cancellation of such shares on a retroactive basis.
F-21
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. STOCKHOLDERS' EQUITY (continued)
Common Stock (continued)
The Company completed an initial public offering of 3,450,000 units(including
units sold pursuant to the underwriter's overallotment options) in April of
1994. Each Unit consisted of one share of the Company's common stock and one
Class A Warrant. The Company received $11,792,588 from the proceeds of the
offering, after the payment of all offering costs.
On September 1, 1995, Joel Freedman, a principal shareholder, director and Chief
Executive Officer of the Company surrendered 36,621 shares of his common stock
in repayment of his officer's loan.
From November 1995 through December 31, 1996, the Company issued 1,597,269
shares of common stock in exchange for the cancellation of $5,000,000 of the
Company's 7% convertible notes.
On April 1, 1996, Frank Falco, a principal shareholder, director and Chief
Operating Officer of the Company, surrendered 92,214 shares of his common stock
in repayment of his officer's loan.
On November 15, 1996, the board of directors of the Company approved a stock
repurchase plan whereby the Company may, from time to time, repurchase on the
open market shares in its common stock in an amount up to $750,000. During the
year ended December 31, 1996, the Company repurchased for retirement 100,000
shares at a price of $216,500.
Common Stock Purchase Warrants and Options
The Company has authorized and in July of 1993, issued 50,000 warrants (the
"Private Placement Warrants") to purchase common stock. The Private Placement
Warrants are exercisable to purchase one share of common stock per warrant at a
price of $5.00 per share until August 1, 1996 and are not redeemable. In January
of 1994, the Company granted to the holders of the Private Placement Warrants
"piggy-back" registration rights pursuant to which the holders of such warrants
may include the shares underlying such warrants in any registration statement
subsequently filed by the Company at no cost to the holders of the Private
Placement Warrants. During the year ended December 31, 1996, 7,500 Private
Placement Warrants were exercised, 7,500 shares were issued in connection with
the exercises and resulted in net proceeds to the Company of $33,750.
The remaining 42,500 Private Placement Warrants expired and were canceled.
The Company's Class A Warrants are separately transferrable and entitle the
holder to purchase two shares of common stock at $4.50 per share (subject to
adjustment, which occurred). The Class A Warrants are exercisable commencing on
April 20, 1995 and expiring April 20, 1999. Any or all of the Class A Warrants
may be redeemed by the Company at a price of $.05 per warrant, upon the giving
of 30 days written notice and provided that the closing bid price of the common
stock for a period of twenty (20) consecutive trading days ending within ten
(10) days of the notice of redemption has equaled or exceeded $9.00 per share.
During the year ended December 31, 1996, 1,051,000 Class A Warrants were
exercised, 2,102,000 shares were issued in connection with the exercises and
resulted in net proceeds to the Company of $6,956,450.
In connection with the Offering, the Company sold to the Underwriter for nominal
consideration, an option for the purchase of up to 300,000 units (the "option
units"). Each option unit consisted of one share of the Company's common stock
and one Class A Warrant. Each option unit was exercisable at a price of $6.60
per option unit during the period beginning April 20, 1996 and continuing until
April 20, 1999. The option units could be exercised as to all or any lesser
number of option units and contained provisions which required, under certain
circumstances, the Company to register the option units underlying such options
for sale to the public. The option units were nontransferable except to officers
of the Underwriter, members of the underwriting group and their respective
officers and partners. The option unit exercise price and the number of option
units covered by the option were subject to adjustment to protect the holders
thereof against dilution in certain events. During May 1996, all the option
units were exercised and the company received net proceeds of $1,979,700 and
issued 300,000 shares of the Company's common stock. As of December 31, 1996 all
300,000 Class A Warrants issued in connection with the underwriter option
remained outstanding.
F-22
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. STOCKHOLDERS' EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
On June 17, 1993, the Company adopted the IDM Environmental Corp. 1993 Stock
Option Plan (formerly International Dismantling & Machinery Corp. 1993 Stock
Option Plan) (the "Stock Option Plan"). Pursuant to the Stock Option Plan, the
Company has reserved 475,000 shares of common stock for issuance pursuant to the
grant of incentive stock options and nonqualified stock options.
On April 11, 1994, the Board of Directors granted options under the Company's
1993 Stock Option Plan to certain employees and a Director to purchase 445,400
and 5,000 shares, respectively, of the Company's common stock at $4.00 per
share, the fair market value at the date of grant. The options are incentive
stock options, except for the Director's stock option which is a nonqualified
stock option. The options are exercisable until April 2004. Twenty percent of
the options vest three months from the date of grant. The balance of the options
vest at a rate of twenty percent per year on each of the four anniversary dates
subsequent to the grant of the options.
On June 2, 1994, the Company granted a total of 5,000 non qualified stock
options to two of the directors to purchase common stock at $6.25 per share, the
fair market value at the date of the grant. The options vest at the same rate as
the initial grant.
On December 28, 1994, the Company granted options to certain employees to
purchase 29,700 shares of the Company's common stock at $4.38 per share, the
fair market value at the date of the grant. On August 9, 1995, the Company
granted an option to a new employee to purchase 5,000 shares of the Company's
common stock at $5.25 per share, the fair market value at the date of grant. The
options vest at the same rate as the first grant.
On January 8, 1996, the Company amended the terms of its 1993 Stock Option Plan
to add provisions allowing for the cashless exercise of options issued under the
plan and providing for the automatic vesting of all options granted under the
plan in the event of certain changes in control of the Company. Pursuant to such
cashless exercise provisions, holders of options may, as payment of the exercise
price, have IDM withhold the number of shares of common stock at the then fair
market value, less the exercise price, of which is equal to the aggregate
exercise price of the shares of common stock issuable upon exercise of the
option. Under such provision of the accelerated vesting, notwithstanding any
vesting schedule set forth in any individual option agreement, all options
granted under the 1993 Plan will become fully vested and exercisable in the
event a person or group, other than Joel Freedman or Frank Falco, acquire in
excess of 15% of common stock of IDM unless such acquisition is approved by the
Board.
On January 8, 1996, the Company's Compensation Committee and Board of Directors
adopted and approved a new stock option plan for the Company, the IDM
Environmental Corp. 1995 Stock Option Plan (the "1995 Plan"), under which stock
option awards may be made to employees, directors and consultants of the
Company. The 1995 Plan became effective on the date it was adopted by the Board
of Directors, subject to the approval of the Company's shareholders, and it will
remain effective until the tenth anniversary of the effective date unless
terminated earlier by the Board of Directors. Pursuant to the plan, the Company
has reserved 500,000 shares of common stock for issuance pursuant to the grant
of incentive stock options and non qualified stock options. On January 8, 1996,
the Company granted options to certain employees and consultants to purchase
69,000 shares of the Company's common stock at $2.94 per share, the fair market
value at the date of the grant (41,500 have vested). In addition, on January 8,
1996, the Company approved, effective November 20, 1995, the granting of 40,000
options to purchase common stock at $3.72 per share, the fair market value at
the date of the grant, to certain consultants (all options were vested). The
balance of the 69,000 options vest at a rate of twenty percent per year on each
of the four anniversary dates subsequent to the grant of the options. Also on
January 8, 1996, the Company granted 75,000 options each to Messrs., Falco and
Freedman at $3.23 per share, 110% of the fair market value at the date of grant.
F-23
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
STOCKHOLDERS' EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
On May 23, 1996, The Company granted vested options to the outside directors, a
consultant and an employee to purchase 50,000 shares at $8.25 per share, the
fair market value at the date of grant.
On June 28, 1996 the Company adopted and approved a new stock option plan (the
"1996 consulting options") under which nonqualified stock options have been
granted to a consultant for the right to acquire 50,000 shares of its common
stock at $3.23 per share. The options, which are fully vested and exercisable
through June 28, 2006, were granted pursuant to a consultant agreement that
expires on June 30, 1997. The fair market value of these shares at the date of
grant was $7.44. The difference between the exercise price and the fair market
value at date of grant (the "intrinsic value") reflects the compensation for the
consulting services.
As referred to in Note 1, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123 ("FASB 123"), "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company's 1993 and 1995 Incentive Stock Option Plans have authorized the
granting of options to key employees and management personnel for up to 975,000
shares of the Company's common stock. Options granted have terms between 5 and
10 years and become fully exercisable ranging from 0 to 4 years of continued
employment.
Pro forma information regarding net income and earnings per share is required by
FASB 123, and has been determined as if the Company had accounted for the
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of implementation of FASB 123
using a Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995, respectively, with ranges as follows:
1996 1995
---- ----
Risk-Free interest 4.39 - 6.40% 5.65 - 6.22%
Dividend yields 0% 0%
Volatility factors of the expected
market price of the Company's
Common Stock .720 - .865% .594 - .700%
Expected life of options 2 - 5 years 4 - 5 years
Fair values for future options are to be estimated at the date of grant.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options. In management's opinion existing stock option valuation
models do not provide a reliable single measure of the fair value of employee
stock options that have vesting provisions and are not transferable. In
addition, option pricing models require the input of highly subjective
assumptions, including expected stock price volatility.
F-24
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. STOCKHOLDERS' EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. In accordance with
FASB 123, only stock options granted during the years ended December 31, 1996
and 1995 have been included for the Company's pro forma information as follows:
1996 1995
---- ----
Pro forma net loss $(9,700,064) $(3,882,441)
Pro forma loss per share:
Primary $ (1.20) $ (0.67)
Fully diluted $ (1.20) $ (0.67)
The Company recognized $63,094(net of tax effect and relating to the 1996
consulting options) and $0 of compensation expense for the years ended December
31, 1996 and 1995, respectively. An additional $552,220 and $15,028 of
compensation expense (net of tax effect) would be recognized under
implementation of FASB 123.
A summary of changes in common stock options under the 1993 plan during 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Price per Exercise
of Shares Share Price
--------- --------- --------
<S> <C> <C> <C>
January 1, 1994 - - -
Granted 485,100 $4.00- $6.25 $4.05
Canceled (30,521) 4.00 4.00
-------
Outstanding at December 31, 1994 454,579 4.05
Granted 5,000 4.38 4.38
Canceled (4,050) 4.00 4.00
-------
Outstanding at December 31, 1995 455,529 4.05
Canceled (63,967) 4.00 4.00
Exercised (20,910) 4.00 4.00
-------
Outstanding at December 31, 1996 370,652 4.05
=======
Options exercisable at
December 31, 1996 224,391 $4.00 - $6.25 $4.06
=======
Available for Future Grant 83,438
=======
</TABLE>
F-25
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. STOCKHOLDERS' EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
The weighted average remaining contractual life of the outstanding options is
7.40 years.
A summary of the 1995 plan activity which occurred during 1996 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Price per Exercise
Shares Share Price
--------- ------------- --------
<S> <C> <C> <C>
Outstanding, January 1, 1996 - - -
Granted during 1996 309,000 $2.94 - $8.25 $4.04
Exercised during 1996 (20,552) $3.72 3.72
Canceled during 1996 (9,448) $3.72 3.72
-------
Outstanding at December 31, 1996 279,000 4.08
=======
Options Exercisable at December 31, 1996 257,000 4.17
=======
Available for future grants 200,448
=======
</TABLE>
The weighted average remaining contractual life of the outstanding options is
9.07 years.
In addition, as of December 31, 1996, the 50,000 options granted under the 1996
consulting options remain outstanding at a weighted average exercise price of
$3.23. The weighted average remaining contractual life of the outstanding
options is 9.5 years.
The weighted average fair value of options granted during the years ended
December 31, 1996 and 1995 for the 1993 plan, 1995 plan and the 1996 consulting
options were as follows:
1996 1995
---- ----
Stock Prices Equal to Exercise Price 3.51 2.30
Stock Prices in Excess of Exercise Price 5.20 -
Stock Prices Less than Exercise Price 1.28 -
F-26
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. STOCKHOLDERS' EQUITY (continued)
Shareholder's Rights Plan
On April 1, 1996, the Board of Directors adopted and approved a "Shareholder
Rights Plan" in order to preserve for stockholders the long-term value of the
Company in the event of a take-over. To put the Plan into effect, the Board
declared a dividend of one Right for each share of common stock outstanding to
stockholders of record at the close of business on April 1, 1996. Each right
represents the right to purchase one one-hundredth of a share of a new series of
preferred stock without voting rights par value $1.00 per share. The exercise
price for each right is $20.00. Each right expires December 31, 2005.
The rights are not exercisable and are not transferrable apart from the
Company's common stock until the tenth day after such time as a person or group
acquires beneficial ownership of 15% or more of the Company's common stock or
the tenth business day (or such later time as the board of directors may
determine) after a person or group announces its intention to commence or
commences a tender or exchange offer the consummation of which would result in
beneficial ownership by a person or group of 15% or more of the Company's common
stock. As soon as practicable after the rights become exercisable, separate
right certificates would be issued and the rights would become transferrable
apart from the Company's common stock. In the event a person or group were to
acquire a 15% or greater position in the Company, each right then outstanding
would "flip in" and become a right to receive that number of shares of common
stock of the Company which at the time of the 15% acquisition had a market value
of two times the exercise price of the rights. The acquirer who triggered the
rights would become excluded from the "flip-in" because his rights would become
null and void upon his triggering the acquisition. The rights are redeemable by
the Company's Board of Directors at a price of $.01 per right at any time prior
to the acquisition by a person or group of beneficial ownership of 15% or more
of the Company's common stock. The redemption of the rights may be effective at
such time, on such basis, and with such conditions as the board of directors in
its sole discretion may establish. Thus, the rights would not interfere with a
negotiated merger or a white knight transaction, even after a hostile tender
offer has been commenced.
16. SUBSEQUENT EVENTS
On February 12, 1997 (the "closing date") the Company entered into a private
placement wherein it offered and sold 300 shares of $10,000 Series "B"
Convertible Preferred Stock (the "preferred shares") in private transactions to
selected investors who qualify as "accredited investors" (within the meaning of
Rule 501(a) promulgated under the Securities Act of 1933, as amended). The
preferred shares will be convertible into shares of the Company's common stock
beginning on the 91st calendar day after the closing date according to the
following:
Lower of x or y
x y
Calendar Days Closing Date Conversion Date
After Closing Average Times Average Times
- ------------- ------------- -------------
91 - 120 120% 82%
121 - 150 110% 79%
151 - 180 100% 76%
> 180 100% 73%
F-27
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
16. SUBSEQUENT EVENTS (continued)
The conversion date average is the average closing bid price of the common stock
as calculated over the five trading day period ending on the trading day
preceding the date on which the holder transmits (by telecopier) his notice to
convert. Each preferred share will be convertible into the Company's common
stock (the "conversion shares") determined by dividing $10,000 by the applicable
conversion price. The preferred shares mature on February 16, 2000, and on that
date each preferred share then outstanding shall automatically convert into
conversion shares at the then current conversion price. The preferred shares pay
an annual 7% dividend. The dividends are payable only upon conversion or
redemption of the preferred shares and are payable either in shares of common
stock (the "dividend shares") at the average market price of the common stock
over the five trading days preceding the conversion date or in cash, at the
option of the Company.
The Company agreed to register the dividend shares, the conversion shares and
the penalty shares in a registration statement filed by the Company at no cost
to the holders of such shares. If the registration statement is not declared
effective by the Commission on or before May 13, 1997, the Company will have the
obligation to pay penalty payments at the rate of $200 per preferred share per
month until the registration statement is declared effective. The Company has
the option to pay the penalty payments in cash or shares of common stock.
The Company shall have the option to redeem any conversion for which the
conversion price is less than $1.80 per share for cash in the amount of $12,200
per preferred share plus accrued dividends.
In connection with this transaction the Company paid a fee of $195,000 and
$25,000 in expenses to the placement agent. In addition, the Company granted
100,000 warrants to the placement agent. Each warrant is exercisable to purchase
one share of common stock at $3.32813 per share commencing on February 12, 1998
and expiring on February 12, 2002. The Company has granted demand and piggy-back
registration rights to the holders of these warrants.
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 thet 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.
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 (see Note 2)
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. Prior to the closing, the Company
obtained the legal opinion of CWC's counsel that states "CWC has full power,
without limitation in any way, to enter into the agreements, and all necessary
corporate steps and proceedings have been taken so that the agreements are
properly granted and executed and delivered as binding obligations of CWC". The
Company believes this claim is without merit and intends to vigorously contest
this claim.
F-28
CONSENT OF SAMUEL KLEIN AND COMPANY
We consent to the incorporation by reference in Registration Statements No.
33-92972, 333-04703 and 333-09445 of IDM Environmental Corp. on Form S-8 of our
reports dated April 4, 1997 appearing in this Annual Report on Form 10-K of IDM
Environmental Corp. for the year ended December 31, 1996.
/s/ Samuel Klein and Company
--------------------------------------
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
July 10, 1997
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