SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-23900
IDM ENVIRONMENTAL CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2194790
- --------------------------------- ---------------------------------
(State or other jurisdiction of (IRS EmployeR Identification No.)
incorporation or organization)
396 Whitehead Avenue, South River, New Jersey 08882
---------------------------------------------------
(Address of principal executive offices)
(908) 390-9550
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
--------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
As of July 31, 1997, 9,985,655 shares of Common Stock of the issuer were
outstanding.
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -June 30, 1997 and
December 31, 1996............................................... 3
Consolidated Statements of Operations - For the six months
ended June 30, 1997 and June 30, 1996........................... 4
Consolidated Statement of Operations - For the three months
ended June 30, 1997 and June 30, 1996........................... 5
Consolidated Statements of Cash Flows - For the six months
ended June 30, 1997 and June 30, 1996........................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 14
PART II - OTHER INFORMATION
Item 2. Changes in Securities....................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES................................................................ 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
============ ============
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,192,215 $ 1,001,254
Accounts receivable, net of allowance for doubtful accounts of $200,000 3,494,536 5,626,208
Stock subscription receivable 784,483 775,862
Notes receivable - current 1,279,553 1,274,773
Inventory 1,182,517 1,182,517
Costs and estimated earnings in excess of billings 1,290,542 2,595,107
Bonding deposits 8,998 55,472
Deferred income taxes 3,289,000 2,609,000
Due from officers 302,249 208,676
Prepaid expenses and other current assets 850,000 945,624
------------ ------------
Total Current Assets 13,674,093 16,274,493
Investment in Affiliate, at cost 1,300,000 1,300,000
Notes Receivable - long term 1,597,851 1,572,238
Deferred Issuance Costs, net 192,499 -
Property, Plant and Equipment, net 2,482,521 2,742,650
Other Assets 580,425 313,246
------------ ------------
$ 19,827,389 $ 22,202,627
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 674,321 $ 351,127
Accounts payable and accrued expenses 4,456,813 7,105,827
Billings in excess of costs and estimated earnings 169,283 86,496
------------ ------------
Total Current Liabilities 5,300,417 7,543,450
Long-Term Debt 380,154 164,034
Minority Interest 1,034,483 1,034,483
------------ ------------
Total Liabilities 6,715,054 8,741,967
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Convertible preferred stock, authorized 1,000,000 shares $1.00 par value,
issued and outstanding 300 shares in 1997 stated at conversion value
of $10,000 per share 3,000,000
less unamortized beneficial conversion feature (265,068)
------------ ------------
2,734,932 -
Common stock, authorized 20,000,000 shares $.001 par value, issued
and outstanding 9,602,370 9,603 9,603
Additional paid-in capital 26,469,054 25,359,465
Retained earnings (deficit) (16,101,254) (11,908,408)
------------ ------------
13,112,335 13,460,660
------------ ------------
$ 19,827,389 $ 22,202,627
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Sale of equipment $ 28,550 $ 152,800
Contract income 7,794,201 11,078,991
----------- -----------
7,822,751 11,231,791
----------- -----------
Cost of Sales:
Direct job costs 7,380,087 11,374,924
Cost of equipment sales 22,413 72,844
----------- -----------
7,402,500 11,447,768
----------- -----------
Gross Profit (loss) 420,251 (215,977)
----------- -----------
Operating Expenses:
General and administrative expenses 4,030,728 3,590,010
Depreciation and amortization 375,841 382,245
----------- -----------
4,406,569 3,972,255
----------- -----------
Income (Loss) from Operations (3,986,318) (4,188,232)
Other Income:
Interest income 37,534 15,871
----------- -----------
Income (Loss) before Provision (Credit)
for Income Taxes (3,948,784) (4,172,361)
Provision (Credit) for Income Taxes (680,000) (700,000)
----------- -----------
Net Income (Loss) (3,268,784) (3,472,361)
Preferred Stock Dividends including $844,521
amortization of beneficial conversion feature.
Total amount of $1,109,589 being amortized
over 180 days 924,062
----------- -----------
Net Income (Loss) on Common Stock $(4,192,846) $(3,472,361)
=========== ===========
Earnings (Loss) per Share:
Primary earnings (loss) per share $ (0.45) $ (0.50)
=========== ===========
Fully diluted earnings (loss) per share $ (0.45) $ (0.50)
=========== ===========
Primary common shares outstanding 9,602,370 7,006,780
=========== ===========
Fully diluted common shares outstanding 9,602,370 7,006,780
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1997 1996
----------- ----------
<S> <C> <C>
Revenue:
Sale of equipment $ - $ 152,800
Contract income 4,129,787 5,612,196
----------- -----------
4,129,787 5,764,995
----------- ----------
Cost of Sales:
Direct job costs 3,391,708 5,127,419
Cost of equipment sales - 72,844
----------- ----------
3,391,708 5,200,263
----------- ----------
Gross Profit 738,079 564,732
----------- ----------
Operating Expenses:
General and administrative expenses 1,863,074 1,937,227
Depreciation and amortization 219,782 171,084
----------- ----------
2,082,856 2,108,311
----------- ----------
(Loss) from Operations (1,344,777) (1,543,579)
Other Income (Expense):
Interest income (expense) (19,710) 13,046
----------- ----------
Income (Loss) before Provision (Credit)
for Income Taxes (1,364,487) (1,530,533)
Provision (Credit) for Income Taxes (230,000) (260,000)
----------- ----------
Net Income (Loss) (1,134,487) (1,270,533)
Preferred Stock Dividends including
$554,795 amortization of beneficial
conversion feature. Total amount of
$1,109,589 being amortized over 180 days 607,295
----------- ----------
Net Income (Loss) on Common Stock $(1,741,782) $(1,270,533)
=========== ==========
Earnings (Loss) per Share:
Primary earnings (loss) per share $ (0.18) $ (0.17)
=========== ==========
Fully diluted earnings (loss) per share $ (0.18) $ (0.17)
=========== ==========
Primary common shares outstanding 9,602,370 7,372,627
=========== ==========
Fully diluted common shares outstanding 9,602,370 7,372,627
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six months Ended June 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $(3,268,784) $(3,472,361)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred Taxes (680,000) (674,392)
Depreciation and amortization 306,475 382,245
Decrease (Increase) In:
Accounts receivable 2,131,672 (1,161,808)
Inventory - -
Notes receivable (39,014) (207,554)
Costs and estimated earnings in excess of billings 1,304,565 2,964,201
Bonding deposits 46,474 383,163
Recoverable income taxes 19,275
Prepaid expenses and other current assets 95,624 84,216
Increase (Decrease) In:
Accounts payable and accrued expenses (2,649,014) (751,903)
Billings in excess of costs and estimated earnings 82,787 (725,543)
----------- -----------
Net cash (used in) operating activities (2,669,215) (3,160,461)
----------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (36,552) (538,523)
Proceeds from disposal of property, plant and equipment 17,707
Acquisition of other assets (267,179)
Loans and advances to officers (93,573) (179,355)
----------- -----------
Net cash (used in) investing activities (379,597) (717,878)
----------- -----------
Cash Flows from Financing Activities:
Long Term Debt borrowing 763,710
Net proceeds from convertible preferred stock issuance 2,780,000
Principal payments on long-term debt (224,396) (197,521)
Issuance of common stock upon exercise of stock options 6,913,388
Dividends on preferred stock (79,541)
----------- -----------
Net cash provided by financing activities 3,239,773 6,715,867
----------- -----------
Increase in Cash and Cash Equivalents 190,961 2,837,528
Cash and Cash Equivalents, beginning of period 1,001,254 83,286
----------- -----------
Cash and Cash Equivalents, end of period $ 1,192,215 $ 2,920,814
=========== ===========
Supplementary Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest expense $ 122,994 $ 24,833
=========== ===========
Income taxes
=========== ===========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Property, plant and equipment financing -- $ 163,605
=========== ===========
Conversion of convertible promissory notes to
common stock $ 2,157,457
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of IDM Environmental Corp. and all of its wholly owned and
majority owned subsidiary companies. The December 31, 1996 balance sheet
data was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The
interim financial statements and notes thereto should be read in
conjunction with the financial statements and notes included in the
Company's Form 10-K for the year ended December 31, 1996. In the opinion of
management, the interim financial statements reflect all adjustments of a
normal recurring nature necessary for a fair statement of the results for
the interim periods presented. The current period results of operations are
not necessarily indicative of results which ultimately will be reported for
the full year ending December 31, 1997.
2. CONTINGENCIES
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration ("OSHA") issued a willful citation and notification
of penalty in the amount of $147,000 on the Company in connection with the
accidental death of an employee of one of the Company's subcontractors on
the United Illuminating Steel Point Project job site in Bridgeport,
Connecticut. A complaint was filed against the Company by the Secretary of
Labor, United States Department of Labor on September 30, 1996. The Company
is contesting the Citations and Notification of Penalty.
In November of 1996, a shareholder filed a class action lawsuit against the
Company and certain directors and officers of the Company. The suit, filed
in the Superior Court of New Jersey, Middlesex County, alleges that the
Company disseminated false and misleading financial information to the
investing public between March 27, 1996 and November 18, 1996 and seeks
damages in an unspecified amount to compensate investors who purchased the
Company's common stock between the indicated dates as well as the
disgorgement of profits allegedly received by the individual defendants
from sales of common stock during that period. The Company believes this
action is without merit and intends to vigorously contest this matter.
On February 11, 1997 the Company was served with a lawsuit naming the
Company as a co-defendant in a wrongful death cause of action arising out
of the accidental death of an employee of a subcontractor. The suit, filed
in the Federal District Court for the Northern District of Indiana, is
based on the same facts as gave rise to the aforementioned administrative
proceeding instituted by OSHA. Management believes that the suit, as it
relates to the Company, is without merit, and intends to vigorously contest
this claim. In addition the Company has insurance in place to protect
against such events.
7
<PAGE>
On April 1, 1997 Continental Waste Conversion, Inc. ("CWC") commenced
litigation against the Company and two of its subsidiaries, Global Waste &
Energy, Inc., Delaware and Global Waste & Energy, Inc., Alberta, and the
two principal officers of Global Alberta. CWC alleges that the agreements
entered into whereby CWC granted to Global Delaware the exclusive world
wide rights (excluding Canada) to the proprietary Kocee Gas Generator waste
treatment technology in exchange for a 10% interest in Global Delaware
should be voided because amongst other claims CWC did not obtain proper
approvals and the transaction was not consummated on an arms length basis.
Their claim alleges the loss of revenues estimated at $30 million. 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.
3. EARNINGS PER SHARE
The Company is calculating earnings per share to comply with the recent SEC
staff position on accounting for securities issued with beneficial
conversion features. This accounting requires that the Company reflect the
difference between the market price of the company's common stock and the
applicable conversion rate on the convertible preferred stock as a dividend
at the issue date (the beneficial conversion feature totaling $1,109,589)
and is amortizing the dividend over a 180 day period from February 12,
1997, the issue date of the convertible preferred stock.
4. SUBSEQUENT EVENTS
On August 13, 1997, the Company completed a private placement of $3,025,000
of 7% Convertible Notes (the "Convertible Notes") and 2,675,000 three year
Warrants (the "Three Year Warrants").
The Convertible Notes are convertible into Common Stock at the lesser of
(i) $2.75 per share or (ii) 75% of the average closing bid price of the
Common Stock during the five trading days prior to conversion. The Three
Year Warrants are exercisable for a three year period at the lesser of
$3.00 per share or the lowest conversion price of the Convertible Notes.
Conversion of the Convertible Notes and exercise of the Three Year Warrants
is subject to the issuance of a maximum of 1,997,130 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 1,997,130 shares, the holders of Convertible Notes and
Three Year Warrants remaining outstanding if and when 1,997,130 shares have
been issued will have the right to demand redemption of the Convertible
Notes at 125% of the principal balance outstanding and to demand redemption
of the Three Year Warrants at the pre-tax profit such holders would have
realized had the Three Year Warrants been exercised at the time redemption
is demanded. Further, the Company has the right, upon notice to the
holders, to redeem any Convertible Notes submitted for conversion at a
price of $2.75 or less at 125% of the principal amount of such Convertible
Notes. The Convertible Notes pay interest at 7% payable quarterly and on
conversion or at redemption in cash or Common Stock, at the Company's
option.
8
<PAGE>
5. REVENUE RECOGNITION AND USE OF ESTIMATES
The consolidated financial statements have been prepared on the basis of
the percentage of completion method of accounting. Under this method
contract revenue is determined by applying to the total estimated income on
each contract, a percentage which is equal to the ratio of contract costs
incurred to date to the most recent estimate of total costs which will have
been incurred upon the completion of the contract. Costs and estimated
earnings in excess of billings represents additional earnings over
billings, based upon percentage completed, as outlined above. Similarly,
billings in excess of costs and estimated earnings represent excess of
amounts billed over income recognized. Actual results can differ from the
estimates. Losses anticipated on contracts, excluding period costs, should
be charged to operations as soon as they are evident. In the first quarter
of 1997, the Company recognized revenues equivalent to its costs incurred
on its Davy contract based on approximately one million dollars in
unapproved change orders. The Company reversed these revenues in the second
quarter when it became aware that the change orders had not been approved.
The Company is aggressively pursuing its claims. Future revenues will be
recognized when this claim is finally settled. Also, in the first quarter
the Company recorded revenue of $3.5 million dollars for the sale of four
generators on a sale agreement dated March 28, 1997. Based on the Company's
discussions with the SEC accounting staff, the Company has agreed to
restate its quarterly financial statements for the year "because
recognizing change orders as revenues was tantamount to recognizing gain
contingencies which is expressly prohibited by SFAS 5"; and, "because the
revenue on the sale of the four generators should not be recognized until
the period they are shipped." The disclosure requirements of the APB
opinion number 20 of earnings (loss) per share, net income (loss), and
income tax (credit) are as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------
First Second Six
Quarter Quarter Months
----------- ----------- -----------
<S> <C> <C> <C>
Income (Loss) before Provision (Credit) for Income Taxes 1,722,311 (1,936,487) (214,176)
Change (4,306,608) 572,000 (3,734,608)
---------- --------- ---------
Amount Restated (2,584,297) (1,364,487) (3,948,784)
Provision (Credit) for Income Taxes 300,000 (340,000) (40,000)
Change (750,000) 110,000 (640,000)
--------- --------- ---------
Amount Restated (450,000) (230,000) (680,000)
Net Income (Loss) 1,422,311 (1,596,487) (174,176)
Change (3,556,608) 462,000 (3,094,608)
--------- --------- ---------
Amount Restated (2,134,297) (1,134,487) (3,268,784)
Net Income (Loss) on Common Stock 1,105,544 (2,203,782) (1,098,238)
Change (3,556,608) 462,000 (3,094,608)
--------- --------- ---------
Amount Restated (2,451,064) (1,741,782) (4,192,846)
Earning (Loss) Per Share 0.12 (0.23) (0.11)
Change (0.38) 0.05 (0.34)
--------- --------- ---------
Amount Restated (0.26) (0.18) (0.45)
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis Of Financial Condition And Results
Of Operations.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in this
report.
Second Quarter of 1997 Compared with Second Quarter of 1996
The Company's total revenues decreased by approximately 28.4% from $5,765,000
for the quarter ended June 30, 1996 to $4,130,000 for the quarter ended June 30,
1997. Contract service income decreased during the quarter by 26.4% from
$5,612,000 in 1996 to $4,130,000 in 1997. The decrease in contract service
income and total revenues is attributable to two reasons. First, the Company is
being more selective in bidding only jobs with an acceptable gross profit
margin. During 1996, the Company took on a number of contracts with lower profit
margins in order to penetrate certain strategic markets. While the Company is
currently working on fewer contracts than it did last year, each of the current
contracts has higher anticipated gross profit percentages than the contracts
performed during the first half of 1996. Second, the Company had no revenue from
any plant relocation projects in the current quarter versus approximately one
million dollars in the comparable quarter last year. Surplus equipment and scrap
sales revenues decreased 100% from $153,000 in 1996 to none in 1997.
Direct job costs decreased by approximately 33.9% from $5,127,000 for the
quarter ended June 30, 1996 to $3,392,000 for the same period in 1997. The
primary elements of such decrease in job costs were job salaries and material
and supplies. The decrease in job costs was attributable to the decrease in
contract service revenues during the quarter. Cost of equipment sales decreased
from $73,000 in 1996 to $0 in 1997.
General and administrative expenses decreased 3.8% from $1,937,000 during the
quarter ended June 30, 1996 to $1,863,000 during the same period in 1997. The
decrease in general and administrative expense was attributable to an audit
refund of $92,000 on workers compensation insurance.
In addition to its operating income and expenses, the Company reported net
interest income/(expense) of ($20,000) for the quarter ended June 30, 1997 as
compared to net interest income of $13,000 for the same period in 1996. The
decrease in net interest income/expense was primarily attributable to $41,000 in
interest expense for our Canadian subsidiary which commenced operations July of
1996.
As a result of the foregoing, the Company reported a loss before taxes of
$1,364,000 and a net loss of $1,134,000 for the quarter ended June 30, 1997 as
compared to a loss before taxes of $1,531,000 and a net loss of $1,271,000 for
the same quarter in 1996. The net loss attributable to common stock was
increased by the preferred stock dividends ($52,000) and an accounting "deemed
dividend" ($555,000) arising from amortization of the beneficial conversion
feature of the Company's Series B Preferred Stock. The Company is calculating
earning per share to comply with the recent SEC staff position on accounting for
securities issued with beneficial conversion features. This accounting require
that the Company
10
<PAGE>
reflect the difference between the market price of the company's common stock
and the applicable conversion rate on the convertible preferred stock as a
dividend at the issue date (the beneficial conversion feature totaling
$1,109,589) and is amortizing the dividend over a 180 day period from February
12, 1997, the issue date of the convertible preferred stock.
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
Total revenues decreased by approximately 30.4% from $11,232,000 for the six
months ended June 30, 1996 to $7,823,000 for the same period in 1997. Contract
service income decreased during the period by 29.7% from $11,079,000 in 1996 to
$7,794,000 in 1997. See the quarterly comparison for discussion of the factors
contributing to the decrease.
Surplus equipment revenues decreased 86.9% from $153,000 in 1996 to $29,000 in
1997 on lower volume.
Direct job costs decreased by approximately 35.1% from $11,375,000 for the six
months ended June 30, 1996 to $7,380,000 for the same period in 1997. See the
quarterly comparison for a discussion of the factors contributing to the
decrease in direct job costs.
Cost of equipment sales decreased from $73,000 in 1996 to $22,000 in 1997 on
lower volume.
General and administrative expenses increased 11.0% from $3,590,000 during the
six months ended June 30, 1996 to $4,031,000 during the same period in 1997. The
increase was primarily attributable to the $249,000 in expenses recorded by the
Company's 90% owned subsidiary, Global Waste & Energy Inc. and a $279,000
increase in professional fees.
The Company reported an increase in net interest income/(expense) from $16,000
for the six months ended June 30, 1996 to $38,000 for the same period in 1997.
The increase was attributable to increased interest income due to $2.8 million
in funds from the convertible preferred stock issuance during February 1997.
As a result of the foregoing, the Company reported a loss before taxes of
$3,949,000 and a net loss after tax of $3,269,000 for the six months ended June
30, 1997 as compared to a loss before taxes of $4,172,000 and a net loss after
taxes of $3,472,000 for the same period in 1996.
The net loss attributable to common stock was increased by $79,000 in preferred
stock dividends and $845,000 amortization of the beneficial conversion feature.
Material Changes in Financial Condition, Liquidity and Capital Resources.
At June 30, 1997, the Company had a backlog totaling approximately $44 million
compared to a backlog of approximately $52 million at June 30, 1996. The largest
component of the Company's backlog at June 30, 1997 was $15 million for the East
Dam project.
11
<PAGE>
In addition to its existing backlog, the Company is presently bidding on, and
intends to bid on numerous projects to replace revenues from projects which will
be completed during 1997 and to increase the total dollar volume of projects
under contract. Management anticipates that the Company's efforts to bid on and
secure new contracts will focus on projects which can be readily serviced from
the three regional offices opened by the Company during 1994 and 1995. In
addition, the Company has submitted proposals on several large international
plant relocation projects. The Company's regional offices, particularly the Oak
Ridge, Tennessee, Los Alamos, New Mexico, and Boston, Massachusetts offices are
strategically located in areas having a high concentration of prospective public
and private remediation sites. While bidding to perform services at such sites
is expected to be highly competitive, management believes that the Company's
existing presence on projects at these locations combined with its proven
expertise and resources will enhance the Company's chances of successfully
bidding on substantial new projects.
The Company had working capital of $8,294,000 including cash and cash
equivalents balances of $1,192,000 at June 30, 1997. This compares to working
capital of $8,731,000 and a cash balance of $1,001,000 at December 31, 1996. The
decrease in working capital is primarily attributable to the $3 million sale of
Series B Convertible Preferred Stock in February 1997 less the $3,269,000 net
loss for the six months.
Quarter-end receivables as a percentage of second quarter income was 84.6% in
1997 compared to 134.9% in the same period of 1996. Year-end receivables as a
percentage of fourth quarter income increased substantially from 53.0% in 1994
to 103.5% in 1995 and 157% in 1996. This ratio was 82% at December 31, 1993. The
ratio dropped to 53% at December 31, 1994 because the Company received a
$4,184,000 payment on a major contract on December 23, 1994. If this payment had
been received after year end, the ratio would have been a more comparable 98.4%.
Unbilled revenue as a percentage of quarterly contract income has increased from
0% at December 31, 1993, to 31% at December 31, 1994, to 56% at December 31,
1995, and to 27% at December 31, 1996 and 31% at June 30, 1997. Also, accounts
payable have constantly decreased since 1994 whereas accounts receivable and
unbilled revenues have increased substantially during this period. Prior to
going public in April 1994, most of the Company's revenues were generated in the
private sector. Many of these contracts had substantial initial mobilization
payments and generated positive cash flow during the life of the contract. Since
then the company has been successful, as a result of its growth strategy, in
obtaining a number of government contracts at major Department of Energy and
Department of Defense sites. This work was obtained as a direct result of
opening three new regional offices. The experience with these contracts has been
negative cash flows until we near contract completion. This is due to the
requirement that we submit a schedule and a schedule of values at the beginning
of the job and bill according to the percent complete of each item in the
schedule of values - not the costs we have incurred. Our jobs of any size are at
a risk of being front end cost loaded when there is little progress to report
(i.e., we cannot bill until the structure is demolished). The Company is aware
of this problem and is trying to remedy it by maximizing mobilization costs in
the schedule of values, requiring subcontractors to bill on the same basis and
aggressively negotiating better (less front end cost loaded) schedule of values.
Initially the Company tried to increase payment terms to vendors by paying them
after the Company received our payment. This method was unsuccessful. Many
vendors put the Company on a COD basis and its D&B rating weakened because D&B's
file showed "increased slowness in the company's payment record." This lower
rating hurt the Company in attempts to establish credit with new vendors.
Because IDM is a growing company and trying to establish good relationships with
its vendors, the company is now paying its vendors within terms to fifteen days
late and attempting to improve its D&B "paydex rating." The paydex rating of 60
is much worse than the average of the lower quartile for the industry of 68
(median for the industry is 75).
Inventory of $1,182,000 at June 30, 1997 remains unchanged from December 31,
1996.
12
<PAGE>
The Company's inventory consists of nineteen (19) generator sets with a total
electrical capacity of 242,500 kilowatts per hour (KWH). The estimated market
price of the Company's generator inventory is twelve million dollars. Twelve
(12) of the generators are steam driven and range in size from 12,500 kilowatts
to 33,000 kilowatts (KW). Seven (7) of the generators are diesel driven and
range in size from 1,000 to 9,000 kilowatts (KW). These generator sets should
not be considered as obsolete or outdated inventory since its design and
technology has not changed much over the years. They are very long lead items
(15-18 months), experience and project specific and as such they are not to be
compared with disposable items. It is the Company's intent to incorporate two
(2) 15,000 KW generator sets (steam driven) in the Company's pending El Salvador
waste to energy project. In future projects, the Company will try to use the
balance of the 15,000 KW generator sets and the 12,500 KW and 33,000 KW sets.
The Company has available at December 31, 1996, approximately $11,575,000 of
operating loss carry-forwards that may be applied against future taxable income.
$2,350,000 of such losses expire in the year 2010 and the balance the following
years. Based on the reported loss to date it will take approximately $9.4
million dollars in future taxable income to recover the reported deferred tax
asset.
At June 30, 1997, the Company's only long term debt was $380,000 in installment
debt secured by job equipment.
During the quarter ended June 30, 1997, the Company made additional loans of
$277,000 repayable upon demand with interest at 9.25% to its ninety percent
owned subsidiary, Global Waste & Energy, Inc. ("Global Delaware"). In addition,
IDM, through a wholly-owned subsidiary of Global Delaware ("Global Alberta")
loaned $160,000 (Canadian) to Continental Waste Conversion, Inc. ("CWC")
repayable in 18 consecutive installments commencing January 1, 1997 with
interest at 7.5% per annum. As of the date of this report, CWC has made no
payment and the loan is delinquent. On April 1, 1997 CWC commenced litigation
against the Company and two of its subsidiaries, Global Delaware and Global
Alberta, and the two principal officers of Global Alberta. CWC alleges that the
agreements entered into whereby CWC granted to Global Delaware the exclusive
world wide rights (excluding Canada) to the proprietary Kocee Gas Generator
waste treatment technology in exchange for a 10% interest in Global Delaware
should be voided because amongst other claims CWC did not obtain proper
approvals and the transaction was not consummated on an arms length basis. Their
claim alleges the loss of revenues estimated at $30 million. 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.
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.
Since 1994, the Company has consistently generated negative operating cash
flows. The primary reason for this was due to the Company's policy of
successfully bidding new work at lower than normal margins in order to penetrate
strategic markets serviced by the Company's newly opened regional offices. Now
that the Company is established in these markets, the Company has been bidding
work at normal margins. Management of the Company believes, based on the current
backlog of work and expected work to be awarded based on bids outstanding, that
future operating cash flows will be positive by year end.
As a result of the Company's negative operating cash flows, the Company has,
from time to time, sought additional capital to support operations and growth.
During the first half of 1997, the Company sold 300 shares of Series B
Convertible Preferred Stock for $3.0 million. The Series B Preferred Stock is
convertible into Common Stock at a price based on the lesser of a predetermined
percentage of the market price at closing or a predetermined discount to the
market price of the Common Stock over the five trading-day period preceding
conversion. The current conversion price of the Series B Preferred Stock is the
lesser of $2.225 or 73% of the average closing price of the Common Stock over
the five trading-day period preceding conversion. The Series B Preferred Stock
13
<PAGE>
pays a 7% dividend payable on conversion or at redemption in cash or Common
Stock, at the Company's option. Conversions are subject to the Company's right
to redeem at $12,200 per share any Series B Preferred Shares submitted for
conversion at a price of $1.80 per share or less. In conjunction with the sale
of the Series B Preferred Stock, the Company undertook to file a registration
statement covering the resale by the holders of Common Stock issuable pursuant
to the terms of the Series B Preferred Stock. Pursuant to the terms of such
undertaking, the Company is obligated to pay to the holders two percent of the
face amount of the preferred stock per month, payable in cash or in Common
Stock, commencing approximately May 15, 1997 until the required registration
statement becomes effective.
Subsequent to the end of the quarter, on August 13, 1997, the Company completed
a private placement of $3,025,000 of 7% Convertible Notes (the "Convertible
Notes") and 2,675,000 three year Warrants (the "Three Year Warrants"). The
Convertible Notes are convertible into Common Stock at the lesser of (i) $2.75
per share or (ii) 75% of the average closing bid price of the Common Stock
during the five trading days prior to conversion. The Three Year Warrants are
exercisable for a three year period at the lesser of $3.00 per share or the
lowest conversion price of the Convertible Notes. Conversion of the Convertible
Notes and exercise of the Three Year Warrants is subject to the issuance of a
maximum of 1,997,130 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 1,997,130
shares, the holders of Convertible Notes and Three Year Warrants remaining
outstanding if and when 1,997,130 shares have been issued will have the right to
demand redemption of the Convertible Notes at 125% of the principal balance
outstanding and to demand redemption of the Three Year Warrants at the pre-tax
profit such holders would have realized had the Three Year Warrants been
exercised at the time redemption is demanded. Further, the Company has the
right, upon notice to the holders, to redeem any Convertible Notes submitted for
conversion at a price of $2.75 or less at 125% of the principal amount of such
Convertible Notes. The Convertible Notes pay interest at 7% payable quarterly
and on conversion or at redemption in cash or Common Stock, at the Company's
option.
Management believes that the Company's working capital following its August 1997
Convertible Note placement is sufficient to meet the Company's anticipated needs
for at least the following twelve months, including the performance of all
existing contracts of the Company. However, as the Company is presently pursuing
bids on multiple large projects, the Company may be required to seek new bank
lines of credit or other financing in order to facilitate the performance of
jobs if the volume and size of projects being performed by the Company increases
substantially. While the Company is conducting ongoing discussions with various
potential lenders with a view to establishing available bank lines of credit if
and when needed to support future growth, the Company presently has no
commitments from any bank or other lender to provide financing if such financing
becomes necessary to support growth.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
14
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
(a) On August 13, 1997, the Company sold $3,025,000 of 7% Convertible
Notes and 2,675,000 Three Year Warrants.
(b) The securities were issued to sixteen accredited investors.
(c) The aggregate sales price of such securities was $3,025,000.
Commissions totaling 10% were paid in connection with the placement.
(d) The securities were offered pursuant to Regulation D. The offer was
directed exclusively to a limited number of accredited investor
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 Convertible Notes are convertible into Common Stock at the lesser
of (i) $2.75 per share or (ii) 75% of the average closing bid price of
the Common Stock during the five trading days prior to conversion. The
Three Year Warrants are exercisable for a three year period at the
lesser of $3.00 per share or the lowest conversion price of the
Convertible Notes. Conversion of the Convertible Notes and exercise of
the Three Year Warrants is subject to the issuance of a maximum of
1,997,130 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
1,997,130 shares, the holders of Convertible Notes and Three Year
Warrants remaining outstanding if and when 1,997,130 shares have been
issued will have the right to demand redemption of the Convertible
Notes at 125% of the principal balance outstanding and to demand
redemption of the Three Year Warrants at the pre-tax profit such
holders would have realized had the Three Year Warrants been exercised
at the time redemption is demanded. Further, the Company has the
right, upon notice to the holders, to redeem any Convertible Notes
submitted for conversion at a price of $2.75 or less at 125% of the
principal amount of such Convertible Notes. The Convertible Notes pay
interest at 7% payable quarterly and on conversion or at redemption in
cash or Common Stock, at the Company's option.
Item 4. Submission of Matter to a Vote of Security Holders
(a) On June 9, 1997, an annual meeting of shareholders of IDM
Environmental Corp. was held.
(b) The following directors were elected (by the vote indicated) at such
meeting:
Frank Patti 7,201,386 For 142,496 Against
(c) In addition to the election of directors as noted above, the following
matters were voted upon at such meeting:
(i) Approval of amendment to Certificate of Incorporation to increase
the number of authorized shares of common stock from 20,000,000
shares to 30,000,000 shares (6,552,449 For, 184,879 Against,
7,850 Abstain)
(ii)Approval of issuances of shares in excess of 1,915,000 in
connection with Series B Convertible Preferred Stock (1,914,067
For, 202,104 Against, 3,850 Abstain)
Item 5. Other Information
On July 11, 1997, Mori Aaron Schweitzer resigned as a director of the
Company.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- ------------------------------------------------------
10.1* Form of Convertible Note due January 31, 1999
10.2* Form of Three Year Warrant
(b) Reports on Form 8-K
None.
- ------------------------
* Previously filed.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IDM ENVIRONMENTAL CORP.
Dated: November 19, 1997 By: /s/ Joel Freedman
---------------------------------
Joel Freedman, President
Dated: November 19, 1997 By: /s/ Michael B. Killeen
---------------------------------
Michael B. Killeen, Principal
Financial and Accounting Officer
17
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<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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