SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 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
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(Address of principal executive offices)
(908) 390-9550
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(Registrant's Telephone Number, Including Area Code)
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(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......................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 13
PART II - OTHER INFORMATION
Item 2. Changes in Securities....................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES................................................................ 16
<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 4,094,536 5,626,208
Stock subscription receivable 784,483 775,862
Notes receivable - current 6,679,553 1,274,773
Inventory 917,125 1,182,517
Costs and estimated earnings in excess of billings 1,790,542 1,655,754
Bonding deposits 8,998 55,472
Deferred income taxes 2,649,000 2,609,000
Due from officers 302,249 208,676
Prepaid expenses and other current assets 850,000 1,884,977
------------ ------------
Total Current Assets 19,268,701 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
------------ ------------
$ 25,421,997 $ 22,202,627
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 674,321 $ 351,127
Accounts payable and accrued expenses 6,956,813 7,105,827
Billings in excess of costs and estimated earnings 169,283 86,496
------------ ------------
Total Current Liabilities 7,800,417 7,543,450
Long-Term Debt 380,154 164,034
Minority Interest 1,034,483 1,034,483
------------ ------------
Total Liabilities 9,215,054 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) (13,006,646) (11,908,408)
------------ ------------
16,206,943 13,460,660
------------ ------------
$ 25,421,997 $ 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 $ 3,528,550 $ 152,800
Contract income 8,294,201 14,960,600
----------- -----------
11,822,751 15,113,400
----------- -----------
Cost of Sales:
Direct job costs 7,380,087 10,018,263
Cost of equipment sales 287,805 72,844
----------- -----------
7,667,892 10,091,107
----------- -----------
Gross Profit 4,154,859 5,022,293
----------- -----------
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 (251,710) 1,050,038
Other Income:
Interest income 37,534 15,871
----------- -----------
Income (Loss) before Provision (Credit)
for Income Taxes (214,176) 1,065,909
Provision (Credit) for Income Taxes (40,000) 212,000
----------- -----------
Net Income (Loss) (174,176) 853,909
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 $(1,098,238) $ 853,909
=========== ===========
Earnings (Loss) per Share:
Primary earnings (loss) per share $ (0.11) $ 0.12
=========== ===========
Fully diluted earnings (loss) per share $ (0.11) $ 0.12
=========== ===========
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 3,557,787 7,478,755
----------- -----------
3,557,787 7,631,555
----------- ----------
Cost of Sales:
Direct job costs 3,391,708 5,454,122
Cost of equipment sales - 72,844
----------- ----------
3,391,708 5,526,966
----------- ----------
Gross Profit 166,079 2,104,589
----------- ----------
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 (1,916,777) (3,722)
Other Income (Expense):
Interest income (expense) (19,710) 13,046
----------- ----------
Income (Loss) before Provision (Credit)
for Income Taxes (1,936,487) 9,324
Provision (Credit) for Income Taxes (340,000) 2,000
----------- ----------
Net Income (Loss) (1,596,487) 7,324
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 $(2,203,782) $ 7,324
=========== ==========
Earnings (Loss) per Share:
Primary earnings (loss) per share $ (0.23) $ 0.00
=========== ==========
Fully diluted earnings (loss) per share $ (0.23) $ 0.00
=========== ==========
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) $ (174,176) $ 853,909
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred Taxes (40,000) 237,608
Depreciation and amortization 306,475 382,245
Decrease (Increase) In:
Accounts receivable 1,531,672 (1,161,808)
Inventory 265,392 -
Notes receivable (5,439,014) (207,554)
Costs and estimated earnings in excess of billings (134,788) (917,408)
Bonding deposits 46,474 383,163
Recoverable income taxes 19,275
Prepaid expenses and other current assets 1,034,977 84,216
Increase (Decrease) In:
Accounts payable and accrued expenses (149,014) (2,108,564)
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. NOTES RECEIVABLE
The Company entered into a sale agreement with a German company dated as of
March 28, 1997 for the sale of certain power generating equipment (the
"equipment") for a total purchase price of six million ($6,000,000)
dollars. The $3.5 million sale, net of the $2.5 million to our joint
venture partner, less our inventory carrying cost of approximately $.3
million generated a gross margin of $3.2 million. The payment terms of the
sale agreement included an initial payment of $600,000 and four installment
payments of $1,350,000 each plus interest at 5.6246 % payable on September
28 and December 28, 1997 and March 28 and June 28, 1998. The debt is
collateralized by a security interest in the equipment. Prior to the sale,
the equipment was owned jointly by the Company and its joint venture
partner, UPE. The Company agreed to purchase UPE's ownership interest in
the equipment for two million five hundred thousand ($2,500,000) dollars.
3. 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.
4. 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.
5. 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>
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 53.4% from $7,632,000
for the quarter ended June 30, 1996 to $3,558,000 for the quarter ended June 30,
1997. Contract service income decreased during the quarter by 52.4% from
$7,479,000 in 1996 to $3,558,000 in 1997. The decrease in contract service
income and total revenues is attributable to three 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. Third, the Company recorded
a reserve of one million dollars reversing previously booked revenues as a
result of disputes in connection with the Company's contract 96-026 (the "Davy"
contract). Based on the best information available at the time the Company's
first quarter report was filed, the Company anticipated that the Davy contract
would break even. The Company had estimated total contract costs of $2.8
million. The contract value was $1.8 million and the Company had submitted $0.6
million in contract change orders and expected to submit an additional $0.4
million in change orders. Since that date, the Company has had a "falling out"
with its joint venture partner who in trying to get another contract with the
same customer did not submit the additional change orders. Since the change
orders have not been approved by the customer, the Company has reversed this one
million dollars in contract revenue in the current quarter. The Company is
vigorously pursuing collection of these amounts from both the customer and its
joint venture partner. The Company has liened the job site and expects to
ultimately recover this money. Surplus equipment and scrap sales revenues
decreased 100% from $153,000 in 1996 to none in 1997.
Direct job costs decreased by approximately 37.8% from $5,454,000 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. The reason why contract revenues
decreased 52.4% and direct job costs decreased only 37.8% during the quarter is
primarily attributable to the reversal of one million dollars in revenues on the
Davy contract discussed above. Without this reversal the reduction in contract
revenues would have been a more comparable 39.1%. 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
$1,936,000 and a net loss of $1,596,000 for the quarter ended June 30, 1997 as
compared to income before taxes of $9,000 and net income of $7,000 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 requires that the Company
9
<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 21.8% from $15,113,000 for the six
months ended June 30, 1996 to $11,823,000 for the same period in 1997. Contract
service income decreased during the period by 44.6% from $14,961,000 in 1996 to
$8,294,000 in 1997. See the quarterly comparison for discussion of the factors
contributing to the decrease.
Surplus equipment revenues increased 95.7% from $153,000 in 1996 to $3,529,000
in 1997. The increase in surplus equipment revenues was attributable to the sale
of four generators to a German company in the first quarter for $3,500,000.
Direct job costs decreased by approximately 26.3% from $10,018,000 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 increased from $73,000 in 1996 to $288,000 in 1997. The
increase in cost of equipment sales was attributable to the sale of four
generators to a German company.
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
$214,000 and a net loss after tax of $174,000 for the six months ended June 30,
1997 as compared to income before taxes of $1,066,000 and net income after taxes
of $854,000 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.
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 $ 11,468,000, 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
increase in working capital is primarily attributable to the $3 million sale of
Series B Convertible Preferred Stock in February 1997.
10
<PAGE>
Quarter-end receivables as a percentage of second quarter income was 89.8%
(before the reversal of Davy contract revenue) in 1997 compared to 101.9% 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 44% at December 31, 1996 and 46% 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 $917,000 at June 30, 1997 decreased from $1,182,000 at December 31,
1996. The decrease in inventory at June 30, 1997 was attributable to the
Company's entering into a sale agreement with a German company dated as of March
28, 1997 for the sale of certain power generating equipment (the "equipment")
for a total purchase price of six million ($6,000,000) dollars. The payment
terms of the sale agreement required an initial payment of $600,000 and four
installment payments of $1,350,000 each plus interest at 5.6246 % payable on
September 28 and December 28, 1997 and March 28 and June 28, 1998. The debt is
collateralized by a security interest in the equipment. Prior to the sale, the
equipment was owned jointly by the Company and its joint venture partner, UPE.
The Company agreed to purchase UPE's ownership interest in the equipment for two
million five hundred thousand (US$2,500,000) dollars.
The Company's inventory consists of fifteen (15) generator sets with a total
electrical capacity of 212,500 kilowatts per hour (KWH). The estimated market
price of the Company's generator inventory is ten million dollars. Twelve (12)
of the generators are steam driven and range in size from 12,500 kilowatts to
33,000 kilowatts (KW). Three (3) 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.
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
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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.
As a result of the Company's negative operating cash flows, the Company has,
from time to time, sought additional capital to support operations and growth.
During the first half of 1997, the Company sold 300 shares of Series B
Convertible Preferred Stock for $3.0 million. The Series B Preferred Stock is
convertible into Common Stock at a price based on the lesser of a predetermined
percentage of the market price at closing or a predetermined discount to the
market price of the Common Stock over the five trading-day period preceding
conversion. The current conversion price of the Series B Preferred Stock is the
lesser of $2.225 or 73% of the average closing price of the Common Stock over
the five trading-day period preceding conversion. The Series B Preferred Stock
pays a 7% dividend payable on conversion or at redemption in cash or Common
Stock, at the Company's option. Conversions are subject to the Company's right
to redeem at $12,200 per share any Series B Preferred Shares submitted for
conversion at a price of $1.80 per share or less. In conjunction with the sale
of the Series B Preferred Stock, the Company undertook to file a registration
statement covering the resale by the holders of Common Stock issuable pursuant
to the terms of the Series B Preferred Stock. Pursuant to the terms of such
undertaking, the Company is obligated to pay to the holders two percent of the
face amount of the preferred stock per month, payable in cash or in Common
Stock, commencing approximately May 15, 1997 until the required registration
statement becomes effective.
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.
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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.
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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.
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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.
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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: August 19, 1997 By: /s/ Joel Freedman
---------------------------------
Joel Freedman, President
Dated: August 19, 1997 By: /s/ Michael B. Killeen
---------------------------------
Michael B. Killeen, Principal
Financial and Accounting Officer
16
EXHIBIT A
THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED,
HYPOTHECATED, OR OTHERWISE TRANSFERRED, DISPOSED OF OR OFFERED FOR SALE, IN
WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THAT ACT COVERING THIS NOTE AND/OR THE COMMON STOCK ISSUABLE UPON CONVERSION
THEREOF, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IDM ENVIRONMENTAL
CORP., THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
Principal Sum: $___________
Holder: __________________
CONVERTIBLE NOTE
(the "Note")
IDM ENVIRONMENTAL CORP.
IDM ENVIRONMENTAL CORP., a New Jersey corporation (hereinafter called the
"Corporation"), hereby promises to pay the Principal Sum to the order of Holder
on January 31, 1999. This Note shall accrue interest at the rate of 7% per
annum, payable on the first day of each calendar quarter commencing October 1,
1997 and at maturity or on conversion (each, an "interest payment date").
Accrued interest shall be payable at the Company's option either (i) in cash, or
(ii) in registered and unrestricted common stock of the Company at the
conversion price which shall on the interest payment date be applicable under
Section 2(a). Interest shall be computed on the basis of a 360-day year.
1. This Note is being issued under a Private Placement Purchase Agreement
between the Company and the Holder (the "Subscription Agreement"). The term
"Registration Statement" shall have the meaning attributed thereto in the
Subscription Agreement, and the term "Effective Date" means the date on
which the Registration Statement shall be declared to be effective.
"Completion Date" shall have the meaning ascribed thereto in the
Subscription Agreement.
2. Conversion Rights.
(a) The principal and accrued interest on this Note is convertible by
Subscriber from time to time after the Completion Date, in whole or in
part, into shares of common stock of the Company ("Common Stock") at
the lesser (the "Conversion Price") of $2.75 per share (the "Cap") or
75% of the average closing bid price (the "Average Price") of the
Common Stock during the last five trading days prior to conversion.
(b) In the event that the Holder elects to exercise its conversion rights
hereunder, such conversion shall be effective when Holder shall give
to the Company written notice of such election (which may be effected
by facsimile). The Company shall, within two business days after
receipt by the Company of notice of conversion and the Note being
converted, deliver irrevocable instructions to its transfer agent
(with a copy to Holder) to issue on an expedited basis the shares of
Common Stock issuable on such conversion.
(c) If the Effective Date has not occurred by the 90th day after the
Completion Date, then, in addition to the Holder's other remedies:
(i) the interest rate under the Note shall be increased to 18% per
annum (or, if less, the highest rate permitted by law) until the
Effective Date, and
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(ii) at Holder's option, the Note shall not be repaid by the Company
or shall remain convertible and accrue interest, until such date
as is designated by Holder but not later than 180 days after the
Effective Date.
(d) If the Effective Date has not occurred by the 180th day after the
Completion Date, then, in addition to the Holder's other remedies, the
interest rate under the Note shall be further increased to 24% per
annum (or, if less, the highest rate permitted by law) until the
Effective Date.
(e) The Company shall reserve for issuance on conversion and exercise of
this Note and the Warrant (as defined in the Subscription Agreement)
the number shares of Common Stock which would be issuable under this
Note if converted at a Conversion Price of $1.375. The Company shall
use its best efforts promptly to list on NASDAQ all shares of Common
Stock which are issued upon conversion of this Note.
(f) The Note shall be convertible at any time only to the extent that
Holder would not as a result of such exercise beneficially own more
that 4.99% of the then outstanding Common Stock. Beneficial ownership
shall be defined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934. The opinion of counsel to Holder shall prevail
in the event of any dispute on the calculation of Holder's beneficial
ownership.
(g) If any capital reorganization or reclassification of the common stock,
or consolidation, or merger of the Company with or into another
corporation, or the sale or conveyance of all or substantially all of
its assets to another corporation shall be effected, then, as a
condition precedent of such reorganization or sale, the following
provision shall be made: The Holder of the Note shall from and after
the date of such reorganization or sale have the right to receive (in
lieu of the shares of common stock of the Company immediately
theretofore receivable with respect to the Note, upon the exercise of
conversion rights), such shares of stock, securities or assets as
would have been issued or payable with respect to or in exchange for
the number of outstanding shares of such common stock immediately
theretofore receivable with respect to the Note (assuming the Note
were then convertible). In any such case, appropriate provision shall
be made with respect to the rights and interests of the Holders to the
end that such conversion rights (including, without limitation,
provisions for appropriate adjustments) shall thereafter be
applicable, as nearly as may be practicable in relation to any shares
of stock, securities or assets thereafter deliverable upon the
exercise thereof.
(h) The Company covenants to call a special meeting of shareholders on or
before November 15, 1997 to approve the issuance of shares on
conversion of the Notes and Warrants issued to the Purchasers (as
defined in the Subscription Agreement). Joel Freedman and Frank Falco
have on this date agreed to vote in favor of such approval, and the
Board of Directors of the Company will recommend that the shareholders
of the Company vote in favor of such approval. Until such approval is
obtained, the maximum number of shares which will be issued on
conversion of the Notes and exercise of the Warrants is 1,997,130,
issuable on a first converted-first exercised basis. Should such
approval not be obtained by November 15, 1997, then until such
approval is obtained, the Company shall on demand by Holder made at
any time or times redeem any portion of the Note designated for
redemption (the "Redeemed Portion") at a redemption price equal to
125% of the principal and/or interest proposed to be converted. The
redemption price shall be payable within five business days after
demand for redemption is made, and shall accrue interest payable in
demand at 11% per annum.
3. In the event that the Holder proposes to convert all or any portion of the
principal or interest of this Note at a conversion price of less than
$2.75, the Company shall at its option be entitled to redeem all or any
portion of the Note proposed to be converted. Such option shall be
exercisable by paying to the Holder, within three business days after the
date of such proposed conversion, 125% of the amount of principal proposed
to be converted, together with accrued and unpaid interest.
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4. The Company covenants and agrees that all shares of Common Stock which may
be issued upon conversion of this Note will, upon issuance, be duly and
validly issued, fully paid and non-assessable and no personal liability
will attach to the holder thereof.
5. Purchase for Investment. The Holder, by acceptance hereof, acknowledges
that the Note (and the Common Stock into which the Note is convertible) has
not been registered under the Act, covenants and agrees with the Company
that such Holder is taking and holding this Note (and the Common Stock into
which the Note is convertible) for investment purposes and not with a view
to, or for sale in connection with, a distribution thereof and that this
Note (and the Common Stock into which the Note is convertible) may not be
assigned, hypothecated or otherwise disposed of in the absence of an
effective registration statement under the Act or an opinion of counsel for
the Holder, which counsel shall be reasonably satisfactory to the Company,
to the effect that such disposition is in compliance with the Act, and
represents and warrants that such Holder is an "accredited investor" that
such Holder has, or with its representative has, such knowledge and
experience in financial and business matters to be capable of evaluating
the merits and risks in respect of this Note (and the Common Stock into
which the Note is convertible) and is able to bear the economic risk of
such investment.
6. Certain Payments. In the event the Company fails to deliver irrevocable
instructions to its transfer agent as required under Section 2(b) within
two days after conversion , or if the Company fails timely to make a
redemption payment as required under Section 2 or 3, then, without limiting
Holder's other rights and remedies (including, without limitation, rights
and remedies available to Holder upon an event of default), the Company
shall forthwith pay to the Holder an amount accruing at the rate of $1,000
per day for each day of such breach for each $100,000 principal amount of
this Note, with pro rata payments for principal amounts of less than
$100,000.
7. Events of Default and Acceleration of the Note.
(a) An "event of default" with respect to this Note shall exist if any of
the following shall occur, if:
(i) The Company shall breach or fail to comply with any provision of
this Note and such breach or failure shall continue for 15 days
after written notice by any Holder of any Note to the Company.
(ii) A receiver, liquidator or trustee of the Company or of a
substantial part of its properties shall be appointed by court
order and such order shall remain in effect for more than 15
days; or the Company shall be adjudicated bankrupt or insolvent;
or a substantial part of the property of the Company shall be
sequestered by court order and such order shall remain in effect
for more than 15 days; or a petition to reorganize the Company
under any bankruptcy, reorganization or insolvency law shall be
filed against the Company and shall not be dismissed within 45
days after such filing.
(iii)The Company shall file a petition in voluntary bankruptcy or
request reorganization under any provision of any bankruptcy,
reorganization or insolvency law, or shall consent to the filing
of any petition against it under any such law.
(iv) The Company shall make an assignment for the benefit of its
creditors, or admit in writing its inability to pay its debts
generally as they become due, or consent to the appointment of a
receiver, trustee or liquidator of the Company, or of all or any
substantial part of its properties.
(b) If an event of default referred to in clause (i) shall occur, the
Holder may, in addition to such Holder's other remedies, by written
notice to the Company, declare the principal amount of this Note,
together with all interest accrued thereon, to be due and payable
immediately. Upon any such declaration, such amount shall become
immediately due and payable and the Holder shall have all such rights
3
<PAGE>
and remedies provided for under the terms of this Note and the
Subscription Agreement. If an event of default referred to in clauses
(ii), (iii) or (iv) shall occur, the principal amount of this Note,
together with all interest accrued thereon, shall become immediately
due and payable and the Holder shall have all such rights and remedies
provided for under the terms of this Note and the Subscription
Agreement.
8. Miscellaneous.
(a) All notices and other communications required or permitted to be given
hereunder shall be in writing and shall be given (and shall be deemed
to have been duly given upon receipt) by delivery in person, by
telegram, by facsimile, recognized overnight mail carrier, telex or
other standard form of telecommunications, or by registered or
certified mail, postage prepaid, return receipt requested, addressed
as follows: (a) if to the Holder, to such address as such Holder shall
furnish to the Company in accordance with this Section, or (b) if to
the Company, to it at its headquarters office, or to such other
address as the Company shall furnish to the Holder in accordance with
this Section.
(b) This Note shall be governed and construed in accordance with the laws
of the State of New Jersey applicable to agreements made and to be
performed entirely within such state.
(c) The Company waives protest, notice of protest, presentment, dishonor,
notice of dishonor and demand.
(d) If any provision of this Note shall for any reason be held to be
invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision hereof, but this Note shall be
construed as if such invalid or unenforceable provision had never been
contained herein.
(e) The waiver of any event of default or the failure of the Holder to
exercise any right or remedy to which it may be entitled shall not be
deemed a waiver of any subsequent event of default or of the Holder's
right to exercise that or any other right or remedy to which the
Holder is entitled.
(f) The Holder of this Note shall be entitled to recover its legal and
other costs of collecting on this Note, and such costs shall be deemed
added to the principal amount of this Note.
(g) In addition to all other remedies to which the Holder may be entitled
hereunder, Holder shall also be entitled to decrees of specific
performance without posting bond or other security.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed on the
date set forth below
Dated: _____________________
IDM ENVIRONMENTAL CORP.
By:____________________________________
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Exhibit B
Neither this Warrant nor the shares of Common Stock issuable on exercise of this
Warrant have been registered under the Securities Act of 1933. None of such
securities may be transferred in the absence of registration under such Act or
an opinion of counsel to the effect that such registration is not required.
IDM ENVIRONMENTAL CORP.
WARRANT
DATED:
Number of Shares:
Holder:
Address:
- -------------------------------
1. THIS CERTIFIES THAT the Holder is entitled to purchase from IDM
ENVIRONMENTAL CORP., a New Jersey corporation (hereinafter called the
"Company"), the number of shares of the Company's common stock ("Common
Stock") set forth above, at an exercise price equal to $3.00, or, if less,
the lowest Conversion Price at which, prior to exercise, any Purchaser
shall have converted any Note or any portion of any Note. The terms
"Conversion Price," "Notes" and "Purchaser" have the meanings attributed to
them in the Subscription Agreement (as hereinafter defined). This Warrant
may be exercised in whole or in part at any time prior to expiration. The
exercise price for each exercise shall be computed separately, so that if
after any given exercise, a Note is converted at a Conversion Price lower
than $3.00 and lower than the exercise price relating to such first
exercise, the exercise price for the later exercise shall be equal to such
Conversion Price.
2. All rights granted under this Warrant shall expire on the third anniversary
of the date of issuance of this Warrant.
3. Notwithstanding anything to the contrary contained herein, Holder shall not
have the right to exercise this Warrant so long as and to the extent that
at the time of such exercise, such exercise would cause the Holder then to
be the "beneficial owner" of five percent (5%) or more of the Company's
then outstanding Common Stock. For purposes hereof, the term "beneficial
owner" shall have the meaning ascribed to it in Section 13(d) of the
Securities Exchange Act of 1934. The opinion of legal counsel to Holder, in
form and substance satisfactory to the Company and the Company's counsel,
shall prevail in all matters relating to the amount of Holder's beneficial
ownership.
4. In the event the Company breaches its obligation to deliver irrevocable
instructions to its transfer agent as required under Section 14, or timely
to make any payment required under Section 7 for Common Stock under this
Warrant upon exercise, then, without limiting Holder's other rights and
remedies, the Company shall forthwith pay to the Holder an amount accruing
at the rate of $1,000 per day for each day of such breach for each 20,000
shares of common stock subject to this Warrant, with pro rata payments for
shares in an amount less than 20,000.
5. This Warrant and the Common Stock issuable on exercise of this Warrant (the
"Underlying Shares") may be transferred, sold, assigned or hypothecated,
only if registered by the Company under the Securities Act of 1933 (the
"Act") or if the Company has received from counsel to the Company a written
opinion to the effect that registration of the Warrant or the Underlying
Shares is not necessary in connection with such transfer, sale, assignment
or hypothecation. The Warrant and the Underlying Shares shall be
appropriately legended to reflect this restriction and stop transfer
instructions shall apply. The Holder shall through its counsel provide such
information as is reasonably necessary in connection with such opinion.
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6. The holder of this warrant is entitled to certain registration rights under
an Agreement dated of even date herewith (the "Subscription Agreement").
Upon each permitted transfer of this Warrant after the registration
statement has been declared effective, the Company will within two business
days after receipt of notice thereof supplement the registration statement
to reflect the name of the transferee as a selling shareholder thereunder.
7. The Company covenants to call a special meeting of shareholders on or
before November 15, 1997 to approve the issuance of shares on conversion of
the Notes and Warrants issued to the Purchasers (as defined in the
Subscription Agreement). Joel Freedman and Frank Falco have on this date
agreed to vote in favor of such approval and the Board of Directors of the
Company will recommend that the shareholders of the Company vote in favor
of such approval. Until such approval is obtained, the maximum number of
shares which will be issued on conversion of the Notes and exercise of the
Warrants is 1,997,130, issuable on a first converted-first exercised basis.
Should such approval not be obtained by November 15, 1997, then until such
approval is obtained, the Company shall on demand by Holder made at any
time or times redeem any portion of the Warrant designated for redemption
(the "Redeemed Portion") at a redemption price equal to the pre-tax profit
Holder would have earned had Holder, at the close of business on the date
of its demand for redemption, exercised the Redeemed Portion and
simultaneously sold the shares received on such exercise at the closing
NASDAQ sales price on such date. The redemption price shall be payable
within five business days after demand for redemption is made, and shall
accrue interest payable on demand at 11% per annum.
8. Any permitted assignment of this Warrant shall be effected by the Holder by
(i) executing the form of assignment at the end hereof, (ii) surrendering
the Warrant for cancellation at the office of the Company, accompanied by
the opinion of counsel to the Company referred to above; and (iii) unless
in connection with an effective registration statement which covers the
sale of this Warrant and or the shares underlying the Warrant, delivery to
the Company of a statement by the transferee (in a form acceptable to the
Company and its counsel) that such Warrant is being acquired by the Holder
for investment and not with a view to its distribution or resale; whereupon
the Company shall issue, in the name or names specified by the Holder
(including the Holder) new Warrants representing in the aggregate rights to
purchase the same number of Shares as are purchasable under the Warrant
surrendered. Such Warrants shall be exercisable immediately upon any such
assignment of the number of Warrants assigned. The transferor will pay all
relevant transfer taxes. Replacement warrants shall bear the same legend as
is borne by this Warrant.
9. The term "Holder" should be deemed to include any permitted record
transferee of this Warrant.
10. The Company covenants and agrees that all shares of Common Stock which may
be issued upon exercise hereof will, upon issuance, be duly and validly
issued, fully paid and non-assessable and no personal liability will attach
to the holder thereof. The Company further covenants and agrees that,
during the periods within which this Warrant may be exercised, the Company
will at all times have authorized and reserved a sufficient number of
shares of Common Stock for issuance upon exercise of this Warrant and all
other Warrants.
11. This Warrant shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company.
12. In the event that as a result of reorganization, merger, consolidation,
liquidation, recapitalization, stock split, combination of shares or stock
dividends payable with respect to such Common Stock, the outstanding shares
of Common Stock of the Company are at any time increased or decreased or
changed into or exchanged for a different number or kind of share or other
security of the Company or of another corporation, then appropriate
adjustments in the number and kind of such securities then subject to this
Warrant shall be made effective as of the date of such occurrence so that
the position of the Holder upon exercise will be the same as it would have
been had it owned immediately prior to the occurrence of such events the
Common Stock subject to this Warrant. Such adjustment shall be made
successively whenever any event listed above shall occur and the Company
will notify the Holder of the Warrant of each such adjustment. Any fraction
of a share resulting from any adjustment shall be eliminated and the price
per share of the remaining shares subject to this Warrant adjusted
accordingly.
3
<PAGE>
13. The rights represented by this Warrant may be exercised at any time within
the period above specified by (i) surrender of this Warrant (with the
purchase form at the end hereof properly executed) at the principal
executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the
address of the Holder appearing on the books of the Company); (ii) payment
to the Company of the exercise price for the number of Shares specified in
the above-mentioned purchase form together with applicable stock transfer
taxes, if any; and (iii) unless in connection with an effective
registration statement which covers the sale of the shares underlying the
Warrant, the delivery to the Company of a statement by the Holder (in a
form acceptable to the Company and its counsel) that such Shares are being
acquired by the Holder for investment and not with a view to their
distribution or resale.
14. Within two business days following each receipt by the Company of the
documents required to exercise all any part of this Warrant as provided in
Section 13, the Company shall deliver irrevocable instructions to its
transfer agent (with a copy to Holder) to issue on an expedited basis
certificates evidencing the shares of common stock so purchased. Such
certificates shall bear appropriate restrictive legends in accordance with
applicable securities laws, but shall be unrestricted and bear no legends
once the registration statement referred to above has been declared
effective.
15. This Warrant shall be governed by and construed in accordance with the laws
of the State of New Jersey. The federal and state courts in the city of
Newark, New Jersey shall have exclusive jurisdiction over this instrument
and the enforcement thereof. Service of process shall be effective if by
certified mail, return receipt requested. All notices shall be in writing
and shall be deemed given upon receipt by the party to whom addressed. This
instrument shall be enforceable by decrees of specific performances well as
other remedies.
IN WITNESS WHEREOF, IDM Environmental Corp. has caused this Warrant to be
signed by its duly authorized officers under Its corporate seal, and to be dated
as of the date set forth above.
IDM ENVIRONMENTAL CORP.
By:_________________________________
4
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