SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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.
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(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)
(732) 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 November 17, 1998, 25,828,174 shares of Common Stock of the issuer
were outstanding.
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
----------------------------------------
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997....................................... 1
Consolidated Statements of Operations - For the nine
months ended September 30, 1998 and September 30, 1997...... 2
Consolidated Statement of Operations - For the three months
ended September 30, 1998 and September 30, 1997............. 3
Consolidated Statements of Cash Flows - For the nine months
ended September 30, 1998 and September 30, 1997............. 4
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 19
Item 6. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 484,619 $ 602,242
Accounts receivable 3,992,938 4,094,408
Notes receivable - current 108,805 116,457
Inventory 582,517 582,517
Costs and estimated earnings in excess of billings 705,402 455,823
Bonding deposits - 9,157
Due from officers 481,872 369,541
Prepaid expenses and other current assets 1,124,340 1,433,068
------------ -----------
Total Current Assets 7,480,493 7,663,213
Investments in and Advances to Unconsolidated Affiliates 2,507,233 3,453,309
Investment in Affiliate, at cost 1,893,125 1,715,000
Notes Receivable - long term 1,381,155 1,381,155
Debt Discount and Issuance Costs 174,400 4,610,166
Deferred Income Taxes 4,570,000 4,170,000
Property, Plant and Equipment 3,269,788 3,277,116
Other Assets 880,746 880,746
------------ -----------
$ 22,156,940 $ 27,150,705
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 341,913 $ 3,566,393
Accounts payable and accrued expenses 6,311,894 5,159,635
Billings in excess of costs and estimated earnings 91,507 86,604
------------ -----------
Total Current Liabilities 6,745,314 8,812,632
Long-Term Debt 125,495 258,686
------------ -----------
Total Liabilities 6,870,809 9,071,318
------------ -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, authorized 75,000,000 shares $.001 par value, issued
and outstanding 21,524,183 in 1998 and 14,513,073 in 1997 21,524 14,513
Additional paid-in capital 54,664,941 38,497,705
Convertible preferred stock, authorized 1,000,000 shares $1.00 par value
Series B, Issued and outstanding 0 in 1998 and 270 shares in 1997,
stated at conversion value of $10,000 per share - 2,700,000
Series C, Issued and outstanding 1,104 shares, stated at conversion
value of $10,000 per share 1,104,000 -
Series RR, Issued and outstanding 1,200 shares, stated at conversion
value of $10,000 per share less unamortized beneficial conversion
feature of $200,000 1,000,000 -
Retained earnings (deficit) (41,504,334) (23,132,831)
------------ -----------
15,286,131 18,079,387
------------ -----------
$ 22,156,940 $ 27,150,705
============ ===========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the Nine Months Ended September 30,
1998 1997
---------------- --------------
<S> <C> <C>
Revenue:
Contract income $14,547,358 $13,163,032
Sale of equipment - 28,550
------------ -----------
14,547,358 13,191,582
------------ -----------
Cost of Sales:
Direct job costs 15,843,676 12,311,445
Cost of equipment sales - 22,413
------------ -----------
15,843,676 12,333,858
------------ -----------
Gross Profit (loss) (1,296,318) 857,724
------------ -----------
Operating Expenses:
General and administrative expenses 8,774,586 5,835,451
Depreciation and amortization 483,328 539,412
------------ -----------
9,257,914 6,374,863
------------ -----------
Loss from Operations (10,554,232) (5,517,139)
Other Income (Expense)
Interest income(Expense) (4,418,305) (252,674)
------------ -----------
Loss before Credit for Income Taxes (14,972,537) (5,769,813)
Credit for Income Taxes (400,000) (1,000,000)
------------ -----------
Net Loss (14,572,537) (4,769,813)
Preferred Stock Dividends including $3,630,000 and $1,109,589
amortization of beneficial conversion feature in 1998 and 1997.
Total amounts of $3,830,000 and $1,109,589 for 1998 and 1997 3,798,966 1,236,847
------------ ----------
Net Loss on Common Stock ($18,371,503) ($6,006,660)
============ ==========
Loss per Share:
Basic Loss per share ($1.03) ($0.59)
============ ==========
Diluted Loss per share ($1.03) ($0.59)
============ ==========
Basic common shares outstanding 17,802,210 10,173,582
============ ===========
Diluted common shares outstanding 17,802,210 10,173,582
============ ===========
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the Three Months Ended September 30,
1998 1997
----------- ----------
<S> <C> <C>
Revenue:
Contract income $4,531,809 $5,368,831
Sale of equipment - -
------------ -----------
4,531,809 5,368,831
------------ -----------
Cost of Sales:
Direct job costs 4,349,328 4,931,358
Cost of equipment sales - -
------------ -----------
4,349,328 4,931,358
------------ -----------
Gross Profit (Loss) 182,481 437,473
------------ -----------
Operating Expenses:
General and administrative expenses 2,393,864 1,804,723
Depreciation and amortization 165,082 163,571
------------ -----------
2,558,946 1,968,294
------------ -----------
Loss from Operations (2,376,465) (1,530,821)
Other Income (Expense):
Interest income (expense) (95,621) (290,208)
------------ -----------
Loss before Credit for Income Taxes (2,472,086) (1,821,029)
Credit for Income Taxes - (320,000)
------------ -----------
Net Loss (2,472,086) (1,501,029)
Preferred Stock Dividends including $300,000 and $265,068
amortization of beneficial conversion feature in 1998 and 1997.
Total amount of $3,830,000 and $1,109,589 for 1998 and 1997 351,923 312,785
------------ -----------
Net Loss on Common Stock ($2,824,009) ($1,813,814)
============ ===========
Loss per Share:
Basic Loss per share ($0.15) ($0.16)
============ ===========
Diluted Loss per share ($0.15) ($0.16)
============ ===========
Basic common shares outstanding 19,132,125 11,296,671
============ ===========
Diluted common shares outstanding 19,132,125 11,296,671
============ ===========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
For the Nine Months Ended September 30,
1998 1997
---------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ($14,572,537) ($4,769,813)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes (400,000) (1,000,000)
Depreciation and amortization 479,656 539,412
Amortization of debt discount and issuance costs 4,357,013 206,849
Compensation cost of consultant stock options 1,871,400 -
Decrease (Increase) In:
Accounts receivable 101,470 (963,182)
Notes receivable 7,652 (39,014)
Costs and estimated earnings in excess of billings (249,579) 1,947,676
Prepaid expenses and other current assets 308,728 (498,080)
Bonding deposits 9,157 46,474
Increase (Decrease) In:
Accounts payable and accrued expenses 1,573,327 (2,768,679)
Billings in excess of costs and estimated earnings 4,903 73,568
------------ -----------
Net cash used in operating activities (6,508,810) (7,224,789)
------------ -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (472,328) (39,820)
Proceeds from disposal of property, plant and equipment - 22,368
Investment in and advances to unconsolidated affiliates 946,076 -
Acquisition of other assets (178,125) -
Loans and advances to officers (112,331) (43,093)
------------ -----------
Net cash provided by (used in) in investing activities 183,292 (60,545)
------------ -----------
Cash Flows from Financing Activities:
Net proceeds from convertible notes issuance - 2,780,000
Net proceeds from convertible preferred stock issuance 4,590,000 2,722,500
Principal payments on long-term debt (488,912) (474,800)
Long term debt borrowing 156,238 938,993
Preferred stock dividends (168,966) (127,258)
Proceeds from exercise of stock options and warrants 2,119,535 5,693,015
------------ -----------
Net cash provided by financing activities 6,207,895 11,532,450
------------ -----------
Increase (Decrease) in Cash and Cash Equivalents (117,623) 4,247,116
Cash and Cash Equivalents, beginning of period 602,242 1,001,254
------------ -----------
Cash and Cash Equivalents, end of period $ 484,619 $5,248,370
============ ===========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
<TABLE>
For the Nine Months Ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $249,648 $231,707
========= =========
Income taxes - -
========= =========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Conversion of convertible promissory notes to common stock $3,025,000 -
========== =========
Beneficial conversion feature of debt discount on convertible notes - $4,718,750
========== =========
Conversion of preferred stock to common stock $5,496,000 $ 300,000
========== =========
Beneficial conversion feature of convertible preferred stock $3,830,000 $1,109,589
========== =========
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 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, 1997. 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, 1998.
2. CONTINGENCIES
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration ("OSHA") issued three citations and notification of
penalty in the aggregate 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. A hearing was conducted in the matter in April, 1997. In June 1998,
the Company received a copy of the written decision filed by OSHA's Review
Commission. The Commission vacated the first alleged wilful citation, but
affirmed each of the second and third wilful citations, imposing a penalty
in the amount of $70,000 for each citation. The Company strongly objects to
the Commission's finding on the basis that it cannot be sustained as
matters of fact or law and has filed a timely Notice of Appeal with the
OSHA Review Commission for Discretionary Review, which body has accepted
jurisdiction of the matter on administrative appeal. The Company is
contesting the Citations and Notification of Penalty.
Also in connection with this accidental death, the employee's estate filed
a complaint for wrongful death against the subcontractor and the Company on
February 11, 1997. The estate seeks damages in the amount of $45 million.
The Company is being defended by the subcontractor's insurance carrier
pursuant to the subcontractor's obligation to defend and indemnify the
Company with respect to the actions of its (subcontractor's) employees and
agents. The Company will be fully indemnified for any liability, if any,
for any potential judgement or settlement in this matter and, therefore,
the action is not expected to have any material effect.
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, as subsequently
amended in June 1997, alleges that the Company disseminated false and
misleading financial information to the investing public between March 8,
1996 and November 18, 1996 and sought damages in an unspecified amount to
compensate investors who purchased the Company's securities between the
indicated dates, as well as the disgorgement of profits allegedly received
by some of the individual defendants from sales of common stock during that
period. A written settlement agreement has been executed by plaintiff's
counsel on behalf of the class. The matter was settled and finally resolved
with the payment of $1,125,000 to the class. The entire settlement sum was
paid by the Company's director's and officer's ("D&O") insurance policy
carrier pursuant to the obligations owed by the carrier under the Company's
existing D&O policy. The settlement covered the class period March 8, 1996
to June 5, 1997. The settlement, as expressly reflected in the settlement
documents, has been made as a business accommodation only, and neither the
Company, nor any director, officer or employee of the Company has admitted
or will admit any wrong doing of any kind. With the closing of the
settlement, the action was dismissed with prejudice and the Company and
each of the individuals who have been named as defendants were released
from any and all claims for the entire class period.
6
<PAGE>
2. CONTINGENCIES (Continued)
In April of 1997, The Company and it's subsidiary, Global Waste & Energy,
Inc., were named as co-defendants in a cause of action styled Enviropower
Industries, Inc. v. IDM Environmental Corp., Global Waste & Energy, Inc.,
et al filed in the Court of Queen's Bench of Alberta, Judicial District of
Calgary (Action No. 9701-04774). The plaintiff, Enviropower (formerly known
as Continental Waste Conversion International, Inc.), alleged that the
license granted to the Company to utilize and market Enviropower's
proprietary gasification technology was granted without proper corporate
authority due to the lack of shareholder approval. The plaintiff has
asserted the subsequent employment by Global Waste & Energy of two former
officers of Enviropower as a basis for its allegations. Enviropower sought
to have the license and all other agreements between Enviropower and the
Company declared null and void in addition to seeking damages for alleged
lost profits and other unspecified damages. In June of 1997, the Company
filed a separate cause of action against Enviropower seeking injunctive
relief against Enviropower, seeking to enforce the agreements with
Enviropower and to collect amounts owed to the Company by Enviropower. On
September 19, 1997, the Company was awarded an interim injunction against
Enviropower recognizing it's exclusive rights to the licensed technology
throughout the pendency of the action and until further order of the court.
Enviropower has since filed for protection under Canadian bankruptcy laws,
staying all proceedings between the Company and Enviropower. The Company is
awaiting a determination by the Trustee for Enviropower as to his intent
with respect to liquidation of the bankruptcy estate. The injunction order
entered in the Company's favor protecting it's exclusive right to the
technology remains in full force and effect.
In July of 1998, the Company, it's subsidiary, Global Waste & Energy and
certain affiliates and officers were named as co-defendants in a cause of
action styled Kasterka Vrtriebs GmbH v. IDM Environmental Corp., et al,
filed in the Court of Queen's Bench of Alberta, Judicial District of
Calgary. The plaintiff, Kasterka, has alleged that the Company and it's
affiliates breached a marketing agreement that had been entered between
Kasterka and Enviropower. The plaintiff has alleged that the defendants
failed to supply the required plans and specifications relating to the
gasification technology originally developed by Enviropower and that, as a
result, Kasterka was unable to manufacture and market gasification units in
the territories designated in the marketing agreement. Kasterka has
asserted a variety of claims for damages in the aggregate amount of
approximately $42 million. The Company believes the suit is without merit
and intends to vigorously contest the cause of action.
In September of 1998, the Company was named as a defendant in a cause of
action styled Balerna Concrete Corporation, et al. v. IDM Environmental
Corp., et al, filed in the United States District Court of Massachusetts
(Case No. 98CV11883ML). The plaintiffs alleged that the Company, and
others, engaged in a pattern of illegal conduct to divert funds from the
plaintiffs through the operation of a concrete finishing business. The
plaintiffs have asserted various claims under RICO, common law fraud,
conversion, breach of contract and others basis seeking damages in an
amount to be determined by the court. The Company believes the suit is
without merit and intends to vigorously contest the cause of action.
3. CONVERTIBLE PREFERRED STOCK SERIES C, "LOCK-UP WARRANTS" AND "RELOAD
WARRANTS"
On February 13, 1998, the Company sold 3,600 shares of Series C 7%
Convertible Preferred Stock and 2,350,000 Four Year $5.00 Warrants (amended
on June 2, 1998 to $3.75). The securities were issued to five accredited
investors. The aggregate sales price of such securities was $3,600,000.
Commissions totaling 10% were paid in connection with the placement. The
securities were offered pursuant to Regulation D. The offer was directed
exclusively to a limited number of accredited investors without general
solicitation or advertising and based on representations from the investors
that such investors were acquiring for investment The securities bear
legends restricting the resale thereof. The Series C Preferred Stock is
convertible into Common Stock at the lesser of (i) $4.50 per share (amended
on June 2, 1998 to $3.25) or (ii) 75% of the average closing bid price of
the Common Stock during the five trading days prior to conversion. The Four
Year $3.75 Warrants are exercisable for a four year period at the lesser of
$3.75 per share or the lowest conversion price of the Series C Preferred
Stock. Conversion of the Series C Preferred Stock and exercise of
7
<PAGE>
3. CONVERTIBLE PREFERRED STOCK SERIES C, "LOCK-UP WARRANTS" AND "RELOAD
WARRANTS" (Continued)
the Four Year $3.75 Warrants was subject to the issuance of a maximum of
3,285,438 shares of Common Stock on conversion unless the shareholders of
the Company approved issuance beyond that level upon conversion. On June 2,
1998, at the Annual Stockholders' Meeting, the shareholders approved a
proposal for the issuance of shares in excess of 3,285,438. Further, the
Company has the right, upon notice to the holders, to redeem any Series C
Preferred Stock submitted for conversion at a price of $2.75 or less of
125% of the principal amount of such Series C Preferred Stock plus accrued
and unpaid dividends. The Series C Preferred Stock pays dividends at 7% per
annum payable quarterly and on conversion or at redemption in cash or
Common Stock, at the Company's option.
On February 11, 1998, the Company issued 1,270,000 Three Year $4.50
Warrants (the "Lock-Up Warrants"). The Lock-Up Warrants were issued to
three accredited investors. The Lock-Up Warrants were issued in conjunction
with the execution of Lock-Up Agreements by the holders of $3.00 Warrants
of the Company whereby the holders of such warrants agreed not to resell
any shares underlying those warrants prior to July 30, 1998. The Lock-Up
Warrants were offered pursuant to Section 4(2) of the Securities Exchange
Act of 1933, as amended. The offer was directed exclusively to a limited
number of accredited investors without general solicitation or advertising
and based on representations from the investors that such investors were
acquiring for investment. The Lock-Up Warrants are exercisable for a three
year period at $4.50 per share.
On June 2, 1998, the Company issued 266,875 $6.00 and 266,875 $6.75
Warrants (the "Reload Warrants"). The $6.00 Warrants and $6.75 Warrants
were issued as an inducement for early exercise by the holders of certain
$3.00 Warrants and are exercisable to the extent of one $6.00 Warrant and
one $6.75 Warrant for each $3.00 Warrant previously exercised. The $6.00
Warrants and $6.75 Warrants are exercisable for a period of one year
commencing June 8, 1998 to purchase Common Stock at $6.00 and $6.75 per
share, respectively. Exercise of the $6.00 Warrants and $6.75 Warrants is
subject to the restrictions that the holders, individually, will not
beneficially own in excess of 4.99% of the Company's Common Stock following
any exercise.
4. CONVERTIBLE PREFERRED STOCK SERIES RR
On August 11, 1998, the Company sold 1,500 shares of Series RR 6%
Convertible Preferred Stock. The securities were issued to one accredited
investor. The aggregate sales price of such securities was $1,500,000.
Commissions totaling 10% were paid in connection with the placement. The
securities were offered pursuant to Regulation D. The offer was directed
exclusively to a single accredited investor without general solicitation or
advertising and based on representations from the investor that such
investor was acquiring for investment.
The Series RR Preferred Shares are convertible into Common Stock at the
lesser of (i) $2.25 per share or (ii) 75% of the average closing bid price
of the Common Stock during the five trading days prior to conversion. The
Preferred Shares pay an annual dividend of 6% payable semi-annually or on
conversion or at redemption in cash or Common Stock, at the Company's
option.
8
<PAGE>
5. 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 (note
payable) as a dividend (interest expense) at the issue date and amortize
from the issue date of the convertible security. Earnings per share as
reported for each of the periods ended September 30, 1997 and 1998 reflect
the following:
-- The beneficial conversion feature of the Series B preferred stock was
$1,109,589 and was amortized as a dividend over a 180 day period from
February 12, 1997, the issue date of the convertible preferred stock.
-- The beneficial conversion feature of the Company's convertible notes
and related warrants was $4,818,750 and was recorded as additional
interest expense from August 13, 1997, the issue date of the
convertible notes, to March 4, 1998, the date the last convertible
note was converted into common stock.
-- The beneficial conversion feature of the Series C preferred stock and
related warrants was $3,330,000 and was amortized as a dividend from
the issue date, February 13, 1998, to June 22, 1998, the date the
Registration Statement of the underlying stock was declared effective.
-- The beneficial conversion feature of the series RR preferred stock was
$500,000 and is being amortized as a dividend from the issue date
August 11, 1998, to November 12, 1998, the date the Registration
Statement of the underlying stock was declared effective.
6. STOCKHOLDERS' EQUITY
In June of 1998, the Company amended its Certificate of Incorporation
increasing the number of authorized shares of common stock from 30 million
to 75 million shares.
During the nine month period ended September 30, 1998, convertible
securities were converted resulting in the issuance of common stock as
follows:
-- the remaining 270 shares of Series B Convertible Preferred Stock were
converted, resulting in the issuance of an aggregate of 1,359,441
shares of common stock.
-- the remaining $3,025,000 of 7% Convertible Notes were converted,
resulting in the issuance of an aggregate of 1,152,669 shares of
common stock. Debt discount of $4,205,886 was amortized as additional
interest expense on the convertible notes during the six months ended
June 30, 1998. The unamortized balance of deferred issuance costs of
$260,223 were charged to paid in capital upon conversion of the
convertible notes to common stock.
-- 2,496 shares of Series C Convertible Preferred Stock were converted,
resulting in the issuance of an aggregate of 2,921,792 shares of
common stock. $167,495 of unamortized deferred issuance costs
associated with these conversions was charged to paid in capital upon
the conversion of the convertible preferred stock to common stock.
-- 300 shares of Series RR Convertible Preferred Stock were converted,
resulting in the issuance of 681,689 shares of common stock. $27,878
of unamortized deferred issuance costs associated with these
conversions was charged to paid in capital upon the conversion of the
convertible preferred stock to common stock.
9
<PAGE>
6. STOCKHOLDERS' EQUITY (Continued)
-- 686,662 Class A Warrants were exercised resulting in net proceeds to
the Company of $1,484,417; 288,750 Three Year Warrants were exercised
resulting in net proceeds to the Company of $629,063; and, 2,027 stock
options were exercised resulting in proceeds to the Company of $4,054.
7. CONSULTANT STOCK OPTIONS
During the nine months ended September 30, 1998, the Company granted
immediately exercisable options to consultants to purchase 1,220,000 shares
of common stock at the market price of the Company's common stock at the
date of grant. The Company recorded a non-cash compensation expense of
$1,871,400 during the first quarter in connection with the grant of those
options.
8. SUBSEQUENT EVENTS
Due from Officers
-----------------
From time to time the Company has made loans and advances to the two
principal shareholders, directors and officers of the Company. Subsequent
to September 30, 1998, Frank Falco, Chairman of the Board of Directors and
Chief Operating Officer of the Company, paid the Company $490,000, which
represented payment in full of all amounts due from officers to the
Company.
Amendment of Warrants
---------------------
Subsequent to September 30, 1998, the Company and certain warrant holders
agreed to amend the terms of certain $3.00 Warrants, Lock-Up Warrants and
Reload Warrants to reduce the exercise price of those warrants for certain
warrant holders who had indicated a willingness to exercise currently
outstanding warrants. Pursuant to such agreement, the exercise price of
those warrants was reduced to $0.33 per share until December 31, 1998, and
$1.00 thereafter, and the Company obtained the right to call the warrants
for redemption.
In total, the exercise prices were reduced on 1,176,513 of the three year
$3.00 Warrants associated with the August 1997 convertible note issuance,
670,000 of the three year $4.50 Lock-Up warrants, 157,500 of the one year
$6.00 Reload Warrants, and 157,500 of the $6.75 Reload Warrants.
Conversion of Preferred Shares
------------------------------
Subsequent to September 30, 1998, as of November 19, 1998, shares of Series
C Preferred Stock and Series RR Preferred Stock were converted as follows:
-- the remaining 1,104 shares of Series C Convertible Preferred Stock
were converted, resulting in the issuance of an aggregate of 3,485,682
shares of common stock
-- 350 shares of Series RR Convertible Preferred Stock were converted,
resulting in the issuance of an aggregate of 1,302,634 shares of
common stock
Loans by Warrant Holders
------------------------
Subsequent to September 30, 1998, the holders of certain $3.00 Warrants,
Lock-Up Warrants and Reload Warrants loaned $671,023 to the Company. The
loans may be credited against the exercise price of those Warrants.
10
<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.
Three Months ended September 30, 1998 Compared with Three Months ended September
30, 1997
The Company's total revenues decreased by approximately 15.6% from $5,369,000
for the quarter ended September 30, 1997 to $4,532,000 for the quarter ended
September 30, 1998. The decrease in contract service revenues in 1998 from 1997
is primarily attributable to a decrease in volume of projects from our Boston
office which produced revenues of approximately $1 million during the third
quarter of 1997 as compared to approximately $100,000 for the third quarter of
1998.
Direct job costs decreased by approximately 11.8% from $4,931,000 for the
quarter ended September 30, 1997 to $4,349,000 for the same period in 1998. The
decrease in job costs was primarily attributable to the reduction in project
volume from our Boston office. The primary elements of such decrease in job
costs were job salaries and materials and supplies.
While total revenues decreased by 15.6% for the quarter, general and
administrative expenses increased 32.6% from $1,805,000 during the quarter ended
September 30, 1997 to $2,394,000 during the same period in 1998. The increase in
general and administrative expense was primarily attributable to (1) a $154,000
audit refund of workers compensation insurance which reduced general and
administrative expense in 1997, (2) a $250,000 increase in professional fees in
1998 as compared to the same period in 1997, and (3) increased salary expense,
office expense and travel and entertainment expenses related to increased
activity on foreign projects.
In addition to its operating income and expenses, the Company reported net
interest expense of $96,000 for the quarter ended September 30, 1998 as compared
to net interest expense of $290,000 for the same period in 1997. The decrease in
net interest income/expense was attributable to $206,000 in interest expense
recorded on the convertible notes and related warrants in 1997. This amount
represented the amortization of the beneficial conversion feature of the
convertible notes and warrants.
As a result of the foregoing, the Company reported a loss before taxes of
$2,472,000 and a net loss of $2,472,000 for the quarter ended September 30, 1998
as compared to a loss before taxes of $1,821,000 and a net loss of $1,501,000
for the same quarter in 1997.
The net loss attributable to common stock was increased by the preferred stock
dividends totaling $52,000 in 1998 and $48,000 in 1997, and an accounting
"deemed dividend" of $300,000 and $265,000 in 1998 and 1997 arising from the
amortization of the beneficial conversion feature of the Company's Preferred
Stock. The Company is calculating earning per share to comply with the recent
SEC staff position on accounting for securities issued with beneficial
conversion features. This accounting requires that, the Company
reflect the
difference between the market price of the Company=s common stock and the
applicable conversion rate on the convertible preferred stock as a dividend at
the issue date (the beneficial conversion feature totaled $3,830,000 and
$1,109,589 in 1998 and 1997, respectively) and amortize the dividend over a 180
day period from the issue date for the Series B Preferred Stock and to the date
the registration statement became effective for the Series RR Preferred Stock.
Nine Months ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Total revenues increased by approximately 10.3% from $13,192,000 for the nine
months ended September 30, 1997 to $14,547,000 for the same period in 1998.
Contract service income increased during the period by 10.5% from $13,163,000 in
1997 to $14,547,000 in 1998. The increase in contract service income for the
nine months was primarily attributable to an increase in volume of projects from
our Oak Ridge office which produced revenues during the first half of 1998 of
approximately $2 million greater than in the first half of 1997. The increase in
revenues from Oak Ridge projects was partially offset by the decrease in
revenues from our Boston office in the third quarter of 1998.
Surplus equipment revenues decreased from $29,000 in the nine months ended
September 30, 1997 to $0 for the same period in 1998.
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<PAGE>
Direct job costs increased by approximately 28.7% from $12,311,000 for the nine
months ended September 30, 1997 to $15,844,000 for the same period in 1998. The
increase in job costs was primarily attributable to unforeseeable developments
on the Company's Boston State Hospital and East Dam projects which resulted in
negative gross margin from those projects of $1.9 million dollars on total
contract revenues of $4.8 million dollars in the second quarter of 1998. The
primary elements of such increase in job costs were job salaries and material
and supplies.
The Company is a subcontractor to the prime contractor on the Boston State
Hospital project. The Company, in turn, subcontracted with Dockside Dismantling
Corporation ("Dockside"). Dockside defaulted on it's subcontract with the
Company and abandoned the work for which it was, and remains, responsible. In
addition, on or about May 27, 1998, the project owner's consulting engineer
notified the Company of the claim of certain work deficiencies for which
Dockside and, derivatively, the Company are allegedly responsible. The Company
has estimated the additional costs to complete and to correct Dockside's work to
be in excess of $1.2 million dollars and recorded job costs in this amount in
it's financial statements for the second quarter of 1998. The Company made an
immediate claim against the bond ($500,000 performance and $500,000 payment)
provided by Dockside's surety company. The surety company has disclaimed
coverage and the issue of the enforceability of the bond is now the subject of
litigation pending in Federal Court in the Commonwealth of Massachusetts. Trial
is now scheduled in the matter for February 1999. The Company expects to receive
payment for and recognize revenues for the work performed in subsequent periods.
These revenues have not been recognized in the financial statements.
With respect to the East Dam project, upon transition from the north end to the
south end of the dam, the estimated drill footage of the project was
substantially reduced compared to the bid package for the project. As a result,
the total estimated revenues from the project was reduced from approximately $20
million to approximately $15 million. The impact on the financial statements for
the second quarter was approximately a negative $700,000 in gross margin. While
the project is still expected to show a profit, increased costs during the
second quarter for unapproved change orders and a revised estimate of lower
revenues decreased the expected gross margin significantly. In accordance with
conservative accounting principles, all costs have been recognized, while
expected revenues from unapproved change orders and claims will be recognized in
subsequent periods when they are received. The Company submitted a claim on this
project in excess of ten million dollars.
The cost of equipment sales decreased from $22,000 in 1997 to $0 in 1998.
General and administrative expenses increased 50.4% from $5,835,000 during the
nine months ended September 30, 1997 to $8,775,000 during the same period in
1998. The increase in general and administrative expense was primarily
attributable to a $1.9 million expense recorded in the first quarter of 1998 for
options granted to consultants to purchase 1,220,000 shares of common stock of
the Company at the market price of the company's common stock at the date of the
grant and increase in expenses during the third quarter of 1998 as discussed
above.
The Company reported an increase in interest expense from $253,000 for the nine
months ended September 30, 1997 to $4,418,000 for the same period in 1998. The
increase was attributable to $4,169,000 in interest expense recorded on the
convertible notes and warrants in 1998. This amount represented the amortization
of the beneficial conversion feature of the convertible notes and warrants.
As a result of the foregoing, the Company reported a loss before taxes of
$14,973,000 and a net loss after tax of $14,573,000 for the nine months ended
September 30, 1998 as compared to a loss before taxes of $5,770,000 and a net
loss after taxes of $4,770,000 for the same period in 1997.
The net loss attributable to common stock was increased by $169,000 and $127,000
in preferred stock dividends and $3,630,000 and $1,110,000 of amortization of
the beneficial conversion feature of preferred stock in 1998 and 1997,
respectively.
12
<PAGE>
Material Changes in Financial Condition, Liquidity and Capital Resources.
At September 30, 1998, the Company had working capital of approximately $0.7
million, including a cash balance of $0.5 million. This compares to a working
capital deficit of $1.1 million and a cash balance of $0.6 million at December
31, 1997. The increase in working capital and decrease in cash is attributable
to (1) the conversion to common stock of $3,025,000 in notes payable classified
as a current liability at December 31, 1997, (2) the receipt of net proceeds of
$3,240,000 from the Series C Preferred Stock, (3) the receipt of $1.35 million
of net proceeds from the issuance of the Series RR Preferred Stock, and (4) the
receipt of $2.1 million from the exercise of warrants and stock options, which
was offset by the loss for the period.
Approximately $0.7 million of working capital consisted of unbilled costs and
estimated earnings on ongoing projects. Such amounts are expected to be received
during 1998 as projects progress with all such amounts being payable to the
Company by the completion of such projects.
Also included in the Company's working capital balance at September 30, 1998 was
$0.6 million of surplus equipment inventory (net of a $0.9 million valuation
reserve) held for sale which gross inventory level was identical to that
reported at December 31, 1997. The inventory reflects the Company's sale of
substantially all of its surplus equipment inventory, other than generators, to
UPE in connection with the formation of a marketing alliance with UPE during
1995. The Company's remaining 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 this inventory in future projects.
The Company had available at December 31, 1997, approximately $19,775,000 of
operating loss carry-forwards that may be applied against future taxable income.
$2,350,000 of such losses expire in the year 2010 , $9,225,000 in the year 2011,
and the balance the following year. Based on the reported loss to date it will
take approximately $13.4 million dollars in future taxable income to recover the
reported deferred tax asset of $4,570,000 at September 30, 1998. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible and the net operating losses can be carried
forward. In determining such projected future taxable income, management has
considered the Company's historical results of operation, the current economic
environment with the Company's core industries and future business activities
which the company has positioned itself. Management believes the company will
realize taxable income in future years. However, based on the Company's
substantial losses over the past three years, the current contract commitments
in the backlog, and carry forward limitations governed by state, federal and
foreign tax agencies, management believes it is more likely than not that the
Company will not realize its entire net deferred tax asset. A valuation
allowance of $6,757,000 has been established by management as a reduction of the
Company's deferred tax assets of $11,327,000. Management believes that the net
deferred tax asset will be realized through future taxable income, primarily
from the substantial revenue to be derived from projects such as the El Salvador
Power Project and/or the Greifswald Nuclear Plant Decommissioning/Site
Revitalization Project. Management believes that the income generated from these
projects will be more than sufficient to realize the deferred tax asset at
September 30, 1998.
The Company's accounts receivable increased by 2.5% from 1997 to 1998. Such
increase in accounts receivable was attributable to the decrease in revenues
during the period. Accounts receivable as a percentage of quarterly revenues was
88.1% and 76.3% in 1998 and 1997, respectively. Year-end receivables as a
percentage of fourth quarter revenue increased substantially from 53.0% in 1994
to 103.5% in 1995 and 88% in 1996. 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%.
13
<PAGE>
Unbilled revenue as a percentage of quarterly contract income was 0% at December
31, 1993, 31% at December 31, 1994, 56% at December 31, 1995 and 26% at December
31, 1996, 11% at December 30, 1997, and 13% at September 30, 1998. 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) schedules
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 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).
Other items impacted the Company's cash flows during 1998. The Company carried
out several non-cash transactions and transactions with subsidiaries not
reflected in the Company's cash flow statements. Among the non-cash transactions
entered into during 1998 were (1) the conversion of $3.0 million of convertible
preferred stock into common stock and (2) the conversion of $3.025 million of
convertible notes payable to common stock. Transactions with subsidiaries during
1998 related principally to the capitalization of various subsidiaries formed to
deploy the Company's Kocee Gas Generator technology. At September 30, 1998, the
Company had loaned $3.3 million to its 90% owned subsidiary, Global Waste and
Energy, Inc. Such loan is repayable on demand with interest at 9.25%.
The Company requires substantial working capital to support its ongoing
operations. As is common in the environmental services industry, payment for
services rendered by the Company are generally received pursuant to specific
draw schedules after services are rendered. Thus, pending the receipt of
payments for services rendered, the Company must typically fund substantial
project costs, including significant labor and bonding costs, from financing
sources within and outside of the Company. Certain contracts, in particular
those with United States governmental agencies, may provide for payment terms of
up to 90 days or more and may require the posting of substantial performance
bonds which are generally not released until completion of a project.
Prior to the completion of the Company's public offering, operations were
historically funded through a combination of operating cash flow, term notes and
bank lines of credit. Following the public offering, the Company paid off all of
its then existing bank debt. At September 30, 1998, the Company had no bank debt
and no significant long-term debt and was funding its operations entirely
through cash on hand and operating cash flow.
In February of 1997, the Company sold 300 shares, or $3.0 million, of Series B
Convertible Preferred Stock to provide funding for the Company's East Dam
project and other projects on which the Company commenced work during the first
half of 1997. The Series B Preferred Shares were convertible into Common Stock
commencing 91 days after issuance at the lesser of (i) 120% of the average
closing price of the Common Stock over the five trading-day period preceding
closing ($2.67) or 82% of the average closing price of the Common Stock over the
five trading-day period preceding conversion for conversion occurring between
the 91st and 120th day following closing, (ii) 110% of the average closing price
of the Common Stock over the five trading-day period preceding closing ($2.475)
or 79% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring between the
121st and 150th day following closing, (iii) 100% of the average closing price
of the Common Stock over the five trading-day period preceding closing ($2.225)
or 76% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring between the
151st and 180th day following closing, and (iv) 100% of the average closing
price of the Common Stock over the five trading-day period preceding closing
($2.225) or 73% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring on or after the
181st day following closing. The Series B Preferred Shares paid a 7% dividend
payable on conversion or at redemption in cash or Common Stock, at the Company's
option. As of March 31, 1998, all of the Convertible Preferred Stock had been
converted resulting in the issuance of 1,552,366 shares of common stock.
14
<PAGE>
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 "$3.00 Warrants"). The Convertible Notes were 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
$3.00 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 $3.00 Warrants was subject to the
issuance of a maximum of 1,997,130 shares of Common Stock on conversion unless
the shareholders of the Company approved issuances beyond that level upon
conversion. Shareholder approval of issuances beyond 1,997,130 shares was
received on November 4, 1997. Further, the Company had 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 paid interest at 7% payable quarterly and on conversion or at
redemption in cash or Common Stock, at the Company's option. In the event that a
registration statement covering the shares underlying the Convertible Notes had
not been declared effective within 90 days or 180 days after the issuance of the
Convertible Notes, the interest rate on the Convertible Notes would increase to
18% and 24%, respectively, from those dates until such a registration statement
became effective. The registration statement was declared effective in January
9, 1998. The amount of additional interest expense was $54,500. As of September
30, 1998, all of the Convertible Notes had been converted resulting in the
issuance of 1,152,669 shares of common stock.
The value, totaling $4,718,750, of the discounted conversion feature on the
Convertible Notes and the value of the $3.00 Warrants has been accounted for as
additional interest via a debit to debt discount and a credit to
paid-in-capital. The debt discount has been calculated as the fixed discount
from the market at the date of sale based upon the common stock's trading price
of $4 per share on August 13th. This interest was being amortized over the
period from the date of issuance to the date the Convertible Notes were first
convertible, January 8, 1998 and for the $3.00 Warrants to June 30, 1998. During
1997, $600,000 was amortized and recorded as interest expense. During 1998,
$4,118,750 was charged to interest expense.
On February 13, 1998, the Company sold 3,600 shares of Series C 7% Convertible
Preferred Stock (the "Series C Preferred Stock") and 2,350,000 Four Year $5.00
Warrants (amended on June 2, 1998 to $3.75)(the "$3.75 Warrants"). The aggregate
sales price of such securities was $3,600,000. Commissions totaling 10% were
paid in connection with the placement. The Series C Preferred Stock is
convertible into Common Stock at the lesser of (i) $4.50 per share (amended on
June 2, 1998 to $3.25) or (ii) 75% of the average closing bid price of the
Common Stock during the five trading days prior to conversion. The $3.75
Warrants are exercisable for a four year period at the lesser of $3.75 per share
or the lowest conversion price of the Series C Preferred Stock. Conversion of
the Series C Preferred Stock and exercise of the $3.75 Warrants was subject to
the issuance of a maximum of 3,285,438 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
3,285,438 shares, the holders of Series C Preferred Stock and $3.75 Warrants
remaining outstanding if and when 3,285,438 shares have been issued will have
the right to demand redemption of the Series C Preferred Stock at $1,250 per
share plus accrued dividends and to demand redemption of the $3.75 Warrants at
the pre-tax profit such holders would have realized had the $3.75 Warrants been
exercised at the time redemption is demanded. Further, the Company has the
right, upon notice to the holders, to redeem any Series C Preferred Stock
submitted for conversion at a price of $2.75 or less at 125% of the principal
amount of such Series C Preferred Stock plus accrued and unpaid dividends. The
Series C Preferred Stock pays dividends at 7% per annum payable quarterly and on
conversion or at redemption in cash or Common Stock, at the Company's option. On
June 2, 1998, at the Annual Stockholders Meeting, the shareholders approved a
proposal for the issuance of shares in excess of 3,285,438. As of September 30,
1998, 2,496 of the shares of Series C Preferred Stock had been converted
resulting in the issuance of an aggregate of 2,921,792 shares of Common Stock.
Subsequent to September 30, 1998, as of November 19, 1998, the remaining 1,104
shares of Series C Preferred Stock were converted resulting in the issuance of
3,485,682 shares of Common Stock.
On February 11, 1998, the Company issued 1,270,000 Three Year $4.50 Warrants
(the "Lock-Up Warrants"). The Lock-Up Warrants were issued in conjunction with
the execution of Lock-Up Agreements by the holders of $3.00 Warrants of the
Company whereby the holders of such warrants agreed not to resell any shares
underlying those warrants prior to July 30, 1998. The Lock-Up Warrants are
exercisable for a three year period at $4.50 per share. On June 2, 1998, the
Company approved the issuance of 266,875 $6.00 and 266,875 $6.75 Warrants (the
"Reload Warrants"). The Reload Warrants were issued as an inducement for early
exercise by the holders of certain $3.00 Warrants and are exercisable to the
extent of one $6.00 Warrant and one $6.75 Warrant for each $3.00 Warrant
previously exercised. The $6.00 Warrants and $6.75 Warrants are exercisable for
a period of one year commencing June 8, 1998 to purchase Common Stock at $6.00
and $6.75 per share, respectively. Exercise of the $6.00 Warrants and $6.75
Warrants is subject to the restrictions that the holders, individually, will not
beneficially own in excess of 4.99% of the Company's Common Stock following any
exercise.
15
<PAGE>
On August 11, 1998, the Company sold 1,500 shares of Series RR 6% Convertible
Preferred Stock. The securities were issued to one accredited investor. The
aggregate sales price of such securities was $1,500,000. Commissions totaling
10% were paid in connection with the placement. The Series RR Preferred Shares
are convertible into Common Stock at the lesser of (i) $2.25 per share or (ii)
75% of the average closing bid price of the Common Stock during the five trading
days prior to conversion. Conversion of the Preferred Shares is subject to the
issuance of a maximum of 3,600,000 shares of Common Stock on conversion unless
the shareholders of the Company have approved issuance beyond that level upon
conversion. In the absence of shareholder approval of issuances above 3,600,000
shares, the holders of Preferred Shares remaining outstanding if and when
3,600,000 shares have been issued will have the right to demand redemption of
the Preferred Shares at 120% of the principal balance outstanding. Further, the
holder of the Preferred Shares has the right to demand redemption of any
Preferred Shares remaining outstanding in the event that (1) the Company carries
out a placement of common stock or securities convertible into common stock on
or before the effective date of a registration statement to be filed covering
the shares underlying the Preferred Shares and (2) the holder elects not to
exercise its right of first refusal with respect to such securities. In the
event the holder exercises its redemption right in connection with a subsequent
offering, the Company is obligated to redeem the remaining Preferred Shares for
(1) cash in an amount equal to 125% of the principal balance outstanding plus
accrued dividends and (2) in the event the Company's common stock is trading
above $3.25 at the time of redemption, the issuance of up to 461,539 two year
warrants exercisable at $3.25 per share. The Preferred Shares pay an annual
dividend of 6% payable semi-annually or on conversion or at redemption in cash
or Common Stock, at the Company's option. As of September 30, 1998, 300 of the
shares of Series RR Preferred Stock had been converted resulting in the issuance
of an aggregate of 681,689 shares of Common Stock. Subsequent to September 30,
1998, as of November 19, 1998, an additional 350 shares of Series RR Preferred
Stock were converted resulting in the issuance of 1,302,634 shares of Common
Stock.
Subsequent to September 30, 1998, the Company and certain warrant holders agreed
to amend the terms of certain $3.00 Warrants, Lock-Up Warrants and Reload
Warrants to reduce the exercise price of those warrants for certain warrant
holders who had indicated a willingness to exercise currently outstanding
warrants. Pursuant to such agreement, the exercise price of those warrants was
reduced to $0.33 per share until December 31, 1998, and $1.00 thereafter, and
the Company obtained the right to call the warrants for redemption.
In total, the exercise prices were reduced on 1,176,513 of the $3.00 Warrants,
670,000 of the $4.50 Lock-Up warrants, 157,500 of the $6.00 Reload Warrants, and
157,500 of the $6.75 Reload Warrants. Subsequent to September 30, 1998, the
holders of certain $3.00 Warrants, Lock-Up Warrants and Reload Warrants loaned
$671,023 to the Company. The loans may be credited against the exercise price of
those Warrants.
Also subsequent to September 30, 1998, Frank Falco, Chairman of the Board of
Directors and Chief Operating Officer of the Company, paid the Company $490,000,
which represented payment in full of all amounts due from officers to the
Company.
Other than funds provided by operations and the potential receipt of funds from
the exercise of outstanding warrants, the Company presently has no sources of
financing or commitments to provide financing. A total of 370,000 Class A
Warrants issued in connection with the Company's initial public offering were
outstanding and exercisable at September 30, 1998. Such warrants are exercisable
to purchase two shares of common stock each for a price of $9.00, or $4.50 per
share. The warrants are exercisable until April of 1999 unless earlier called.
The Company may call the warrants if the closing bid price of the common stock
equals or exceeds $9.00 for a period of twenty consecutive trading days.
Exercise of the warrants would provide gross proceeds to the Company of
approximately $3.3 million and result in the issuance of 0.7 million shares.
There can be no assurance, however, when, if ever, any or all of the warrants
will be exercised.
In addition to funds used to support ongoing operations, the Company has
utilized funds to make various strategic investments during 1998. Funds utilized
for strategic investments during 1998 have been principally invested in (1)
Seven Star International Holding, Inc. ("7 Star"), (2) Kortman Polonia, and (3)
Vision 2000 initiatives.
16
<PAGE>
On January 8, 1998, the Company made a $300,000 payment representing its one
half share of the capital of 7 Star. 7 Star is a joint venture between IDM and
Jin Xin and is incorporated in The British Virgin Islands. 7 Star has entered
into a license agreement with Life International Products, Inc. ("Life") for the
right to process, produce, promote and sell Life products in the Peoples
Republic of China (including Hong Kong), Taiwan, Indonesia and Singapore. The
license agreement requires a minimum royalty of $400,000 for the first year
which was paid upon execution of the license agreement.
In November of 1998, the Company paid $500,000 to acquire Kortman Polonia, a
Polish company with substantial real estate holdings. The Company has initiated
discussions with various real estate developers and major U.S. retailers with
respect to the sale of various real estate tracts held by Kortman Polonia and
the development and leasing of the remaining tracts.
In addition to its funding requirements to support ongoing operations, the
Company has committed substantial capital resources to implementation of the
Company's strategic initiative known as "Vision 2000." The focus of Vision 2000
is to position the Company as a leading participant in the global energy market
and in the nuclear facility decommissioning and site revitalization market. The
development and initial implementation of Vision 2000 initiatives have required
substantial capital expenditures on the Company's part and can be expected to
continue to require substantial capital expenditures in the future. In
particular, the Company's first energy project, the Miravalle Power Project in
El Salvador, is expected to cost approximately $55 million to develop and will
require substantial funding beyond that which the Company can presently provide.
The Company has entered into discussions with several potential equity investors
in the Miravalle Power Project. The Company is also in discussion with a major
project financing source with respect to the provision of debt financing for the
balance of the cost above the contributions of the Company and its equity
partner. The Company's ability to successfully bring the Miravalle Power Project
on line and implement its other Vision 2000 initiatives is substantially
dependent upon its ability to secure project financing and other financing.
While the Company believes that it will be able to attract adequate financing to
develop the Miravalle Power Project and its other anticipated projects, the
Company has no definitive commitments to provide financing for those projects
and there is no assurance that such financing will be available. Other than
funding Vision 2000 initiatives and the Company's bonding and other job costs,
the Company does not anticipate any substantial demands on the liquidity or
capital resources of the Company during the following twelve months.
Management believes that the Company's working capital, combined with the
expected receipt of funds from the resolution of certain change orders and
litigation, is sufficient to meet the Company's anticipated needs, other than
project financing requirements discussed above, 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 and there is no assurance as to the timing or amount of the receipt of
funds from change orders, litigation or other sources, the Company may be
required to seek new bank lines of credit or other financing in order to
facilitate the performance of jobs. 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.
17
<PAGE>
Year 2000 Issues
The Company recognizes the need to ensure that its operations, as well as those
of third parties with whom the Company conducts business, will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems
through a combination of actions including a review of all software
applications, desktop equipment network, and telecommunications products used by
the Company to determine if they are Year 2000 compliant. The Company will also
send questionnaires to its major customers and suppliers to assess their Year
2000 readiness, review all contacts for year 2000 liability and will develop
remediation and contingency plans where appropriate. The Company expects to
complete this work by this end of the second quarter 1999.
The Company's costs of achieving Year 2000 compliance to date have been
immaterial to financial position, results of operations or cash flows. The
Company does not anticipate that additional amounts incurred in connection with
its Year 2000 compliance program will be material to its financial condition or
results of operations.
Due to the uncertainties involved, the Company cannot predict the impact of the
Year 2000 on its operations. Achieving Year 2000 compliance is dependent on many
factors, some of which are not within the Company's control, including without
limitation, the continuity of service provided by the government, utilities,
transportation industry and other service providers. Should one of these systems
fail, or should the Company's internal systems or the internal systems of one or
more significant vendors or suppliers fail to achieve Year 2000 compliance, the
Company's business and its results of operations could be adversely affected.
Certain Factors Affecting Future Operating Results
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward- looking statements. Certain factors that might cause such
a difference include the following: possible fluctuations in the growth and
demand for energy in markets in which the Company may seek to establish energy
production operations; intense competition for establishment of energy
production operations in growing economies; currency, economic, financing and
other risks inherent in establishing energy operations in foreign markets;
uncertainty regarding the rate of growth in demand for nuclear decommissioning
and site revitalization services; continued delays in awarding and commencing
contracts; delays in payment on contracts occasioned by dealings with
governmental and foreign entities; changes in accepted remediation technologies
and techniques; fluctuations in operating costs associated with changes in
project specifications and general economic conditions; substantial fluctuations
in revenues resulting from completion and replacement of contracts and delays in
contracts; economic conditions affecting the ability of prospective customers to
finance projects; and other factors generally affecting the timing and financing
of projects. In addition to the foregoing, the following specific factors may
affect the Company's future operating results.
At September 30, 1998, the Company was on-site on projects with a total left in
value of services yet to be performed of $15 million. The largest project on
which the Company was on-site at September 30, 1998 was the Bechtel Jacobs
project with an approximate value of services to be performed of $6 million. The
contract is expected to be fully completed by early 1999.
In addition to its existing contracts, the Company is presently bidding on, or
proposes to bid on, numerous projects in order to replace revenues from projects
which will be completed during 1998 and to increase the total dollar volume of
projects under contract. Management anticipates that the Company's efforts to
bid on and secure new contracts will focus on projects which can be readily
serviced from the regional offices opened by the Company during 1994 and 1995 as
well as certain large international plant relocation projects and nuclear
decommissioning projects which the Company intends to pursue. The Company's
regional offices, particularly the Oak Ridge, Tennessee office, are
strategically located in areas having a high concentration of prospective
governmental and private remediation sites. While bidding to perform services at
such sites is expected to be highly competitive, management believes that the
Company's existing presence on adjacent projects combined with its proven
expertise and resources will allow the Company to successfully bid on and
perform substantial additional projects based out of its regional offices.
In addition to remediation and plant relocation projects on which the Company is
presently bidding or negotiating, the Company during 1997 entered the energy
production and services market. The Company expects to begin energy projects and
nuclear decommissioning projects at various prospects by as early as the second
half of 1998. In addition to the El Salvador Power Project, the Greifswald
Nuclear Plant Decommissioning and Site Revitalization Project and the Georgia
Power Project described in the Company's Form 10-K for the year ended December
31, 1997, the Company, through September 30, 1998, had entered into preliminary
agreements with respect to the development and operation of (i) a 200-ton per
day industrial waste processing and energy production facility in Taipei,
Taiwan; and (ii) a 1,750 ton per day municipal and industrial waste-to-energy
power plant in Szczecin, Poland.
While the Company anticipates that entry into the energy production and nuclear
facilities decommissioning and site revitalization market will provide
significant opportunities for sustainable growth in both revenues and operating
profits, entry into those markets requires substantial capital commitments and
involves certain risks. Undertaking energy production and nuclear
decommissioning projects can be expected to require capital expenditures of as
little as several million dollars to hundreds of millions of dollars per
project. The Company does not currently have the necessary capital resources to
undertake such ventures without third party financing. The Company anticipates
that it will take on equity partners and seek third party debt financing to
finance substantial portions of the projects which it expects to undertake.
While the Company has been successful in attracting substantial partners in both
its El Salvador energy project and its German nuclear decommissioning/site
revitalization project, the Company has no commitments from potential partners
and financing sources to provide funding for future projects and there is no
assurance that such partners and financing sources will be available, or will
provide financing on acceptable terms, if and when the Company commences future
projects.
18
<PAGE>
Impact of Inflation
Inflation has not been a major factor in the Company's business since inception.
There can be no assurances that this will continue. However, it is anticipated
that any increases in costs to the Company can be passed on to its customers in
the form of higher prices.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 28, 1998, the Superior Court of New Jersey, Law Division,
Middlesex County, entered an Order finally approving a binding settlement in the
action captioned Arthur Goldberg, et al. vs. IDM Environmental Corp., et al. The
matter was settled and finally resolved with the payment of $1,125,000 to the
class action plaintiffs. The entire settlement sum was paid by the Company's
director's and officer's ("D&O") insurance policy carrier pursuant to
obligations owed by the carrier under the Company's existing D&O policy. The
settlement covers the class period March 8, 1996 to June 5, 1997. The
settlement, as expressly reflected in the settlement documents, was made as a
business accommodation only, and neither the Company nor any director, officer
or employee of the Company admitted any wrongdoing of any kind. With the final
approval of the settlement, the action was dismissed on the merits and with
prejudice, and the Company and each of the individual defendants were released
from any and all claims for the entire class period.
In July of 1998, the Company, it's subsidiary, Global Waste & Energy and
certain affiliates and officers were named as co-defendants in a cause of action
styled Kasterka Vrtriebs GmbH v. IDM Environmental Corp., et al, filed in the
Court of Queen's Bench of Alberta, Judicial District of Calgary. The plaintiff,
Kasterka, has alleged that the Company and it's affiliates breached a marketing
agreement that had been entered between Kasterka and Enviropower. The plaintiff
has alleged that the defendants failed to supply the required plans and
specifications relating to the gasification technology originally developed by
Enviropower and that, as a result, Kasterka was unable to manufacture and market
gasification units in the territories designated in the marketing agreement.
Kasterka has asserted a variety of claims for damages in the aggregate amount of
approximately $42 million. The Company believes the suit is without merit and
intends to vigorously contest the cause of action.
In September of 1998, the Company was named as a defendant in a cause of
action styled Balerna Concrete Corporation, et al. v. IDM Environmental Corp.,
et al, filed in the United States District Court of Massachusetts (Case No.
98CV11883ML). The plaintiffs alleged that the Company, and others, engaged in a
pattern of illegal conduct to divert funds from the plaintiffs through the
operation of a concrete finishing business. The plaintiffs have asserted various
claims under RICO, common law fraud, conversion, breach of contract and others
basis seeking damages in an amount to be determined by the court. The Company
believes the suit is without merit and intends to vigorously contest the cause
of action.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- ------------
10.1 Form of Amended and Restated Three Year $3.00 Warrant
10.2 Form of Amended and Restated Three Year $4.50 Lock-Up
Warrant
10.3 Form of Amended and Restated One Year $6.00 and $6.75
Reload Warrants
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
19
<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 20, 1998 By: /S/ Joel Freedman
----------------------------------
Joel Freedman, President
Dated: November 20, 1998 By: /S/ Michael B. Killeen
-----------------------------------
Michael B. Killeen, Principal
Financial and Accounting Officer
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.
AMENDED AND RESTATED WARRANT
DATED: November ____, 1998
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 $0.33 per share for exercises occurring on or before
December 31, 1998 and at $1.00 per share for exercises occurring after December
31, 1998. This Warrant amends, restates and supercedes, in its entirety, a
warrant (the "Original Warrant") issued, on or about August 20, 1997 (the
"Original Issue Date"), in conjunction with the sale of a certain Note. The
Original Warrant evidenced the right to purchase a like number of shares of
Common Stock at $3.00 per share 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.
2. All rights granted under this Warrant shall expire on the third anniversary
of the Original Issue Date.
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.
1
<PAGE>
4. In the event the Company breaches its obligation to deliver irrevocable
instructions to its transfer agent as required under Section 14, 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, as amended (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.
6. The holder of this Warrant is entitled to certain registration rights under
an Agreement dated on or about the Original Issue Date (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. On not less than five (5) days prior written notice to the Holder, provided
that the closing bid price of the Common Stock has equaled or exceeded $2.50
(the "Redemption Trigger Price") for a period of ten (10) consecutive trading
days ending within thirty (30) days of the notice of redemption, this Warrant
may be redeemed, at the option of the Company, at $.01 per share (the
"Redemption Price"). The notice of redemption shall specify the date fixed for
redemption (the "Redemption Date"), the aggregate redemption price payable to
the Holder, and the procedures to be followed to effect the redemption. The
right to exercise this Warrant shall terminate at 5:00 p.m. (E.S.T.) on the
business day immediately preceding the Redemption Date.
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.
2
<PAGE>
9. The term "Holder" shall 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, and the
Redemption Trigger Price and Redemption Price, 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.
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 or 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.
3
<PAGE>
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:
------------------------------
JOEL A. FREEDMAN, President
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.
AMENDED AND RESTATED WARRANT
DATED: November ____, 1998
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 $0.33 per share for exercises occurring on or before
December 31, 1998 and at $1.00 per share for exercises occurring after December
31, 1998. This Warrant amends, restates and supercedes, in its entirety, a
warrant (the "Original Warrant") issued, on or about February 11, 1998 (the
"Original Issue Date"), in conjunction with the execution of a lock-up agreement
(the "Lock-Up Agreement"). The Original Warrant evidenced the right to purchase
a like number of shares of Common Stock at $4.50 per share. This Warrant may be
exercised in whole or in part at any time prior to expiration.
2. All rights granted under this Warrant shall expire on the third anniversary
of the Original Issue Date.
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.
1
<PAGE>
4. In the event the Company breaches its obligation to deliver irrevocable
instructions to its transfer agent as required under Section 14, 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, as amended (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.
6. The holder of this Warrant is entitled to certain registration rights under
the Lock-Up 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. On not less than five (5) days prior written notice to the Holder, provided
that the closing bid price of the Common Stock has equaled or exceeded $2.50
(the "Redemption Trigger Price") for a period of ten (10) consecutive trading
days ending within thirty (30) days of the notice of redemption, this Warrant
may be redeemed, at the option of the Company, at $.01 per share (the
"Redemption Price"). The notice of redemption shall specify the date fixed for
redemption (the "Redemption Date"), the aggregate redemption price payable to
the Holder, and the procedures to be followed to effect the redemption. The
right to exercise this Warrant shall terminate at 5:00 p.m. (E.S.T.) on the
business day immediately preceding the Redemption Date.
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.
2
<PAGE>
9. The term "Holder" shall 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, and the
Redemption Trigger Price and Redemption Price, 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.
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 or 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.
3
<PAGE>
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:
------------------------------
JOEL A. FREEDMAN, President
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.
AMENDED AND RESTATED WARRANT
DATED: November ____, 1998
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 $0.33 per share for exercises occurring on or before
December 31, 1998 and at $1.00 per share for exercises occurring after December
31, 1998. This Warrant amends, restates and supercedes, in its entirety, two
warrants (the "Original Warrants") issued on or about June 8, 1998 (the
"Original Issue Date"). The Original Warrants evidenced the right to purchase,
in the aggregate, a like number of shares of Common Stock at $6.00 and $6.75 per
share. This Warrant may be exercised in whole or in part at any time prior to
expiration.
2. All rights granted under this Warrant shall expire on the first anniversary
of the Original Issue Date.
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.
1
<PAGE>
4. In the event the Company breaches its obligation to deliver irrevocable
instructions to its transfer agent as required under Section 14, 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, as amended (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.
6. The holder of this Warrant is entitled to certain registration rights under
the Lock-Up 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. On not less than five (5) days prior written notice to the Holder, provided
that the closing bid price of the Common Stock has equaled or exceeded $2.50
(the "Redemption Trigger Price") for a period of ten (10) consecutive trading
days ending within thirty (30) days of the notice of redemption, this Warrant
may be redeemed, at the option of the Company, at $.01 per share (the
"Redemption Price"). The notice of redemption shall specify the date fixed for
redemption (the "Redemption Date"), the aggregate redemption price payable to
the Holder, and the procedures to be followed to effect the redemption. The
right to exercise this Warrant shall terminate at 5:00 p.m. (E.S.T.) on the
business day immediately preceding the Redemption Date.
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.
2
<PAGE>
9. The term "Holder" shall 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, and the
Redemption Trigger Price and Redemption Price, 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.
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 or 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.
3
<PAGE>
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:
------------------------------
JOEL A. FREEDMAN, President
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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