SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
[ ] 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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(Name of registrant as specified in its charter)
New Jersey 22-2194790
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
396 Whitehead Avenue, South River, New Jersey 08882
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (732) 390-9550
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Class A Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
17,704,935 shares of common stock of the Registrant were outstanding as of
April 9, 1998. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based on the closing price on
the Nasdaq National Market, was approximately $58,400,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended December 31, 1997 are
incorporated by reference into Part III.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS.................................................. 1
ITEM 2. PROPERTIES................................................ 16
ITEM 3. LEGAL PROCEEDINGS ........................................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS....................................... 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS........................... 18
ITEM 6. SELECTED FINANCIAL DATA................................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................. 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK......................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................... 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT............................................... 31
ITEM 11. EXECUTIVE COMPENSATION................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................... 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................. 31
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K...................................... 31
SIGNATURES
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PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 29 of this Form 10-K.
ITEM 1. BUSINESS
IDM Environmental Corp. (the "Company") is a global diversified services
company offering a broad range of design, engineering, construction, project
development and management, and environmental services and technologies. The
Company, through its domestic and international affiliates and subsidiaries,
offers services and technologies in three principal areas: Energy Project
Development and Management, Environmental Remediation and Plant Relocation
Services.
The Company's energy project development and management services ("Energy
Services") are provided through IDM Energy Corporation and local project
subsidiaries. The Company actively entered the Energy Services market in 1997
and expects to begin construction of energy facilities during 1998 with
operating energy facilities expected to be connected to the local grid in El
Salvador by 1999. The Company is aggressively pursuing additional energy
facility "build, own and operate" opportunities in Asia, Eastern Europe, Central
and South America and expects to bring additional energy facilities on-line
beginning in 1999. Energy Services offered by the Company include project design
and development, engineering, finance, ownership and, soon to be, operation for
conventional and other energy projects.
The Company's environmental remediation services, the historical core
business of the Company, encompass a broad array of environmental consulting,
engineering and remediation services with an emphasis on the "hands-on" phases
of remediation projects. The Company is a leading provider of full-service
turnkey environmental remediation and plant decommissioning services and has
established a track record of safety and excellence in the performance of
projects for a wide range of private sector, public utility and governmental
clients worldwide. Additionally, the Company has melded its core expertise in
engineering, decommissioning and dismantlement services in environmentally
sensitive settings to establish a position in the forefront of the nuclear power
plant decommissioning, site remediation and reindustrialization market.
The Company's plant relocation services encompass a broad array of
non-traditional engineering projects, with an emphasis on plant dismantlement,
relocation and reerection. The Company has established itself as a world leader
in plant relocation services employing a proprietary, integrated matchmarking,
engineering, dismantling and documentation program that provide clients with
significant cost and schedule benefits when compared to traditional alternatives
for commencing plant operations.
The Company is a New Jersey corporation formed in 1978. Its principal
offices are located at 396 Whitehead Avenue, South River, New Jersey 08882,
telephone number (732) 390-9550.
Business Strategy
The Company's business has evolved, and continues to evolve, to capitalize
on market opportunities. The Company has added strategic capabilities and
resources through the years to move the business from its roots as a demolition
and deconstruction company to a full service environmental remediation company
and plant relocation services company and, now, an energy project developer and
manager.
In 1997, the Company began to implement a strategic plan to capitalize on
the Company's strengths and market opportunities to position the Company as a
global leader in providing services and technologies in selected high growth
markets with an emphasis on developing recurring revenue streams. The core
elements of the Company's strategic plan are (1) aggressive entry into the
global energy production development and plant management market, (2) narrowing
the focus of the Company's environmental remediation services to emphasize
specialized services and technologies in high growth, high margin niche markets,
and (3) emphasizing the Company's multi-disciplinary expertise and relationships
to generate growth in demand for the Company's plant relocation services.
Management believes that the Company's ability to respond to opportunities in
the market and deploy a broad array of technologies and expertise in a rapid and
cost effective manner provides a competitive advantage to the Company in its
efforts to achieve the elements of its strategic plan.
1
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Central to the Company's strategy is its commitment to generating long-term
recurring revenue streams as a foundation for the Company's other project
specific activities. International energy production projects are the core of
the Company's planned recurring revenue streams. The Company's entry into the
energy production market began with the execution of a power purchase agreement
in El Salvador pursuant to which the Company agreed to develop, construct and
operate an energy production facility and the largest Salvadorean distribution
company agreed to purchase energy from such facility. The Company has since
entered into preliminary agreements pursuant to which the Company's operating
subsidiary would contract with third party sources to construct an energy
generation facility, supply equipment for such facility, provide financing for
the construction of the facility and provide operations and maintenance services
for the facility. The Company would own a controlling interest in the facility
which is expected to generate substantial ongoing revenues and operating profits
to the Company in addition to development fees which the Company expects to
realize from the project. In conjunction with the Company's initial energy
project in El Salvador, the Company expects to develop expertise in energy
project operations and maintenance services which can be deployed in future
energy projects. Management anticipates that the El Salvador energy project will
begin construction during 1998 and be operational in 1999.
Management has identified a number of potential energy projects for future
development and is committed to identifying additional project opportunities in
the future. Management believes that one or more of the current energy projects
under discussion will come to fruition during 1998 and 1999 and that the
commencement of operations in El Salvador will add to the Company's profile as
an energy project developer, owner and operator allowing the Company to
aggressively pursue additional opportunities to add to its recurring revenue
base from the development and operation of energy projects.
Within the Company's historical environmental remediation services
offerings, the Company strategy is to concentrate its efforts on highly
specialized environmental projects where competition is less intense, profit
margins are generally higher and proprietary technology and engineering
expertise are valued at a premium. With the growth and evolution of the
environmental remediation market in the 1990's, various segments of the
remediation market have reached maturity and have become characterized by
intense competition and minimal operating margins. While the Company continues
to be active in the environmental remediation market, the Company expects that
bidding or negotiating of future remediation contracts will be limited to
special situations in which higher margins can be generated by the deployment of
proprietary technologies such as the Molecular Bonding Soil Remediation System
and Life International Products' superoxygenation bioremediation technology
licensed by the Company and the utilization of specialized engineering services.
In particular, the Company is aggressively pursuing opportunities involving the
decommissioning and remediation of large commercial nuclear power facilities,
which market management believes to be in an early growth stage.
In the plant relocation services area, the Company will continue to
emphasize its ever broadening expertise in an array of project engineering
disciplines and the establishment of strong relationships to drive demand for
its services. With the Company's historical record of sourcing, dismantling,
relocating and reerecting process plants and other facilities as a timely and
cost effective alternative to the construction of new facilities, management
believes that the demand for such services, particularly in growing economies
outside of the United States and western Europe, will continue to grow and that
the Company will be a leading provider of those services worldwide.
Supplementing its core business operations, the Company has historically
sought out, and will continue to seek out, opportunities which are compatible
with the Company's existing expertise and capabilities to enhance the Company's
recurring and nonrecurring revenues. Illustrative of such opportunities is the
Company's acquisition of a license covering the bottling rights and distribution
of the Life International Products' superoxygenation process in southeast Asia
which license was acquired after the Company acquired the rights to utilize the
technology for bioremediation purposes.
2
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Industry Background
Energy Services Industry. Worldwide, the energy industry is diverse and
growing increasingly competitive. Management believes that economic development
in the previously underdeveloped nations of Eastern Europe, Asia and South and
Central America has created, and will continue to produce, growing demand for
electrical power in those markets. While many of the developing nations' energy
needs are served by various independent energy producers, distributors and
state, municipal and privately owned utilities, it is management's belief that
the energy needs of many of those nations are not currently met.
In an effort to capitalize on the perceived growth in demand for electrical
power in developing nations, as well as opportunities to deploy the Company's
proprietary waste-to-energy technology and inventory of generators, the Company
has actively entered the energy market. The Company has formed alliances and
entered into agreements with various strategic and financing partners and
industrial consumers and local governments to construct, own and operate energy
production facilities in Eastern European and Central American markets. While
other energy producers may currently serve those markets or enter into those
markets, the Company has entered into, or expects to enter into Power Purchase
Agreements ("PPAs") in each of those markets whereby industrial or governmental
concerns will guarantee the purchase of all or a substantial portion of the
energy produced by such such facilities. Management believes that additional
opportunities to construct and operate energy facilities will become available
as the industrialization of underdeveloped countries progresses.
While management sees substantial opportunities in the international energy
market, that market is subject, and will continue for the foreseeable future to
be subject, to a variety of risks and uncertainties. The energy market is a
niche market which is served by a relatively small number of large competitors
operating in multiple markets and having substantially greater resources than
the Company and by many local producers having established relationships with
local industry and government. In addition to competitive risks, the operation
of energy facilities and the entry into new markets is subject to local economic
risks which may severely effect the demand for energy and the ability to finance
projects and pay for energy production in underdeveloped nations. See
"Competition - Energy Services."
Environmental Services Industry. The "hands-on" environmental services
industry is a diverse and rapidly changing industry. While the industry was
virtually nonexistent prior to the mid-1970's, the overall worldwide market for
environmental services has grown rapidly over the past two decades. Company
management estimates the worldwide environmental services market at $300 billion
for 1997. Included within such industry are numerous specialty areas with the
largest markets being in solid waste handling and disposal, hazardous waste
treatment and disposal, air pollution control, water supply and wastewater
treatment and analytical and environmental consulting services.
The tremendous growth experienced in the 1980's and early 1990's within the
environmental services industry was driven by growing public concern for and
awareness of environmental issues which was accompanied by extensive legislation
and governmental regulation aimed at protecting the environment and requiring
responsible parties to clean up existing environmental hazards. Since the
enactment of the Resource Conservation and Recovery Act ("RCRA") in 1976, the
federal government and the various state governments have significantly
increased the scope of governmental regulation relating to the environment. See
"Regulation."
As a result of the growing public concern for environmental issues and
extensive government regulation, virtually every industry must now address
environmental issues, both with respect to future operations as well as prior
operations. While significant resources are being devoted to reducing pollution
and the discharge of hazardous waste into the environment, many industries have
devoted, or are facing the prospect of devoting, even greater resources to the
clean up of existing hazards created by prior operations, some of which may have
been terminated years earlier. Such clean up obligations extend to the
remediation of so called "superfund" sites, including removal of structures on
such sites, the decommissioning, dismantling and clean up of chemical plants,
nuclear facilities, utility plants and other facilities where hazardous
materials are generated and the clean up of facilities which do not produce but
may use environmentally hazardous materials which may be spilled or otherwise
discharged into the environment, as well as to asbestos abatement and other
forms of environmental clean up. See "Environmental Services."
3
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In addition to private companies which utilize environmental services to
close or clean facilities on a voluntary basis or as a potential responsible
party under government compulsion, governmental agencies, and facilities
operated by such agencies, particularly the Department of Defense ("DOD") and
the Department of Energy ("DOE"), are becoming larger consumers of "hands-on"
environmental services. Spending by the federal government for "hands-on"
environmental programs is expected to increase as a percentage of total funding.
Total funding for these programs in 1997 was approximately $6 billion by DOE and
$5 billion by DOD. Of this market, the value of "hands-on" remediation and
decommissioning services in 1997 was approximately $700 million for DOE and $600
million for DOD. In 1998, the portion of the market devoted to "hands-on"
services is expected to double. State and local spending, as well as spending by
universities and other research institutions, on "hands-on" environmental clean
up is also expected to increase.
As the environmental services industry has grown and matured, the nature of
the services provided and the nature of the service providers has evolved.
Through the late 1980's, the industry was largely focused on early stage
activities, including site assessment, identification of hazards and hazardous
sites, and identification and establishment of responsible parties. While actual
remediation activities took place at various sites, a significant portion of the
resources devoted in the environmental field went to consultants and attorneys
and the number of sites requiring remediation continued to grow. Actual
remediation or site clean up have commanded a significant portion of the
environmental resources during the 1990's and are expected to continue to be the
focus of resources in the future.
The rapid growth in demand for environmental services during the 1980's and
early 1990's has attracted many entrants into the environmental services market.
Despite the influx of entrants into the market, a significant portion of the
market is still controlled by larger architectural engineering and construction
firms. Such firms have typically been called in as consultants on large jobs to
plan and oversee environmental operations but continue to subcontract out
asbestos and hazardous waste remediation, dismantling and demolition operations.
See "Competition."
With the entry of increasing competition, the market for certain labor
intensive low technology services, such as asbestos abatement, dismantling and
demolition, has become saturated resulting in lower margins in those segments.
Other segments of the market requiring special skills and technologies have not
experienced substantial growth or entrance of competition to date but are
expected to experience strong growth over the coming years. The Company believes
that nuclear facilities decommissioning and remediation will be the primary
growth market in the environmental services field over the coming years.
The Company believes that it is widely recognized within the engineering
and industrial world for its expertise in decontamination, decommissioning and
dismantling services. The Company has worked with numerous top engineering firms
as well as Fortune 500 companies providing specialty environmental services in
the areas of decontamination and decommissioning.
Plant Relocation Services Industry. The plant relocation industry is a
highly specialized niche market business. The Company believes that the
relocation of process plants as a viable option to acquisition or on-site
construction of new facilities has grown rapidly in recent years with the
industrialization of underdeveloped countries, particularly in Eastern Europe,
Asia and South America. It has been management's experience that the acquisition
and relocation of existing facilities can cost one-half or less of the cost of
acquiring new facilities. Additionally, as most large plants and facilities
require substantial lead time to manufacture and deliver, facilities can
typically be brought operational in a significantly shorter time period where a
suitable plant can be identified, acquired and relocated as compared to the time
required to manufacture new facilities.
While information as to the worldwide scope and size of the plant
relocation industry is not readily available, management estimates that the
worldwide market for such services was in excess of $1 billion during 1997 with
a substantial majority of the demand for such services being outside of the
United States. Management expects that demand for plant relocation services in
Asia will be temporarily curtailed during 1998 as a result of the currency
crisis experienced in that region during the second half of 1997 and into early
1998. However, management believes that the cost and time benefits associated
with plant relocations will result in strong growth in demand for those services
over the next decade.
4
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The plant relocation market is served by a variety of engineering and
construction firms which typically offer plant relocation services as an
additional service to customers. Management believes that the Company is one of
the few competitors in the plant relocation industry offering those services as
a primary service as opposed to an additional service. Because of its experience
in sourcing and relocating plants and its emphasis on providing plant
relocations as a primary service, management believes that the Company is widely
recognized as a leader in the worldwide plant relocation services market.
Energy Project Development and Management Services
In 1996, the Company laid the groundwork for entry into the energy market.
In evaluating the potential markets for the Company's power generation equipment
inventory and opportunities for future growth and establishment of recurring
revenue streams, management identified the demand for energy in emerging markets
as a business opportunity with the potential to meet each of the Company's
criteria in those regards.
After evaluating various options for entry into the energy production
market, the Company acquired a license from Continental Waste Conversion, Inc.
("CWC") pursuant to which the Company was granted the exclusive worldwide rights
(excluding Canada) to CWC's proprietary gasification technology that can convert
municipal solid waste into electrical energy. Through that investment, the
Company now offers state-of-the-art solutions to municipal waste and energy
concerns worldwide. Management believes that this gasification technology offers
a number of significant advantages over existing waste-to-energy or other
gasification technologies, including the production of substantially reduced
volumes of secondary waste ash and compliance with the most stringent
international clean air standards.
With the acquisition of the rights to deploy the CWC waste-to-energy
process and a strategic inventory of surplus generators, the Company began to
actively pursue energy production opportunities through the establishment of
strategic alliances and discussions with industrial concerns and governmental
entities in Central America, Eastern Europe and Asia.
The Company's international energy production operations and development
activities are anticipated to principally involve the development, acquisition,
financing, promotion, and management of energy projects in emerging markets. The
objective of the Company is to develop, finance, own and manage integrated
energy projects worldwide through the utilization of the Company's portfolio of
products and services.
The Company's initial international activities are expected to include
management of direct and indirect ownership interests in and/or operation of
energy plants in El Salvador and the nation of Georgia and a waste-to-energy
facility in Taiwan. The Company, as of the first quarter of 1998, was involved
in energy projects in early stages of development, financing or construction in
those countries. The following is a brief description of the Company's energy
projects which are in varying stages of development, financing or construction;
thus the information set forth below is subject to change. In addition, these
projects are, to varying degrees, subject to all the risks associated with
project development, construction and financing in foreign countries, including
without limitation, the receipt of permits and consents, the availability of
project financing on acceptable terms, expropriation of assets, renegotiation of
contracts with foreign governments and political instability, as well as changes
in laws and policies governing operations of foreign-based businesses generally.
Other than as noted below, there can be no assurances that these projects will
commence commercial operations.
El Salvador. The Company, through its wholly-owned subsidiary, Empresa de
Poder y Energia de El Salvador, S.A. de C.V. ("PESA"), has entered into a
15-year power purchase agreement to provide Compania de Alumbrado Electrico de
San Salvador, S.A. de C.V. ("CAESS"), a formerly state-owned El Salvadorean
electric power distribution company, with a minimum of approximately 40
megawatts (MW) of electric power through the 15-year term. In order to meet the
minimum supply requirements under the agreement, the Company plans to construct
a power generating plant with a capacity of 45 MW (the "Miravalle Power
Project").
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The Company has entered into an initial agreement with Caterpillar Power
Ventures, Inc. and Caterpillar Power Ventures International, Ltd., both
subsidiaries of Caterpillar, Inc. (collectively, "Caterpillar"), pursuant to
which it is anticipated that Caterpillar will participate as an equity investor
and lead contractor on the Miravalle Power Project. Subject to execution of
definitive agreements, the initial agreement provides that Caterpillar will
acquire a minority interest in the project in exchange for subordinated debt and
equity financing. Additionally, Caterpillar will provide turnkey engineering,
procurement and construction services as well as operation and maintenance
services for the project. The estimated capital cost of the project is $56
million.
Debt financing arrangements for the balance of the cost of the Miravalle
Power Project are expected to be finalized during the Spring of 1998.
Construction of the project is expected to commence upon finalizing the debt
financing arrangements. The plant is expected to be operational within twelve
months after commencement of construction.
Georgia. The Company, through its wholly-owned subsidiary, IDM Energy
Corporation, in January of 1998, signed a Protocol of Intention ("POI") with the
Ministry for Fuel and Energy ("MFE") of the former Soviet state of Georgia under
which the Company will have the right to design, construct, own and operate
electric power facilities in the region. Under the POI, as projects are
selected, the Company shall have the irrevocable right of first refusal for
their development. The Company and the MFE are developing an initial thirty five
year power purchase agreement which will establish the terms for the sale of
electric power from a generating facility or facilities with a capacity of up to
1,000 MW. An agreement is expected to be finalized during the first half of
1998. The Company and the MFE have identified eight potential projects and
initial development work has commenced. The Company and the MFE will also
jointly evaluate the feasibility of erecting high-voltage transmission lines to
export electrical energy to other countries.
The anticipated capital cost for construction of facilities with a total
generating capacity of 1,000 MW is anticipated to be in the range of $500-$750
million, dependent on final designs, fuel utilized and the number of facilities
constructed. Financing arrangements are expected to commence immediately after
the first project has been selected and a power purchase agreement has been
executed. Construction on such projects is expected to commence upon completion
of financing arrangements and commercial operation is anticipated to commence
within twelve months after commencement of construction.
Taiwan. The Company, through its newly formed affiliate, IDM Asia, and
Five-Nines Technology Company, a leading Taiwanese waste management company, has
signed an agreement to jointly develop a 100-tons-per-day industrial waste
processing and energy production facility in Taipei, Taiwan. The Company
anticipates that the project, which is expected to cost approximately $22
million, will be funded through conventional project financing. Several leading
Taiwanese financial institutions have expressed a strong interest in financing
the project. The venture would be among the first and one of the largest
privately owned industrial and energy production facilities in Taiwan.
The Company and Five-Nines are preparing a detailed plant design. The
project is expected to utilize a unique, proprietary and commercially proven
technology for the treatment of a wide range of waste streams. Necessary steps
have been initiated to secure environmental and regulatory permits. The Company
presently anticipates that preliminary commitments for project financing will be
secured during the Summer of 1998 and that the facility will be operational by
the Summer of 1999 subject to receipt of environmental and regulatory permits.
In addition to the projects referenced above, the Company is actively
pursuing energy projects elsewhere in Asia, Eastern Europe, South and Central
America.
The Company's proposed non-domestic operations are subject to the
jurisdiction of numerous governmental agencies in the countries in which
projects are expected to be located with respect to environmental and other
regulatory matters. Generally, many of the countries in which the Company
expects to do business have recently developed or are in the process of
developing new regulatory and legal structures to accommodate private and
foreign-owned businesses. These regulatory and legal structures and their
interpretation and application by administrative agencies are relatively new and
sometimes limited. Many detailed rules and procedures are yet to be issued. The
interpretation of existing rules can also be expected to evolve over time.
Although the Company believes that its operations are, and will be, in
compliance in all material respects with all applicable environmental laws and
regulations in the applicable foreign jurisdictions, the Company also believes
that the operations of its proposed projects eventually may be required to meet
standards that are comparable in many respects to those in effect in the United
States and in countries within the European Community. In addition, as the
Company acquires additional projects in various countries, it will be affected
by the environmental and other regulatory restrictions of such countries.
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Environmental Remediation Services
General. The Company offers a variety of specialized environmental services
with an emphasis on plant decontamination and decommissioning. Many of the
projects undertaken by the Company are "cross-disciplinary" in nature, involving
one or more elements of dismantling, hazardous waste remediation, radiological
remediation, asbestos abatement, plant relocation and other related services.
The Company's services are generally offered on a "lump sum" basis wherein the
Company bids to perform a complete job for a predetermined price or on a "time
and material" basis wherein the Company is paid certain predetermined hourly or
per day rates for its services plus a charge for materials used. The Company
also provides services on a fixed fee basis where the Company is paid for all
costs incurred plus a predetermined fee or profit margin without regard to the
time required to perform the job. While the majority of the Company's projects
are "lump sum" jobs, the Company generally will not bid on such projects without
an in-depth understanding of the scope of such projects.
Many contracts awarded to the Company require the Company to provide a
surety bond. The Company's ability to obtain bonding and the amount of bonding
required is determined by the Company's net worth, annual revenues and liquid
working capital and the number and size of jobs being performed. The larger the
project and/or the more projects in which the Company is engaged, the greater
the Company's bonding, net worth and liquid working capital requirements. The
bonding requirements which the Company must satisfy vary depending upon the
nature of the job to be performed. The Company generally pays a fee to bonding
companies which typically averages three to four percent of the amount of the
contract to be performed with the percentage decreasing as the Company's net
worth increases. Because such fees are generally payable at the beginning of a
job, the Company must maintain sufficient working capital reserves to permit the
Company to pay such fees and secure bonding prior to commencing work on a
project. Additionally, bonding companies will require the Company to provide as
security for the bonding company liquid working capital, consisting of cash and
accounts receivable, in amounts based on the size of the contract in question.
For projects not involving radiological remediation, the Company must generally
have available liquid working capital in an amount equal to 12.5% of the
contract amount in order to secure bonding. With respect to jobs involving
radioactive materials, the total bonding available to the Company is generally
based on having available liquid working capital in an amount equal to 20% of
the contract amount.
Where the Company has adequate bonding capacity to perform a job, an
experienced member of the Company's management team will analyze the project and
develop preliminary plans, schedules and cost estimates in order to prepare a
bid. If the Company obtains a contract to perform the job being bid on, the
management team, working from the preliminary plans, schedules and cost
estimates, will develop detailed work plans, schedules and cost estimates to
perform the job. Such planning will include securing proper equipment and
materials and staffing the jobs with properly trained and experienced personnel
to perform the job in a safe, efficient, competent and timely manner.
Actual on-site services are supervised by Company employees pursuant to the
detailed plans developed by management. Work is subcontracted to third parties
based upon a large number of factors including safety, efficiency, competency
and scheduling.
In order to assure the safety, quality and timeliness of the Company's
projects and to assure the Company's ability to perform projects, the Company
provides extensive training to its entire full-time workforce and goes to great
efforts to retain its trained workforce, many of whom have been with the Company
since inception. By maintaining an experienced workforce and cross-training its
dismantlers, riggers, ironworkers, equipment operators, laborers,
superintendents and foremen in OSHA 1910.120 hazardous waste procedures,
asbestos abatement, radiological remediation and other related skills, the
Company's workforce can address virtually every situation which may arise in a
remediation project. Management believes this level of training and expertise in
each of the major areas of remediation is unique to the Company. In addition to
stringent safety and performance standards and procedures implemented by the
Company to assure safety, quality and timeliness, the Company has established
strict guidelines for the handling and disposal of hazardous materials. Such
guidelines, which are intended to protect the Company from potential liability
as a generator or transporter of hazardous materials, include strict policies
that the Company contract only as an agent for generators to remediate sites,
that the Company never signs any waste manifest and that all transportation of
hazardous materials from remediation sites be subcontracted to qualified
transportation companies with extensive insurance coverage. See "Regulation."
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The Company's environmental services are primarily provided on a project
basis in the areas of plant dismantling and decommissioning, hazardous waste
remediation, radiological remediation and asbestos abatement.
Plant Dismantling and Decommissioning. Plant dismantling and
decommissioning is the historical core of the Company's operations and serves as
a foundation for each of the Company's other specialty services. Since its
inception, the Company has provided deconstruction services for numerous Fortune
500 companies with the bulk of such services being provided in connection with
the closure of chemical process plants. Where facilities have been closed or
abandoned due to age, safety conditions or other factors, the Company has been
called upon to disassemble such facilities on a piece by piece basis. Unlike the
traditional destruction of buildings using wrecking balls and explosives, the
potential release of toxic chemicals or other hazardous substances produced or
present in such facilities requires custom dismantling services in order to
assure safety and proper identification and disposal of contaminated materials
as well as the safety of the laborers involved. Only skilled craftsmen can
safely dismantle contaminated tanks and structures in government mandated and
regulated personal protective equipment. The scope and nature of deconstruction
services provided is carefully planned based on the nature of the subject
facility and the contents thereof as well as the desires of the owner of the
facility. Such services range from dismantling single buildings and small
unenclosed chemical process facilities to the complete deconstruction of large
manufacturing facilities including multiple buildings and all equipment and
machinery within such buildings or on the site.
The Company typically performs dismantling and decommissioning services in
conjunction with other environmental and/or related services performed by the
Company or by a team of providers. This multi-disciplinary team approach is
expected to expand beyond decommissioning and hazardous waste remediation and
management with the Company's participation in a consortium with Duke Energy to
decommission, clean-up and re-industrialize seven nuclear power plant sites in
Germany. See "Radiological Remediation."
Hazardous Waste Remediation. Hazardous waste remediation encompasses the
clean up of a broad range of hazardous materials. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and the
Resource Conservation and Recovery Act ("RCRA") broadly define "hazardous
substances" which, if released, may trigger reporting and clean up obligations.
The list of "hazardous substances" covered by these laws is extensive and
includes a large number of chemicals, metals, pesticides, radiological
materials, biological agents, explosives, toxic pollutants and other materials
which may produce health concerns if released into the environment. Both CERCLA
and RCRA impose stringent reporting, liability and clean up obligations on
owners and operators (including, in some cases, former owners and operators) of
sites where specified levels of hazardous substances have been released. The
most serious of these sites have been designated as "superfund sites" under
CERCLA.
Under CERCLA, the owners and operators of superfund sites at the time of a
release into the environment, and the transporters of hazardous substances, may
be designated as Potential Responsible Parties ("PRP"), many of whom are Fortune
500 companies, and, as such, may be liable for all or part of the clean up cost
at such site without regard to fault or the legality of the PRP's actions. While
PRP's may undertake clean up activities at superfund sites voluntarily or under
government compulsion, the federal government and the EPA may undertake the
clean up of some sites on its own and subsequently seek to identify and impose
liability for the cost of such clean up on PRP's. Additionally, most states have
environmental regulations comparable to, or supplementing, EPA regulations
wherein private parties can be compelled to clean up hazards or the state can
undertake the clean up of such hazards and seek reimbursement from private
parties.
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The Company has extensive experience working with PRP's, including
Allied-Signal, Exide, NL Industries, Johnson Controls, AT&T and others, in the
clean up of hazardous waste sites, including superfund sites. The Company's
services at such sites have entailed a combination of the dismantling of
facilities and actual implementation of remediation techniques to the subject
hazards. Many of the projects undertaken by the Company at such sites are
specialty jobs wherein major architectural engineering firms contract to have
the Company perform complex dismantling and deconstruction jobs and to perform
actual remediation of hazardous materials in conjunction with the dismantling
process. While the Company maintains existing relations with numerous private
sector industrial PRP's and has performed site assessment and actual remediation
at various sites, the Company has established, and is seeking to strengthen,
relations with the major architectural engineering firms which control a
significant portion of the larger government projects, including many superfund
sites. Because of the general lack of expertise and experience in dismantling
and deconstruction at most of the major engineering firms, and a growing
reputation with such firms, the Company has been called on to serve on
remediation teams with the Company handling all aspects of dismantling and
deconstruction at hazardous waste remediation sites.
Beginning with the Company's formation of a strategic alliance with
Solucorp Industries Ltd. ("Solucorp") during the third quarter of 1995, the
Company offers soil remediation services which enhances the Company's hazardous
waste remediation services. Prior to formation of the alliance with Solucorp,
the Company offered soil remediation services on a limited basis because of the
Company's belief that existing soil remediation technologies were unproven and
not cost-effective. Solucorp has developed a Molecular Bonding System ("MBS")
soil remediation technology utilized in the stabilization of hazardous heavy
metal contaminated soils, sludges and other media.
In 1996, the Company further expanded its hazardous waste services with the
acquisition of a license from, and equity interest in, Life International
Products, Inc. ("Life") pursuant to which the Company began to market and employ
Life's patented superoxygenation technology for long term bioremediation of
contaminated groundwater. Bioremediation involves the introduction of a bacteria
culture, nutrients and oxygen into contaminated groundwater. The bacteria
culture feeds on organic pollutants rendering the contaminated waters harmless.
An essential element in the bioremediation process is the introduction and
maintenance of high levels of oxygen into the contaminated water. The bacteria
culture consumes massive quantities of oxygen in the bioremediation process and
low levels of oxygen or the dissipation of oxygen from the water slows the
bioremediation process. Traditional bioremediation processes have involved the
injection of oxygen into water using an aerator. Management believes that
application of Life's superoxygenation process enhances bioremediation of
contaminated groundwater by increasing the oxygen content and the time such
oxygen will remain in water as compared to traditional methods of oxygen
injection. As a result of more effective and longer lasting oxygen injection,
the Company believes that Life's superoxygenation process will increase the rate
of bioremediation substantially when compared to existing industry practices.
Life has granted the Company the exclusive license to utilize the Life
oxygenation process in the United States, Canada and Mexico for purposes of
bioremediation of contaminated groundwater. The Company's license runs through
September 2001 subject to renewal for successive five year terms provided that
certain minimum revenue requirements are met by the Company.
Radiological Remediation. Radiological remediation services consist
primarily of the decontamination and dismantling of facilities employing or
producing radioactive materials and the removal and disposal of radioactive
materials. Typically, such services are utilized by utility companies which
operate nuclear plants, universities and other research facilities which utilize
radioactive isotopes in a variety of research projects, and the DOE and DOD
which oversee nuclear weapons production.
Utility companies have now operated nuclear plants for more than 30 years.
Because of a combination of special interest pressure, worldwide competition for
electricity customers brought about by widespread de-regulation, strict
government oversight and high operating costs, many nuclear generating
facilities have been prematurely closed. As other nuclear facilities continue to
age and public skepticism as to the safety of such facilities remains high,
additional plants are expected to close. Due to the nature of such facilities,
utility companies are expected to seek experienced dismantling and remediation
specialists to decontaminate, dismantle and decommission such facilities and to
assure proper handling and disposal of radioactive waste.
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Universities and other research facilities also operate nuclear reactors
and utilize radioactive isotopes in research and teaching. With a decline in the
enrollment in nuclear engineering departments in recent years the utilization of
nuclear reactors and related materials in teaching has declined to the point
that some programs may be dropped or significantly curtailed. Even where
research is continuing at universities and in industry, the use of isotopes over
extended periods has created, and is expected to continue to create concerns
with respect to the disposal of radioactive materials and the decontamination of
facilities. In order to safely deal with inactive reactors and radioactive
contamination, industry and universities, sometimes under government direction,
are seeking experienced specialists to remove, decontaminate and/or dispose of
abandoned facilities and contaminated materials in and around abandoned or
functional facilities.
Finally, the DOD and DOE oversee the operations and are responsible for the
clean up of weapons facilities across the country. Extensive remediation
activities are expected to be required as many of such facilities are closed as
a result of sharply reduced nuclear weapons production following the end of the
Cold War. As with other owners and operators of facilities having radioactive
waste and contamination, the federal government has sought, and is expected to
continue to seek, experienced specialists to decontaminate and dismantle such
facilities and to remediate and dispose of radioactive waste in a safe manner.
The Company has skilled personnel with the necessary experience and training to
dismantle these structures in government mandated and regulated personal
protective equipment.
Management believes that radiological remediation is the greatest potential
growth area within the environmental services industry. While the asbestos
abatement and general hazardous remediation markets have matured resulting in
slower growth in demand for those services, management believes that the
greatest growth in the radiological remediation market lies ahead. The DOD and
DOE have only recently begun actual remediation of sites under their management
and management of the Company is not aware of any significant nuclear facilities
on which remediation efforts have been completed. Additionally, no significant
remediation efforts have been undertaken to date to management's knowledge at
nuclear facilities in other countries, including former Soviet-bloc countries
and states in which nuclear facilities were the prevalent sources of power.
Management believes that the Company is well positioned to participate in
the future remediation of such facilities. The Company is presently on site at
DOD and DOE locations.
The Company's radiological and decommissioning services are also expected
to be deployed in connection with the provision of radiological remediation
services for six VVER 440 nuclear power plants and one small reactor plant in
Germany. A consortium including the Company and Duke Energy have reached an
agreement in principal pursuant to which the consortium has been selected to
participate in the privatization and re-industrialization of those sites in
conjunction with the performance of radiological remediation services. Under the
terms of the project, the German government will transfer to the consortium
control of a state-owned corporation established to undertake the
decommissioning and waste management of the facilities. In addition to
decommissioning and clean-up activities, the consortium will revitalize and
re-industrialize the sites with the objective of creating a minimum of 1,500 new
jobs at the site and in the Greifswald and Mecklenburg Vorpommern regions. Site
redevelopment work has commenced. Contract negotiations for the acquisition of
the state-owned corporation are ongoing and management anticipates that a
comprehensive agreement will be finalized during the second half of 1998.
Project engineering is expected to begin immediately after execution of a
definitive agreement with the decommissioning and remediation work expected to
last approximately 10 years. The German federal government has established a
reserve of DM 6.209 billion (approximately $3.65 billion) to finance the
project. The project also enjoys the support of state and local governments
which, among other things, have agreed to provide necessary infrastructure
improvements and other economic benefits to promote the re-industrialization of
the sites.
Asbestos Abatement. The United States Environmental Protection Agency
("EPA"), and most, if not all, states, have enacted rules and regulations
governing the emission of asbestos during the renovation or demolition of
facilities as well as during manufacturing and waste disposal operations. These
regulations have effectively required inspection for and/or abatement of
asbestos prior to or in conjunction with the renovation or demolition of
buildings. Requirements imposed by real estate lenders and practical
considerations as well as disclosure laws relating to real estate transactions
have effectively resulted in asbestos inspection and, where appropriate,
abatement as a condition of most conveyances of real estate.
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The Company provides site assessment, planning and asbestos abatement
services to property owners desiring to remodel or sell properties or abate
existing asbestos on site for health and liability reasons. Because the handling
and risk associated with the presence of asbestos varies depending upon the use,
volume and nature of the asbestos present, the Company will evaluate the
appropriate means of abatement and develop a detailed plan based on such
evaluation. The abatement process may range from encapsulation of exposed
asbestos to the actual physical removal and disposal of the asbestos containing
materials on the site. Such materials may include thermal insulation used on
boilers, tanks, hot and cold water systems and heating, ventilation and air
conditioning systems, surfacing materials used for acoustical, decorative or
fireproofing purposes (asbestos sprayed or trawled on walls, ceiling and
structural members) and other materials such as floor tiles, ceiling tiles,
roofing felt, concrete pipe, outdoor siding and fabrics.
Upon development of a plan of abatement in compliance with applicable state
and federal regulations, the Company's work crew wearing protective clothing,
head gear and breathing apparatuses will physically remove asbestos-containing
materials from the building. The building areas in which abatement work is being
performed are sealed off and blowers or ventilation equipment are utilized to
create negative pressure in the building to prevent the escape of airborne
asbestos from the building. Upon completion of the abatement process, the
asbestos removed is disposed of in accordance with applicable regulations by
transportation and disposal companies.
Plant Relocation Services
In addition to its historical dismantling and decommission services, the
Company has developed as a primary service offering the relocation and
re-assembly of plants. Plant relocation and re-erection projects are typically
bid on, planned and engineered in a manner similar to the Company's dismantling
and decommissioning services taking into account the special demands associated
with transporting and re-erecting such facilities. The Company has developed
proprietary techniques and extensive expertise for dismantling, matchmarking,
relocation engineering, packaging, documentation and re-erection of entire
plants. See "Environmental Services - General."
With the growth in the economies of numerous third-world countries and
other countries which were historically non-industrialized, the Company believes
significant opportunities are available in the worldwide plant relocation and
re-assembly market. Because of the time and cost savings associated with
relocating existing plants as compared to purchasing and starting-up new plants,
the Company believes that growing industrial concerns in South and Central
America, Pacific Rim and Eastern European countries will view the acquisition
and relocation of existing plants as the preferred method of expanding
operations. Typical of such opportunities was the Company's completion during
1996 of the acquisition, relocation and refurbishing of a 1,400-ton-per-day
ammonia plant from Lake Charles, Louisiana to Karachi, Pakistan, a site of the
largest fertilizer producer in Pakistan.
Other Specialty Project Engineering Services.
In addition to the Company's principal services, the Company routinely
evaluates projects requiring specialized engineering services of a
multi-disciplinary nature. Where projects require the extension of specialized
engineering services across disciplines and where the Company possesses the
disciplines required to perform those services, the Company will attempt to
negotiate to provide a package of specialized services. The Company typically
seeks opportunities to perform specialty engineering services on projects where
the need to deploy expertise in multiple fields offers provides favorable
margins.
While the Company's specialty project engineering services are not
generally subject to being categorized based on their non-recurring nature,
typical service offerings have included providing drilling and grouting services
on the East Dam reservoir project in California.
Other Services, Products and Investments
The Company has entered into selected strategic investments and
undertakings in conjunction with, and which supplement, its core operations.
Those investments and undertakings, as of the first quarter of 1998, include (1)
an equity investment in Life International Products, Inc., (2) an equity
investment in Seven Star International Holdings, Inc. ("Seven Star") which holds
a license to distribute beverages incorporating Life's superoxygenation process
and (3) an alliance with Universal Process Equipment, Inc. ("UPE") to buy and
sell surplus equipment.
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At the time of the Company's initial acquisition of a license from Life to
utilize Life's patented superoxygenation process in bioremediation, the Company
also acquired a ten percent (10%) equity interest in Life for $1 million. The
Company, in 1997, invested an additional $375,000 in Life to maintain its ten
percent equity interest.
During 1997, the Company and Jin Xin (Holding), Inc. each acquired a fifty
percent (50%) interest in Seven Star, a BVI company. The Company contributed
$300,000 to the capital of Seven Star and Jin Xin contributed $300,000 to Seven
Star. In December of 1997, Seven Star agreed to acquire the exclusive rights to
distribute beverages incorporating, and otherwise exploit, Life's
superoxygenation process in a territory consisting of the People's Republic of
China (including Hong Kong), Taiwan, Indonesia and Singapore. Pursuant to the
terms of the license, Seven Star paid a minimum guarantee payment in the amount
of $400,000 to Life and will pay ongoing royalties based on a percentage of
revenues realized from licensing of the Life process, subject to certain minimum
royalty requirements. Seven Star intends to sublicense the Life process and
management believes that initial sublicensing fees and ongoing minimum royalties
from potential sublicensees will be sufficient to recoup at least the minimum
guarantee payment paid by Seven Star as well as the minimum ongoing royalties.
In December of 1997, Seven Star entered into an initial sublicense agreement
with Zheng Zhou Wo Li Beverage Limited covering a territory consisting of Zheng
Zhou, Henan, in the People's Republic of China and providing for a minimum
guarantee payment of $600,000 and royalties and minimum royalty requirements in
excess of those under Seven Star's license with Life. As of the end of the first
quarter of 1998, the minimum guarantee payment of Zheng Zhou Wo Li Beverage
Limited had not been made and royalty payments had no yet commenced. Seven
Star's ability to successfully exploit the Life process is subject to the
numerous risks associated with operation in Asia, including the recent currency
crisis which has impaired the growth prospects in the region, as well as the
risks and uncertainties associated with identifying, doing business with, and
enforcing contracts with Seven Star's prospective local partners and
sublicensees.
In addition to its core service business and efforts relating to Life, the
Company is engaged in the purchase and sale of surplus equipment. The Company in
conducting its dismantling and plant relocation operations has developed
extensive expertise in identifying and purchasing equipment. Frequently, where
plants are being dismantled but not relocated, the Company has been able to
acquire equipment, with no future value to the owner, at favorable prices.
Because of the nature and cost of acquiring, transporting and storing such
equipment pending the sale thereof, historically, the Company would frequently
enter into joint venture arrangements with sellers or other persons having
available storage capacity wherein the Company would take a fifty percent
interest in the equipment and the equipment would be held at the joint venture
partner's facilities until such time as the Company identified a purchaser for
such equipment.
In September of 1995, the Company entered into an alliance with Universal
Process Equipment ("UPE") to carry on all future surplus equipment purchase and
sales operations. UPE is one of the world's largest marketers of new and used
process equipment. Pursuant to an Agreement for Commissions and Joint Ventures,
the Company directs all inquiries to buy or sell used process equipment to UPE.
UPE, in turn, will utilize its marketing resources to satisfy such inquiries and
will pay prescribed commissions to the Company based on the nature of each
transaction. Where UPE chooses not to, or is unable to, acquire items, the
Company will continue to be able to acquire such equipment for its own account.
In conjunction with the formation of the strategic alliance with UPE, the
Company sold substantially all of its inventory of glass lined equipment and
process equipment to UPE and an affiliated company. The Company retained its
inventory of generators and other selected items.
The Company expects that from time to time in the future it will have
opportunities to invest or participate in ventures outside of, but connected to,
its core businesses. Management will evaluate any such opportunities and, where
management deems the potential of such opportunities to merit participation or
investment, the Company may enter into additional ventures outside of its core
businesses.
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Marketing
The Company, in marketing its services, relies principally on the efforts
of its operating and executive management team who regularly call upon existing
and prospective customers. The Company, through the efforts of its management,
has established working relationships with numerous Fortune 500 industrial
concerns as well as major national architectural engineering firms, the DOD and
the DOE and many smaller and medium size industrial and engineering firms
worldwide. The Company supplements the efforts of its management by regular
advertising in international trade publications, direct mailings to selected
industrial and engineering firms, strategic telemarketing, and regular
participation in industry conferences and trade shows.
As noted above, marketing efforts with respect to MBS soil remediation
applications is handled jointly by the Company, through its management team, and
Solucorp while surplus equipment marketing is now handled principally by UPE
pursuant to the Company's strategic alliance with UPE and Seven Star is
principally marketing its sublicenses to exploit the Life process in Asia.
Regulation
Environmental Regulations. The Company and, in particular, its clients, are
subject to extensive and evolving environmental laws and regulations. These laws
and regulations are directly related to the demand for many of the services
offered by the Company and often subject the Company to stringent regulation in
the conduct of its operations. The principal environmental legislation affecting
the Company and its clients is described below.
-- Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA regulates
the treatment, storage and disposal of hazardous and solid wastes. RCRA has,
therefore, created a need generally for some of the types of services provided
by the Company. The 1984 Hazardous and Solid Waste Amendments to RCRA ("HSWA")
expanded RCRA's scope by providing for the listing of additional wastes as
"hazardous" and lowering the quantity threshold of wastes subject to regulation.
HSWA also imposes restrictions on land disposal of certain wastes, prescribes
more stringent management standards for hazardous waste disposal sites, sets
standards for underground storage tanks and provides for "corrective" action
procedures. Under RCRA, liability and stringent management standards are imposed
on a person who is an RCRA permit holder, namely, a "generator" or "transporter"
of hazardous waste, or an "owner" or "operator" of a waste treatment, storage or
disposal facility. Both the EPA and states with authorized hazardous waste
programs can bring several types of enforcement actions under RCRA, including
administrative orders and actions seeking civil and criminal penalties. RCRA
also provides for private causes of action as an additional enforcement tool.
-- Comprehensive Environmental Response, Compensation and Liability Act of
1980. CERCLA , also known as the Superfund Act, addresses cleanup of sites at
which there has been or may be a release of hazardous substances into the
environment. CERCLA assigns liability for costs of cleanup and damage to natural
resources to any person who, currently or at the time of disposal of a hazardous
substance, owned or operated any facility at which hazardous substances were
deposited, to any person who by agreement or otherwise arranged for disposal or
treatment, or arranged with a transporter for transport of hazardous substances
owned or possessed by such person for disposal or treatment, and to any person
who accepted hazardous substances for transport to disposal or treatment
facilities or sites from which there is a release or threatened release of
hazardous substances. CERCLA authorizes the Federal government either to clean
up these sites itself or to order persons responsible for the situation to do
so. CERCLA created a fund to be used by the Federal government to pay for the
cleanup efforts. Where the Federal government expends money for remedial
activities, it must seek reimbursement from the potentially responsible parties.
Where the EPA performs remedial work with superfund dollars, it frequently sues
potentially responsible parties for reimbursement under the "cost recovery"
authority of Section 107 of CERCLA. The EPA may also issue an administrative
order seeking to compel potentially responsible parties to perform remedial work
with their own funds under the "abatement" authority of Section 106 of CERCLA.
In lieu of instigating such actions, the EPA may also seek through negotiations
to persuade such parties to perform and/or pay for any and all stages of
remedial action at a site in discharge of their liabilities under CERCLA.
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CERCLA provides that transporters and persons arranging for the disposal of
hazardous waste may be jointly and severally liable for the costs of remedial
action at the site to which the hazardous waste is taken. While the Company
attempts to minimize such exposure by contracting only with qualified hazardous
waste transporters meeting certain minimum insurance requirements and by having
the generator select the disposal site and method there can be no assurances
that the Company will be successful in so limiting such exposure. Under Section
101(20)(B) of CERCLA, when a common or contract carrier delivers a hazardous
substance to a site selected by the shipper, the carrier is not considered to
have caused or contributed to any release at such disposal facility resulting
from circumstances or conditions beyond its control.
The Superfund Amendments and Reauthorization Act ("SARA") was enacted in
1986 and authorized increased Federal expenditure and imposes more stringent
cleanup standards and accelerated timetables. SARA also contains provisions
which expand the enforcement powers of the EPA.
While there can be no assurance, management believes that, even apart from
funding authorized by RCRA and CERCLA, industry and governmental entities will
continue to try to resolve hazardous waste problems due to their need to comply
with other statutory requirements and to avoid liabilities to private parties.
Although the liabilities imposed by CERCLA are more directly related to the
Company's clients, they could under certain circumstances apply to some of the
activities of the Company, including failure to properly design or implement a
cleanup, removal or remedial action plan or to achieve required cleanup
standards and activities related to the transport and disposal of hazardous
substances. Such liabilities can be joint and several where other parties are
involved.
-- Clean Air Act and 1990 Amendments. The Clean Air Act requires compliance
with ambient air quality standards and empowers the EPA to establish and enforce
limits on the emission of various pollutants from specific types of facilities.
The 1990 amendments modify the Clean Air Act in a number of significant areas.
Among other things, they establish emissions allowances for sulfur and nitrogen
oxides, establish strict new requirements applicable to ozone emissions and
other air toxics, establish a national permit program for all major sources of
pollutants and create significant new penalties, both civil and criminal, for
violations of the Clean Air Act.
Included within the scope of the Clean Air Act are rules issued by the EPA
known as National Emissions Standards for Hazardous Air Pollutants ("NESHAP").
NESHAP specifically regulates the emission of asbestos during manufacturing and
waste disposal operations and the renovation and demolition of certain
facilities. Authority to implement and enforce NESHAP standards has been
delegated to the various states which have implemented licensing requirements,
notice requirements and procedures with respect to asbestos abatement and other
rules governing the handling and disposal of asbestos.
-- Clean Water Act of 1972 ("CWA"). Originally enacted as the Federal Water
Pollution Control Act, but renamed as the Clean Water Act in 1977, CWA regulates
the discharge of pollutants into the surface waters of the United States. CWA
established a system of minimum national efficiency standards on an
industry-by-industry basis, water quality standards, and a discharge permit
program. It also contains special provisions addressing accidental or
unintentional spills of oil and hazardous substances into waterways.
-- Other Federal and State Environmental Regulations. The Company's
services are also used by its clients in complying with, among others, the
following Federal laws: the Toxic Substances Control Act, the Safe Drinking
Water Act, the Hazardous Materials Transportation Act and the Oil Pollution Act
of 1990. In addition, many states have passed superfund-type legislation and
other regulations and policies to cover more detailed aspects of environmental
impairment and the remediation thereof. This legislation addresses such topics
as air pollution, underground storage tanks, water quality, solid waste,
hazardous materials, surface impoundments, site cleanup and wastewater
discharge. Most states also regulate the transportation of hazardous wastes and
certain flammable liquids within their borders by requiring that special permits
be obtained in advance of such transportation.
Other Regulations. In addition to a broad array of environmental
regulations relating to the activities of the Company, the Company's business
and proposed businesses, are subject to a variety of non-environmental
regulations. Included in the regulations which may effect the Company's current
business are regulations governing occupational safety and health, wage,
overtime and other employment matters and dealings with governmental agencies.
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The Company's proposed operations relating to the licensing of Life's
superoxygenation process for beverages may be subject to potential regulations
governing such matters as food and beverage safety and processes, packaging and
marketing, among other matters. Additionally, the Company's anticipated
commencement of energy production operations may be subject to various
regulations governing rates, safety of operations, and financing, among other
matters. While the Company anticipates that its licensing activities related to
the Life process and energy production activities will be conducted outside of
the United States in lesser developed countries where extensive regulation may
currently be lacking, it can be expected that some of those countries will adopt
extensive regulation governing those activities similar to the United States.
Competition
Energy Services. Due to the substantial barriers to entry into the market
and the prevalence of purchase agreements, competition within the energy market
is limited in most developing countries, including the markets in which the
Company expects to operate. While a variety of independent energy producers and
private and government owned utilities may provide energy in some of the markets
in which the Company expects to operate, it is anticipated that the Company will
have power production agreements in place in most markets which will provide
contractual commitments to purchase a significant portion, if not all, of the
energy produced from the Company's planned facilities. Further, while the
Company is focused on establishing a niche position in the individual project
100 MW or less market, management believes that the primary competitors in the
energy market generally concentrate on large projects (i.e., 200 MW or greater).
Accordingly, competition for the sale of energy is not expected to be
significant for the foreseeable future in the Company's markets. However, should
those markets grow and undergo deregulation similar to that experienced in the
United States, it can be expected that new competitors will enter those markets
increasing pricing and competitive pressures. Further, while established energy
production operations in developing markets are expected to be isolated from
competition in the near term, competition for contracts to provide energy in
markets may be intense. In light of the opening of the United States utility
markets to competition, many participants with substantially greater resources
than the Company have actively begun efforts to establish energy operations in
developing countries around the world.
Environmental Services. The environmental services industry is highly
competitive and fragmented. Because of the diverse nature of the industry, there
are many competitors, both large and small. Many segments of the industry,
including a significant portion of superfund and other large projects, are
dominated by large national architectural engineering firms such as Bechtel,
Flour, Westinghouse, Foster Wheeler and ICF Kaiser. Additionally, many smaller
engineering firms, construction firms, consulting firms and other specialty
firms have entered the industry in recent years and additional firms can be
expected to enter the industry in the future. Many of the firms competing in the
environmental services industry have significantly greater financial resources
and more established market positions than the Company.
While many firms are active in the environmental services industry
providing site assessment, consulting and engineering services, management
believes that the number of firms having expertise in, and offering,
dismantling, decommissioning and deconstruction services within the
environmental services industry is limited. The Company maintains a highly
trained and qualified workforce and has extensive experience in planning and
implementing decontamination and decommissioning projects in a safe manner. Such
expertise and experience has allowed the Company to successfully compete within
the industry and to secure contracts from industrial firms as well as
engineering firms which lack experience in environmental decontamination and
deconstruction. Because the Company, unlike most engineering firms, is staffed
by experienced and skilled decontamination/deconstruction personnel, the
involvement of engineering firms is often limited to project management with
actual hands-on services being provided by the Company's personnel. Because of
the need for certain permits and licenses, specialized equipment, OSHA-trained
employees and the need to be knowledgeable of and to comply with federal, state
and local environmental laws, regulations and requirements, the Company believes
there are significant barriers to entry into the environmental dismantling,
decommissioning and deconstruction business. There can be no assurance, however,
that other firms, including the major engineering firms which control a
significant portion of superfund and government contracts, will not expand into
or develop expertise in the areas in which the Company specializes, decreasing
any competitive advantage which the Company may enjoy. The Company believes that
its expertise and ability to provide full service, turnkey remediation and
decommissioning services and its utilization of state-of-the-art remediation
techniques, such as the Life oxygenation process and the MBS soil remediation
process, will continue to allow it to compete effectively in the environmental
services industry and to capitalize on the expected growth in demand for
services in the nuclear facilities arena.
15
<PAGE>
Plant Relocation Services. Plant relocation services are a niche business
and competition within the segment is limited. Management believes that the
Company is one of the dominant firms within such industry. While demolition and
dismantling firms offer similar services, the primary competition within the
plant relocation industry is from various large engineering firms which offer
services in the form of construction management as consultants to owners.
However, most firms which offer relocation services do so as an additional
service and not as a primary service. The Company advertises and markets its
relocation services as a primary service. Competition with respect to other
specialty project engineering services is believed to be limited to large
engineering firms. Management believes that the Company's ability to provide
highly specialized cross-disciplinary engineering services will allow it to
compete successfully in this market.
Employees
At January 31, 1998, the Company employed approximately 237 full-time
employees, 11 of whom were management and administrative personnel, 45 of whom
were clerical personnel and 181 of whom were field personnel. The Company also
employs additional field personnel on a temporary basis when needed to
adequately staff projects. All permanent field personnel employed by the Company
are skilled craftsmen with an average of over ten years service with the
Company, they are OSHA-trained and asbestos trained to perform their respective
duties. Temporary employees are regularly hired on location by the Company to
staff jobs performed away from the immediate vicinity of the Company's
headquarters. The Company carefully reviews the training and qualifications of
all temporary workers to assure that all such workers are qualified to perform
the work in question. In all such instances, Company supervisors and foremen
will plan, supervise and oversee all aspects of work performed by such temporary
workers.
The Company believes that it enjoys good relations with all of its
employees. Each of the Company's executive officers have entered into
confidentiality and noncompetition agreements with the Company. None of the
Company's permanent full-time employees are unionized or subject to collective
bargaining agreements and the Company has experienced no work stoppages or
strikes. Some of the temporary personnel hired by the Company may be union
members where the job in question and local conditions as a practical matter
require such personnel.
ITEM 2. PROPERTIES
The principal offices of the Company are located on a 7.5 acre site at 396
Whitehead Avenue, South River, New Jersey, in a 6,925 square foot two story
office building and an adjoining 7,600 square foot two story office building.
Also located on such site is a 4,248 square foot one story storage/work area and
a 5,700 square foot warehouse facility. Such facilities are leased by the
Company from L&G Associates, an affiliate of the Company controlled by Joel
Freedman and Frank Falco, pursuant to a fifteen year lease expiring May 31, 2011
and providing for monthly rental installments of $22,500, subject to annual
adjustments based on the Consumer Price Index, plus insurance, taxes and
maintenance costs.
The Company also maintains 3 regional offices which are leased from third
parties in locations which are adjacent to strategic growth areas and major
environmental projects.
Management believes that the Company's properties are adequate to support
the Company's current and anticipated operations.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration ("OSHA") issued a willful citation and notification of
penalty in the amount of $147,000 on the Company in connection with the
accidental death of an employee of one of the Company's subcontractors on the
United Illuminating Steel Point Project job site in Bridgeport, Connecticut. A
complaint was filed against the Company by the Secretary of Labor, United States
Department of Labor on September 30, 1996. The Company is contesting the
Citations and Notification of Penalty.
On February 11, 1997, the Company was served with a lawsuit naming the
Company as a co-defendant in a wrongful death cause of action arising out of the
accidental death of an employee of a subcontractor. The suit, styled The Estate
of Percey L. Richard, and Percey D. Richard, a minor by next of friend Patricia
Cunningham v. American Wrecking Corp. and its successors, IDM Environmental
Corp. and its successors, SECO Corp. and its successors, all joint and
individually, and all unknown persons, Case No. 2:97CV filed in the Federal
District Court for the Northern District of Indiana, arises out of the same
facts alleged in the above referenced administrative proceeding instituted by
the Occupational Safety and Health Administration. Plaintiff seeks damages of
$45 million. Management believes that the suit, as it relates to the Company, is
without merit and intends to vigorously contest the cause of action. Pursuant to
its subcontract with American Wrecking, the Company is now being defended and
indemnified by the insurance carrier for American Wrecking.
In November of 1996, a shareholder filed a class action lawsuit against the
Company and certain directors and officers of the Company. The suit, captioned
Arthur Goldberg v. Joel A. Freedman, Frank A. Falco, James R. Harrigan, John
Klosek and IDM Environmental Corp., Docket No. L-11783-96 in the Superior Court
of New Jersey, Middlesex County, 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 seeks 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. The Company believes the cause of action is without
merit and intends to vigorously contest such cause of action.
Prior to the oral argument before the Court on the defendants' motion to
dismiss the amended complaint, the parties reached an agreement in principle to
settle all claims, subject to notice to the class, hearing before the Court and
Court approval. It is contemplated that, for settlement purposes only, the
parties will stipulate to a settlement class consisting of all persons
(excluding defendants) who purchased the Company's securities from March 8, 1996
through June 5, 1997, and that the action will be dismissed and appropriate
releases provided in consideration for a payment to the stipulated settlement
class by the Company's insurer. Management expects that the matter will be fully
resolved this calendar year.
In April of 1997, the Company and its 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., has 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 is seeking 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. The Company, in June of 1997, filed a separate cause of action against
Enviropower seeking injunctive relief against Enviropower, seeking to enforce
the agreements with Envirpower and to collect amounts owed to the Company by
Enviropower. On September 19, 1997, the Company was awarded an interim
injunction against Enviropower recognizing its exclusive rights to the licensed
technology throughout the pendency of the action and until further order of the
court.
17
<PAGE>
In addition to the foregoing, the Company is periodically subject to
lawsuits and administrative proceedings arising in the ordinary course of
business. Management believes that the outcome of such lawsuits and other
proceedings will not individually or in the aggregate have a material adverse
effect on the Company's financial condition, operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 4, 1997, a special meeting of shareholders of the Company was
held. The only matter voted upon at such meeting was the approval of issuances
of shares in excess of 1,997,130 on conversion of the 7% Convertible Notes and
Warrants, which proposal was approved by a vote of 6,637,665 For, 230,690
Against and 47,475 Abstentions and Broker Non-Votes.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "IDMC." The Company's common stock commenced quotation on the Nasdaq
Small-Cap market following completion of the Company's initial public offering
in April of 1994. Subsequently, on August 31, 1994, the Company's common stock
commenced quotation on the Nasdaq National Market System. The following table
sets forth the high and low sales prices for the Company's common stock for each
quarterly period during the last two fiscal years:
High Low
------ ------
First Quarter, ended March 1996 $8.438 $2.875
Second Quarter, ended June 1996 8.656 5.688
Third Quarter, ended September 1996 7.625 5.250
Fourth Quarter, ended December 1996 6.250 1.938
First Quarter, ended March 1997 3.188 1.656
Second Quarter, ended June 1997 2.938 0.888
Third Quarter, ended September 1997 7.313 1.875
Fourth Quarter, ended December 1997 8.625 5.063
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At April 9, 1998, the bid price of the Common Stock was $3.50.
Holders
As of April 9, 1998, there were approximately 78 holders of record and
4,500 beneficial owners of the Common Stock of the Company.
Dividends
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
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<PAGE>
Sales of Unregistered Securities
- Series C 7% Convertible Preferred Stock.
(a) 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.
(b) The securities were issued to five accredited investors.
(c) The aggregate sales price of such securities was $3,600,000.
Commissions totaling 10% were paid in connection with the placement.
(d) The securities were offered pursuant to Regulation D. The offer was
directed exclusively to a limited number of accredited investor without general
solicitation or advertising and based on representations from the investors that
such investors were acquiring for investment. The securities bear legends
restricting the resale thereof.
(e) The Series C Preferred Stock is convertible into Common Stock at the
lesser of (i) $4.50 per share or (ii) 75% of the average closing bid price of
the Common Stock during the five trading days prior to conversion. The Four Year
$5.00 Warrants are exercisable for a four year period at the lesser of $5.00 per
share or the lowest conversion price of the Series C Preferred Stock. Conversion
of the Series C Preferred Stock and exercise of the Four Year $5.00 Warrants is
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 Four Year
$5.00 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 Four
Year $5.00 Warrants at the pre-tax profit such holders would have realized had
the Four Year $5.00 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.
- Lock-Up Warrants
(a) On February 11, 1998, the Company issued 1,270,000 Three Year $4.50
Warrants (the "Lock-Up Warrants").
(b) The Lock-Up were issued to three accredited investors.
(c) 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.
(d) The Lock-Up were offered pursuant to Section 4(2). The offer was
directed exclusively to a limited number of accredited investor without general
solicitation or advertising and based on representations from the investors that
such investors were acquiring for investment. The securities bear legends
restricting the resale thereof.
(e) The Lock-Up Warrants are exercisable for a three year period at $4.50
per share.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth, for the periods and at the dates indicated,
selected consolidated financial and operating data for the Company. The
financial data was derived from the consolidated financial statements of the
Company and should be read in conjunction with the Company's audited
consolidated financial statements included in the Index to Financial Statements
on page 35 of this report. See also, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
Years ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues:
Contract revenues........................ $ 17,826 $ 20,808 $ 33,866 $ 25,362 $ 14,436
Equipment and scrap revenues............. 96 834 5,537 3,150 4,368
Other.................................... - - - 22 342
------- -------- ------- ------- -------
Total operating revenues............... 17,922 21,642 39,403 28,534 19,146
Cost of sales:
Direct job costs......................... 17,002 21,492 30,433 20,449 11,539
Unusual job costs........................ - - 3,300 - -
Cost of equipment........................ 647 943 2,977 1,651 1,379
------- -------- ------- ------- -------
Gross profit (loss)................... . . 273 (793) 2,693 6,434 6,228
Operating expenses:
General and administrative.......... . . 10,538 9,567 7,637 5,418 4,514
Depreciation and amortization............ 723 668 653 344 432
Settlement expense....................... - - - - -
------- --------
Income (loss) from operations.............. (10,988) (11,028) (5,597) 672 1,282
Interest income (expense), net............. (513) 30 200 (36) (233)
Other income (expense), net................ - - - - 81
------- -------- ------- ------- -------
Income (loss) before income taxes.......... (11,501) (10,998) (5,397) 636 1,130
Provision (credit) for income taxes........ (1,561) (1,850) (1,530) 312 434
------- -------- ------- ------- -------
Net income (loss).......................... $ (9,940) $ (9,148) $ (3,867) $ 324 $ 696
======= ======== ======= ======= =======
Net income (loss) on common stock.......... $(11,224) $ (9,148) $ (3,867) $ 324 $ 696
======= ======== ======= ======= =======
Net income (loss) per share................ $ (1.00) $ (1.13) $ (0.67) $ 0.06 $ 0.29
======= ======== ======= ======= =======
Weighted average shares outstanding.......11,212,690 8,089,472 5,815,565 5,577,977 2,333,334
========== ========= ========= ========= =========
Balance Sheet Data (at period end):
Working capital............................ $(1,149) $6,122 $ 10,293 $ 12,070 $ 622
Total assets............................. 27,151 22,203 22,028 22,257 9,302
Long-term liabilities...................... 259 164 4,004 - 69
Minority interest.......................... - 1,034 - - -
Shareholders' equity....................... 18,079 13,461 10,940 13,829 1,726
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 29 of this Form 10-K.
General
The Company's business has evolved, and continues to evolve, to capitalize
on market opportunities. The Company has added strategic capabilities and
resources through the years to move the business from its roots as a demolition
and deconstruction company to a full service environmental remediation company
and plant relocation services company and, now, an energy project developer and
manager. The Company's revenues were historically derived primarily from (1)
contract decontamination and decommissioning services in a broad range of
industrial and environmentally sensitive settings, including, but not limited
to, plant dismantlement and relocation services, asbestos abatement services,
and remediation of contaminated soil and groundwater; and (2) equipment and
scrap sales. The Company's operations have been characterized by fluctuations in
revenues and operating profits as projects begin and end. With the
implementation of a strategic shift in the Company's business in 1997, the
Company expects to generate a growing base of recurring revenues and operating
profits from energy projects and long-term nuclear facilities decommissioning
and remediation projects while supplementing such revenues and profits with
revenues from the Company's traditional environmental services and plant
relocation services projects.
The Company's environmental remediation services are provided as primary
contractor or as subcontractor to industrial concerns and governmental and other
entities. Generally, such entities own or operate manufacturing or process plant
facilities which facilities are being abandoned, relocated or otherwise require
varying degrees of dismantling or deconstruction work or remediation of a
variety of environmental hazards. Because of the nature of the operations at
such facilities, the Company's services typically involve varying environmental
concerns which require the application of specialized deconstruction and/or
remediation techniques. In accordance with industry practice, the Company will
typically develop a preliminary work plan for each project and will enter into a
contract to perform the required services. The Company's projects are performed
primarily on a "lump sum" basis wherein the Company bids to perform a complete
job for a predetermined price or on a "time and material" basis wherein the
Company charges predetermined hourly or per day rates for specified services
plus a charge for materials used. Additionally, the Company provides services
pursuant to "fixed fee" contracts wherein the Company is paid for all costs
incurred plus a predetermined fee or profit margin. Because of the risk
associated with lump sum contracts, the Company generally will not bid on such
jobs unless the Company has a thorough understanding of the scope of the job in
question and an established history of performing such jobs within the price
established in the contract or the contract provides for adjustments to the
price based on industry practices and scope of work. While the Company performs
decontamination and decommissioning services directly for numerous industrial
concerns with whom the Company has existing relations and with other industrial
concerns with whom the Company may establish relationships from time to time, a
portion of the Company's services are also provided on a subcontractor basis for
engineering firms which are called in to develop and implement hazardous waste
remediation plans but which lack expertise in dismantling or deconstruction or
specialized remediation processes.
In addition to offering environmental remediation services to its
customers, in connection with such services, the Company has extensive
experience in, and offers, plant relocation and reconstruction services to its
customers.
Since 1995, equipment and scrap sales operations have been conducted
principally through an alliance with Universal Process Equipment ("UPE").
Because of the Company's continual involvement with firms requiring
decontamination and decommissioning services as well as plant relocation and
reconstruction services, the Company has developed extensive expertise in
identifying salvageable equipment and scrap and is often able to acquire
equipment on favorable terms from customers who would otherwise have no ongoing
use for such equipment or otherwise lack the knowledge and expertise to market
such equipment. Pursuant to the Company's alliance with UPE, surplus equipment
and scrap identified by the Company must generally be offered to UPE and UPE
assumes the marketing efforts with respect to such items with the Company
receiving commissions or a share of profits from the resale of such items.
21
<PAGE>
The Company's job expenses are primarily labor and labor related costs,
including salaries to laborers, supervisors and foremen, out-of-town living
expenses, payroll taxes, training, insurance and benefits. Additionally, the
Company's job expenses include bonding and job related insurance cost, repairs,
maintenance and rental of job equipment, job materials and supplies, and
transportation and dumping costs, among others. Direct job costs tend to vary
proportionally with service revenues.
Cost of surplus equipment sales includes the actual cost of such equipment
as well as freight charges to transport such equipment and costs of refurbishing
certain equipment. Such costs vary with the volume of sales, the nature of the
equipment sold and the Company's ability to acquire such equipment on favorable
terms. The Company generally has no cost for scrap materials as the value of
salvageable scrap is generally factored into the price when bidding on jobs and
no payment is made by the Company for such scrap.
In addition to direct job costs and cost of surplus equipment and scrap
sales, the Company incurs various general and administrative expenses to support
its operations. The largest of such expenses is salaries paid to management and
administrative personnel. Other significant general and administrative expenses
include rent on the Company's facilities, general insurance, promotional expense
and general office expense. Selling, general and administrative expenses during
1996 and 1997 have included substantial expenses attributable to the Company's
efforts to reposition itself as an energy project developer and manager and a
leading provider of nuclear facilities decommissioning and remediation services.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. The Company's total revenues decreased by approximately 17.1%
from $21.6 million for the year ended December 31, 1996 to $17.9 million for the
year ended December 31, 1997. Contract service income decreased for the period
by 14.4% from $20.8 million in 1996 to $17.8 million in 1997. The decrease in
contract service income was attributable to a lower volume due to the Company
being more selective in bidding only projects with higher gross margins. The
environmental remediation business has been marked by increasing competition and
pressure on job margins. In light of such operating environment, the Company
during 1997 opted to only pursue specialized niche projects where projects risks
could be limited and higher margins attained. Surplus equipment and scrap sales
decreased by 85.4% from $834,000 from the year ended December 31, 1996 to
$96,000 in 1997 due primarily to the sale in 1996 of $634,000 of glass lined
brewery tanks.
Cost of sales. Cost of sales, which includes direct job costs, cost of
equipment sales, and write-down of the Company's surplus generator inventory,
decreased by approximately 21.4% from $22.4 million for 1996 to $17.6 million
for 1997. Direct job costs decreased by 20.9% during 1997 and decreased from
103.3% to 95.4% of contract income. The primary elements of such decrease in job
costs were materials and supplies, job salaries, subcontracting and disposal
expense. The lower gross margins during 1996 was attributable primarily to cost
overruns on several contracts, including the Los Alamos project where the
Company is presently seeking to recover $2.1 million of additional costs
incurred as a result of change orders from clients.
Cost of equipment sales decreased 92.7% during 1997 and decreased from
77.1% to 49.0% of equipment revenues. The decrease in cost of equipment sales
and the increase in gross margin was attributable to the sale, in a bulk
transaction, of $634,000 in tanks mentioned previously during 1996.
In addition to the routine changes discussed above, the Company's cost of
sales reflects a write-down of the Company's surplus generator inventory of
$600,000 in 1997 and $300,000 in 1996.
22
<PAGE>
General and administrative expense. General and administrative expenses
increased by 9.4% from $9.6 million (44.4% of gross revenues) in 1996 to $10.5
million (58.8% of gross revenues) in 1997. The increase in general and
administrative expenses was primarily attributable to the write-down of a
portion of the Company's notes receivable from UPE ($1,200,000).
Depreciation and amortization. Depreciation and amortization expense stayed
approximately the same $0.7 million in both years.
Loss from operations. Loss from operations was basically the same in both
years ($11.0 million). As a percentage of revenues, loss from operations
increased from 50.9% in 1996 to 61.3% in 1997. The increase in loss from
operations percent of revenues was attributable to the lower volume in 1997.
Interest income and expense. The Company experienced an increase in net
interest expense from $0.0 million in 1996 to $0.5 million in 1997. The increase
in interest expense was primarily attributable to $0.7 million amortization of
debt discount on the convertible notes issued during 1997.
Income taxes. The Company's credit for income taxes decreased from $1.9
million in 1996 to $1.6 million in 1997. The decrease in the income tax credit
for 1997 was primarily attributable to a higher valuation allowance against the
net operating loss from foreign operations.
Miscellaneous. During fiscal years 1996 and 1997, the Company provided no
post retirement benefits subject to FAS 106.
As a result of the foregoing, the Company reported a loss before taxes of
$11,501,000 and a net loss of $9,940,000 for 1997 as compared to a loss before
taxes of $10,998,000 and a net loss of $9,148,000 for 1996. The net loss
attributable to common stock was increased by the preferred stock dividends
($174,000) and an accounting "deemed dividend" ($1,110,000) arising from the
amortization of the beneficial conversion feature of the Company's Series B
Preferred Stock. The Company is calculating earning per share to comply with the
recent SEC staff position on accounting for securities issued with beneficial
conversion features. This accounting requires that the Company reflect the
difference between the market price of the company's common stock and the
applicable conversion rate on the convertible preferred stock as a dividend at
the issue date (the beneficial conversion feature totaling $1,109,589) and has
amortized the dividend over a 180 day period from February 12, 1997, the issue
date of the convertible preferred stock.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
Revenues. The Company's total revenues decreased by approximately 45.2%
from $39.4 million for the year ended December 31, 1995 to $21.6 million for the
year ended December 31, 1996. Contract service income decreased for the period
by 38.6% from $33.9 million in 1995 to $20.8 million in 1996. The decrease in
contract service income was attributable to a combination of (1) completion in
early 1996 of a contract to dismantle and relocate an ammonia plant to Pakistan
(the "FFC Contract") which accounted for $13.4 million of revenues in 1995, (2)
delays in the commencement of several contracts awarded to IDM in 1996 and (3)
the reversal of $2.1 million in previously accrued revenues and gross margin
associated with change order claims under negotiation with two customers that
have not been resolved at year end. Surplus equipment and scrap sales decreased
by 85.4% from $5.5 million from the year ended December 31, 1995 to $0.8 million
in 1996 due to the sale in 1995 of $4 million of glass lined and process
equipment in connection with the formation of the Company's marketing alliance
with UPE.
Cost of sales. Cost of sales, which includes direct job costs, cost of
equipment sales, unusual job costs, and write-down of the Company's surplus
generator inventory, decreased by approximately 39% from $36.7 million for 1995
to $22.4 million for 1996. Direct job costs decreased by 29.4% during 1996 and
increased from 89.9% to 103.3% of contract income. The primary elements of such
decrease in job costs were materials and supplies, job salaries, subcontracting
and disposal expense. The decrease in such job costs was primarily attributable
to the decreased level of activity following completion of the performance of
the FFC Contract. The deterioration in gross margins during 1996 was
attributable to a combination of (1) bidding new contracts at lower than normal
margins in order to penetrate strategic markets serviced by the Company's
regional offices and (2) cost overruns on several contracts, including the Los
Alamos project where the Company is presently in negotiations to recover $2.1
million of additional costs incurred as a result of change orders from clients.
23
<PAGE>
Cost of equipment sales decreased 78.6% during 1996 and increased from
53.8% to 77.1% of equipment and scrap sales revenues. The decrease in cost of
equipment sales and the decrease in gross margin was attributable the sale, in a
bulk transaction, of $4,000,000 of surplus equipment to UPE during 1995.
In addition to the routine changes discussed above, the Company's cost of
sales reflects one time charges of $3.3 million in unusual job costs during 1995
and a write-down of the Company's surplus generator inventory of $300,000 in
1996.
General and administrative expense. General and administrative expenses
increased by 26.3% from $7.6 million (19.2% of gross revenues) in 1995 to $9.6
million (44.4% of gross revenues) in 1996. The increase in general and
administrative expenses was primarily attributable to a combination of (1) the
general and administrative expenses of Global Waste & Energy, the Company's 90%
owned subsidiary which was established during the year ($665,000), (2) the
write-down of a portion of the Company's notes receivable from UPE ($630,000)
and (3) increased legal fees ($394,000).
Depreciation and amortization. Depreciation and amortization expense stayed
approximately the same $0.7 million in both years.
Loss from operations. Loss from operations increased from $5.6 million in
1995 to $11.0 million in 1996. As a percentage of revenues, loss from operations
increased from 14.2% in 1995 to 50.9% in 1996. The increase in loss from
operations was attributable to the deferral of several large contracts which
were expected to commence in 1996.
Interest income and expense. The Company experienced a decrease in interest
income from $0.3 million in 1995 to $0.2 million in 1996 and an increase in
interest expense from $0.1 million in 1995 to $0.2 million in 1996. The decrease
in interest income and increase in interest expense was attributable to lower
levels of funds available for investment due to the loss sustained during the
year and a full year of interest expense on $0.6 million of equipment financed
in December 1995.
Income taxes. The Company's credit for income taxes increased from $1.5
million in 1995 to $1.9 million in 1996. The increase in the income tax credit
for 1996 was attributable to the higher operating loss.
Miscellaneous. During fiscal years 1995 and 1996, the Company provided no
post retirement benefits subject to FAS 106.
As a result of the foregoing, the Company reported a net loss of $9.1
million in 1996 as compared to a net loss of $3.9 in 1995.
Liquidity and Capital Resources
At December 31, 1997, the Company had a deficit in working capital of
approximately $1.1 million, including a cash balance of $0.6 million. This
compares to working capital of $6.1 million and a cash balance of $1.0 million
at December 31, 1996. The $7.2 million decrease in working capital and decrease
in cash is attributable to the $11.5 million pre-tax loss and $4.9 million in
cash used in investing activities of which the investment in and advances to
unconsolidated affiliates of $3.5 million was the largest item. Those amounts
were partially offset by the receipt of $6.5 million from the exercise of
outstanding warrants and options during the year; $5.5 million in net proceeds
from Convertible Securities issuance, less $0.7 million for principal payments
on debt, for a total of approximately $11 million in cash provided by financing
activities.
Approximately $0.5 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.
24
<PAGE>
Also included in the Company's working capital balance at December 31, 1997
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, 1996. 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 $12.2 million dollars in future taxable income
to recover the reported deferred tax asset of $4,170,000 at December 31, 1997.
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 $6,357,000 has been established by management as a reduction of the
company's deferred tax assets of $10,527,000. 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 Miravalle
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
December 31, 1997.
The Company's accounts receivable decreased by 27.2% from 1996 to 1997.
Such decrease in accounts receivable was attributable to lower levels of
business activity. As a percentage of revenues, accounts receivable decreased
from 26.0% in 1996 to 22.8% in 1997. The decrease in accounts receivable as a
percentage of revenues reflects lower sales in the fourth quarter of 1997 versus
1996. Accounts receivable as a percentage of fourth quarter revenues was a
comparable 87% and 88% in 1997 and 1996, 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%.
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, 26% at
December 31, 1996 and 11% at December 30, 1997. Also, accounts payable have
constantly decreased since 1994 whereas accounts receivable and unbilled
revenues have increased substantially during this period. Prior to going public
in April 1994, most of the Company's revenues were generated in the private
sector. Many of these contracts had substantial initial mobilization payments
and generated positive cash flow during the life of the contract. Since then the
company has been successful, as a result of its growth strategy, in obtaining a
number of government contracts at major Department of Energy and Department of
Defense sites. This work was obtained as a direct result of opening three new
regional offices. The experience with these contracts has been negative cash
flows until we near contract completion. This is due to the requirement that we
submit a schedule and a schedule of values at the beginning of the job and bill
according to the percent complete of each item in the schedule of values - not
the costs we have incurred. Our jobs of any size are at a risk of being front
end cost loaded when there is little progress to report (i.e., we cannot bill
until the structure is demolished). The Company is aware of this problem and is
trying to remedy it by maximizing mobilization costs in the schedule of values,
requiring subcontractors to bill on the same basis and aggressively negotiating
better (less front end cost loaded) schedule of values.
25
<PAGE>
Initially the Company tried to increase payment terms to vendors by paying
them after the Company received our payment. This method was unsuccessful. Many
vendors put the Company on a COD basis and its D&B rating weakened because D&B's
file showed "increased slowness in the company's payment record." This lower
rating hurt the Company in attempts to establish credit with new vendors.
Because IDM is a growing company and trying to establish good relationships with
its vendors, the company is now paying its vendors within terms to fifteen days
late and attempting to improve its D&B "paydex rating." The paydex rating of 60
is much worse than the average of the lower quartile for the industry of 68
(median for the industry is 75).
As a result of the loss incurred during 1997, operating activities used
$6.4 million in cash during 1997. The Company also used $4.9 million in cash for
investing activities during 1997 for (1) maintenance of a 10% interest in Life
for $415,000, (2) the acquisition of certain property, plant and equipment and
other assets for $873,000, (3) an investment in and advances to unconsolidated
affiliates of $3,453,000, and (4) advances and loans to certain officers in the
amount of $161,000. Cash flows from financing activities totaled $10.9 million
during 1997 and consisted principally of (1) $6.5 million in proceeds received
from the exercise of various warrants and options, (2) $5.5 million in net
proceeds from convertible securities issuances and (3) ($0.7) million in
principal payments in long-term debt.
In addition to the foregoing items which impacted the Company's cash flows
during 1997, 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 1997 were (1)
the beneficial conversion feature on the convertible notes of $4,819,000 and on
the convertible preferred stock of $1,110,000 and, (2) the conversion of $0.3
million of convertible preferred stock into common stock. Transactions with
subsidiaries during 1997 related principally to the capitalization of various
subsidiaries formed to deploy the Company's Kocee Gas Generator technology. At
December 31, 1997, the Company had loaned $2.5 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 December 31, 1997, 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.
With the substantial increase in volume and size of jobs on which the
Company performed services during 1995, and as a result of the incurrence of
costs relating to the opening of additional offices and to otherwise support
growth, the Company experienced shortages in working capital during the third
quarter of 1995. In September of 1995, after evaluating various financing
options, the Company sold $5 million of 7% convertible notes (the "Convertible
Notes") to various non-U.S. investors. The Company received net proceeds from
the sale of the Convertible Notes of approximately $4.2 million. The Convertible
Notes were due on September 15, 1997 and accrued interest at the rate of seven
percent per annum payable upon maturity only if the notes have not been
converted into Common Stock. The holders of the Convertible Notes were entitled,
at their option, to convert such notes into shares of the Company's Common Stock
at a conversion price for each share equal to the lessor of the closing bid
price of the Common Stock on September 15, 1995 ($5.00), or eighty-two percent
(82%) of the closing bid price of the Common Stock on the day prior to
conversion. As of December 31, 1995, $1,358,000 of the Convertible Notes had
been converted resulting in the issuance of 453,366 shares of Common Stock.
During 1996, the remaining $3,642,000 of Convertible Notes were converted
resulting in the issuance of 1,143,903 shares of Common Stock.
26
<PAGE>
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 are convertible into Common
Stock commencing 91 days after issuance at the lesser of (i) 120% of the average
closing price of the Common Stock over the five trading-day period preceding
closing ($2.67) or 82% of the average closing price of the Common Stock over the
five trading-day period preceding conversion for conversion occurring between
the 91st and 120th day following closing, (ii) 110% of the average closing price
of the Common Stock over the five trading-day period preceding closing ($2.475)
or 79% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring between the
121st and 150th day following closing, (iii) 100% of the average closing price
of the Common Stock over the five trading-day period preceding closing ($2.225)
or 76% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring between the
151st and 180th day following closing, and (iv) 100% of the average closing
price of the Common Stock over the five trading-day period preceding closing
($2.225) or 73% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring on or after the
181st day following closing. The Series B Preferred Shares pay a 7% dividend
payable on conversion or at redemption in cash or Common Stock, at the Company's
option. All Series B Preferred Shares remaining outstanding on February 12, 2000
shall be automatically converted into Common Stock. On August 13, 1997, the
Company completed a private placement of $3,025,000 of 7% Convertible Notes (the
"Convertible Notes") and 2,675,000 three year Warrants (the "Three Year
Warrants").
The Convertible Notes are convertible into Common Stock at the lesser of
(i) $2.75 per share or (ii) 75% of the average closing bid price of the Common
Stock during the five trading days prior to conversion. The Three Year Warrants
are exercisable for a three year period at the lesser of $3.00 per share or the
lowest conversion price of the Convertible Notes. Conversion of the Convertible
Notes and exercise of the Three Year Warrants was subject to the issuance of a
maximum of 1,997,130 shares of Common Stock on conversion unless the
shareholders of the Company approved issuances beyond that level upon
conversion. Shareholder approval of issuances beyond 1,997,130 shares was
received on November 4, 1997. Further, the Company has the right, upon notice to
the holders, to redeem any Convertible Notes submitted for conversion at a price
of $2.75 or less at 125% of the principal amount of such Convertible Notes. The
Convertible Notes pay interest at 7% payable quarterly and on conversion or at
redemption in cash or Common Stock, at the Company's option. In the event that a
registration statement covering the shares underlying the Convertible Notes has
not been declared effective within 90 days or 180 days after the issuance of the
Convertible Notes, the interest rate on the Convertible Notes shall be increased
to 18% and 24%, respectively, from those dates until such a registration
statement becomes effective. The registration statement was declared effective
in January 9, 1998. The amount of additional interest expense was $54,500.
The value, totaling $4,718,750, of the discounted conversion feature on the
notes and the value of the warrants has been accounted for as additional
interest via a debit to debt discount and a credit to paid-in-capital. The debt
discount has been calculated as the fixed discount from the market at the date
of sale based upon the common stock's trading price of $4 per share on August
13th. This interest is being amortized over the three year life of the debt.
During 1997, $600,000 was amortized and recorded as interest expense.
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. 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 investor without general solicitation or advertising and based on
representations from the investors that such investors were acquiring for
investment The securities bear legends restricting the resale thereof. The
Series C Preferred Stock is convertible into Common Stock at the lesser of (i)
$4.50 per share or (11) 75% of the average closing bid price of the Common Stock
during the five trading days prior to conversion. The Four Year $5.00 Warrants
are exercisable for a four year period at the lesser of $5.00 per share or the
lowest conversion price of the Series C Preferred Stock. Conversion of the
Series C Preferred Stock and exercise of the Four Year $5.00 Warrants is 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 Four Year $5.00
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 Four
Year $5.00 Warrants at the pre-tax profit such holders would have realized had
the Four Year $5.00 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 or $2.75 of 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 February 11, 1998, the Company issued 1,270,000 Three Year $4.50
Warrants (the "Lock-Up Warrants"). The Lock-Up 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 were offered pursuant to Section
4(2). The offer was directed exclusively to a limited number of accredited
investor without general solicitation or advertising and based on
representations from the investors that such investors were acquiring for
investment. The securities bear legends restricting the resale thereof. The
Lock-Up Warrants are exercisable for a three year period at $4.50 per share.
On January 8, 1998, the Company made a $300,000 payment representing its
one half share of the capital of Seven Star International Holding, Inc. ("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.
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 440,000 Class A
Warrants issued in connection with the Company's initial public offering were
outstanding and exercisable at December 31, 1997. 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 $4.0 million and result in the issuance of .9 million shares.
There can be no assurance, however, when, if ever, any or all of the warrants
will be exercised.
27
<PAGE>
Other than funding the Company's bonding and other job costs, the Company
does not anticipate any substantial demands on the liquidity or capital
resources of the Company during the following twelve months.
Management believes that the Company's working capital is sufficient to
meet the Company's anticipated needs for at least the following twelve months,
including the performance of all existing contracts of the Company. However, as
the Company is presently pursuing bids on multiple large projects, the Company
may be required to seek new bank lines of credit or other financing in order to
facilitate the performance of jobs if the volume and size of projects being
performed by the Company increases substantially. While the Company is
conducting ongoing discussions with various potential lenders with a view to
establishing available bank lines of credit if and when needed to support future
growth, the Company presently has no commitments from any bank or other lender
to provide financing if such financing becomes necessary to support growth.
The Year 2000 Issue
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations. The
Company has reviewed its accounting software and has determined since the
software it is using has four digits to identify the year that it does not have
a problem
Certain Factors Affecting Future Operating Results
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: 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 December 31, 1997, the Company was on-site on projects with a total
leave in value of services yet to be performed of $31 million. The largest
projects on which the Company was on-site at December 31, 1997 were the East Dam
project in Southern California with an approximate value of services to be
performed of $15 million and Bechtel Jacobs with an approximate value of
services to be performed of $8 million. Both contracts are expected to be fully
completed by the end of 1998.
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 and Los
Alamos, New Mexico offices are strategically located in areas having a high
concentration of prospective governmental and private remediation sites. While
bidding to perform services at such sites is expected to be highly competitive,
management believes that the Company's existing presence on adjacent projects
combined with its proven expertise and resources will allow the Company to
successfully bid on and perform substantial additional projects based out of its
regional offices.
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 the following prospects by as
early as the second half of 1998, which are representative of the future
direction in which the Company plans to embark:
28
<PAGE>
Miravalle Power Project. The Company has signed a 15 year power purchase
agreement pursuant to which it will construct, own and operate a power
production facility to supply approximately 45 megawatts of electric power
to El Salvador's leading power distribution company. The Company has
entered into an initial agreement with Caterpillar Power Ventures, Inc. and
Caterpillar Power Ventures International Ltd., both subsidiaries of
Caterpillar, Inc., pursuant to which it is anticipated that Caterpillar
will participate as an equity investor and lead contractor on the Miravalle
Power Project. The Company, at April 15, 1998, was finalizing project
financing and expects to begin construction of a $55 million facility
shortly. Construction on this project is expected to take about one year
with the plant scheduled to be operational and supplying electricity by the
middle of 1999.
Initial estimates of the value of the supply contract were $360 million.
However, with the privatization of the energy distribution industry in El
Salvador shortly after the Company finalized its supply contract, lower
power rates originally sought by the Salvadorean government are being
eliminated. With realistic prospects of power tariffs as much as doubling
over the next two years, the value of the power supply contract could be
substantially higher than initially projected.
Greifswald Nuclear Plant Decommissioning/Site Revitalization Project. The
Company is a principal member of a consortium selected by the German
Government to negotiate the revitalization/reindustrialization and
privatization of the Energiewerke Nord site in Lubmin, Germany. Nuclear
decommissioning and associated cleanup and maintenance activities at the
site will take about 10 years to complete. The German Government has
appropriated DM 6.209 billion for the project.
The revitalization and reindustrialization of the site is expected to
provide numerous additional opportunities for the Company, including
attracting new investment in the region, upgrading infrastructure; and
possibly new construction project. The Company, and its consortium partners
(which includes Duke Energy), have committed to create a minimum of 1,500
new jobs at the site in the Greifswald and Mecklenberg-Vorpommem region and
have identified and negotiated with numerous multinational high-technology,
biotechnology and basic manufacturing companies desiring to establish a
presence at the site. The first investor, Foremost-Magellan, a
Taiwanese/American high technology holding company, has committed to
establish operations in the region and at the site.
Georgia Project. The Company has signed a Protocol of Intention with the
Ministry of Fuel and Energy in the former Soviet state of Georgia under
which the Company will have the right to construct, own and operate
electric energy facilities in the region. The Company, at April 15, 1998,
was actively developing the most financially attractive projects in Georgia
with the intent of signing a 35-year power purchase agreement which will
establish the terms for the sale of electric power from generating
facilities with a capacity of up to 1,000 megawatts.
In addition to the above projects which are in advanced stages, the Company
is presently in discussions involving 21 distinct energy production projects
worldwide. The Company believes that the successful commencement of power
production operations in El Salvador will enhance its position in the energy
production market and that ongoing discussions will result in the Company's
participation in the development of multiple energy production facilities
providing 1,500 megawatts or more of electric energy to various countries and
cities in Asia, Central and South America and Eastern Europe.
The Company also believes that successful implementation of the planned
decommissioning and site revitalization activities at the Greifswald site will
open the door for numerous opportunities to provide similar long term services
at nuclear facilities throughout the world, including in Western Europe and the
United States.
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.
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.
29
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Samuel Klein and Company, appears on
pages F-1 through F-33 of this report. See Index to Financial Statements on
page 35 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements: See Index to Financial
Statements on page 35 of this report for financial statements
and supplementary data filed as part of this report.
(2) Financial Statement Schedules
None
30
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(3) Exhibits
<TABLE>
Exhibit
Number Description of Exhibit
---------- --------------------------
<S> <C>
3.1 Restated Certificate of Incorporation of IDM Environmental Corp. (1)
3.2 Bylaws, as amended, of IDM Environmental Corp. (3)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Class A Warrant Certificate (1)
4.3 Form of Warrant Agreement (1)
4.4 Certificate of Designation fixing terms of Series A Junior Participating Preferred
Stock (2)
4.5 Certificate of Designation fixing terms of Series B Preferred Stock (6)
4.6* Certificate of Designation fixing terms of Series C Preferred Stock
4.7 Warrant Agreement dated February 12, 1997 (6)
10.1 Lease Agreement between International Dismantling & Machinery Corporation
and L&G Associates dated March 1, 1993 for site in South River, New Jersey (1)
10.2+ 1993 Incentive Stock Option Plan, as amended (3)
10.3+ 1995 Incentive Stock Option Plan (3)
10.4+* 1998 Comprehensive Stock Option and Award Plan
10.5+ Employment Agreement between the Company and Joel Freedman, as amended,
dated February 1, 1996 (3)
10.6+ Employment Agreement between the Company and Frank Falco, as amended,
dated February 1, 1996 (3)
10.7+* Amendment, dated September of 1997, to Employment Agreement between the Company and Joel Freedman
10.8+* Amendment, dated September of 1997, to Employment Agreement between the Company and Frank Falco
10.9+* Second Amendment, dated February 1998, to Employment Agreement between the Company and Joel
Freedman
10.10+* Second Amendment, dated February 1998, to Employment Agreement between the Company and Frank Falco
10.11+* Nonqualified Stock Option Agreement between the Company and Joel Freedman
10.12+* Nonqualified Stock Option Agreement between the Company and Frank Falco
10.13 Alexander Charles Lentes Stock Option (7)
10.14 Bernd Muller Stock Option (7)
10.15* Stock Option Agreement with M.H. Meyerson & Co., Inc. dated August, 1997
10.16* Nonqualified Stock Option Grant, dated January 8, 1998, between the Company and The Boston Group
10.17 Amended and Restated Warrant Agreement with Rochon Capital Group Ltd. (7)
10.18* Consulting Agreement dated May 23, 1997 between the Company and Ron Logerwell
10.19 Form of Agreement regarding confidential information and competition by
employees (1)
10.20 Form of Severance Agreement (3)
10.21 Voting Agreement (1)
10.22 Share Rights Agreement dated April 1, 1996 (2)
10.23 License Agreement dated June 30, 1996 with Life International Products (4)
10.24 Agreement dated July 19, 1996 with Continental Waste Conversion, Inc. (4)
10.25 License Agreement dated July 18, 1996 with Continental Waste Conversion, Inc. and Continental
Waste Conversion International, Inc. (4)
10.26 Promissory Note in the amount of $160,000 (Canadian) dated July 22, 1996 from Continental Waste
Conversion, Inc. to Continental Waste Conversion International (4)
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
10.27 Pledge and Security Agreement dated July 19, 1996 between Continental Waste Conversion, Inc. and
Continental Waste Conversion International, Inc. (4)
10.28 Form of 7% Convertible Note due January 31, 1999 (5)
10.29 Form of Three Year $3.00 Warrant (5)
10.30* Protocol of Intention dated January 20, 1998 re: Georgia power plant
10.31* License Agreement dated December 15, 1997 between Life International Products, Inc. and Seven
Star International Holding, Inc.
10.32* Form of Lock-Up Agreement
10.33* Form of Lock-Up Warrant
10.34* Form of Four Year $5.00 Warrant
10.35* Consulting Agreement dated March 1997 with SAGA Promotions, Inc.
10.36* Stock Option Grant dated February 1998 to SAGA Promotions, Inc.
10.37* Stock Option Grant dated February 1998 to Aaron Lehman
10.38* Revised Memorandum of Understanding dated March 1998 re: Taiwan waste-to-energy project
10.39* Modification to Power Purchase Contract dated November 1997 re: El Salvador power project
21.1* List of subsidiaries
23.1* Consent of Samuel Klein and Company
27.* Financial Data Schedule
+ Compensatory plan or management agreement.
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed with Registrant's Registration Statement on
Form SB-2 (Commission File No. 33-66466) declared effective by the Securities and Exchange Commission on
April 20, 1994
(2) Incorporated by reference to the respective exhibits filed with Registrant's Current Report on Form 8-K
dated April 1, 1996
(3) Incorporated by reference to the respective exhibits filed with Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1995
(4) Incorporated by reference to the respective exhibits filed with Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996
(5) Incorporated by reference to the respective exhibits filed with Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997
(6) Incorporated by reference to the respective exhibits filed with Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996
(7) Incorporated by reference to the respective exhibits filed with Registrant's Registration Statement on
Form S-3 (Commission File No. 333-28485) declared effective by the Securities and Exchange Commission on
January 9, 1998
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 1997.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IDM ENVIRONMENTAL CORP.
By:/s/ Joel Freedman
-------------------------
Joel Freedman
President
Dated: April 15, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
----------- ------ ------
/s/ Joel A. Freedman President, Chief Executive Officer April 15, 1998
- - --------------------- (Principal Executive Officer) and
Joel A. Freedman Director
/s/ Frank A. Falco Executive Vice President, Chief April 15, 1998
- - --------------------- Operating Officer and Chairman
Frank A. Falco of the Board of Directors
/s/ Michael B. Killeen Treasurer (Principal Accounting April 15, 1998
- - ---------------------- and Financial Officer) and Director
Michael B. Killeen
- - --------------------- --------, 1998
Richard Keller Director
- - --------------------- --------, 1998
Frank Patti Director
/s/ Robert McGuinness
- - ---------------------
Robert McGuinness Director April 15, 1998
33
<PAGE>
IDM ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
------
Independent Auditor's Report................................................ F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996............... F-2
Consolidated Statements of Operations for the Years ended December 31, 1997,
1996 and 1995........................................................... F-3
Consolidated Statements of Stockholders' Equity for the Years ended December
31, 1997, 1996 and 1995................................................. F-4
Consolidated Statements of Cash Flows for the Years ended December 31, 1997,
1996 and 1995........................................................... F-5
Notes to Consolidated Financial Statements................................. F-7
34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
IDM Environmental Corp. and Subsidiaries
South River, New Jersey
We have audited the accompanying consolidated balance sheets of IDM
Environmental Corp. and Subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDM Environmental
Corp. and Subsidiaries as of December 31, 1997 and 1996, and the results of
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Samuel Klein and Company
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
April 8, 1998
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
ASSETS 1997 1996
--------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 602,242 $ 1,001,254
Accounts receivable 4,094,408 5,626,208
Stock subscription receivable 775,862
Notes receivable - current 116,457 1,274,773
Inventory 582,517 1,182,517
Costs and estimated earnings in excess of billings 455,823 1,655,754
Bonding deposits 9,157 55,472
Due from officers 369,541 208,676
Prepaid expenses and other current assets 1,433,068 1,884,977
--------------- ---------------
Total Current Assets 7,663,213 13,665,493
Investment in and Advances to Unconsolidated Affiliates, at cost 3,453,309
Investment in Affiliate, at cost 1,715,000 1,300,000
Notes Receivable - long term 1,381,155 1,572,238
Debt Discount and Issuance Costs 4,610,166 -
Deferred income taxes 4,170,000 2,609,000
Property, Plant and Equipment 3,277,116 2,742,650
Other Assets 880,746 313,246
--------------- ---------------
$ 27,150,705 $ 22,202,627
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 3,566,393 $ 351,127
Accounts payable and accrued expenses 5,159,635 7,105,827
Billings in excess of costs and estimated earnings 86,604 86,496
--------------- ---------------
Total Current Liabilities 8,812,632 7,543,450
Long-Term Debt 258,686 164,034
Minority Interest 1,034,483
--------------- ---------------
Total Liabilities 9,071,318 8,741,967
--------------- ---------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, authorized 30,000,000 shares $.001 par value, issued
and outstanding 14,513 073 in 1997 and 9,602,730 in 1996 14,513 9,603
Additional paid-in capital 38,497,705 25,359,465
Convertible preferred stock, authorized 1,000,000 shares $1.00 par value, issued and
outstanding 270 shares in 1997 stated at conversion value of $10,000 per share 2,700,000 -
Retained earnings (deficit) (23,132,831) (11,908,408)
--------------- ---------------
18,079,387 13,460,660
--------------- ---------------
$ 27,150,705 $ 22,202,627
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
For the Years Ended December 31,
1997 1996 1995
----------------- --------------- ---------------
<S> <C> <C> <C>
Revenue:
Contract income $ 17,825,849 $ 20,807,491 $ 33,865,680
Sale of equipment 96,050 834,355 5,131,504
Sale of scrap - - 406,187
----------------- --------------- ---------------
17,921,899 21,641,846 39,403,371
----------------- --------------- ---------------
Cost of Sales:
Direct job costs 17,002,308 21,491,328 30,432,547
Unusual job costs - - 3,300,000
Cost of equipment sales 47,057 643,242 2,977,484
Write-down of inventory surplus 600,000 300,000 -
----------------- --------------- ---------------
17,649,365 22,434,570 36,710,031
----------------- --------------- ---------------
Gross Profit (Loss) 272,534 (792,724) 2,693,340
----------------- --------------- ---------------
Operating Expenses:
General and administrative expenses 10,537,677 9,567,435 7,637,621
Depreciation and amortization 723,415 668,227 653,273
----------------- --------------- ---------------
11,261,092 10,235,662 8,290,894
----------------- --------------- ---------------
Loss from Operations (10,988,558) (11,028,386) (5,597,554)
Other Income (Expense):
Interest income (expense) (512,768) 30,542 200,141
----------------- --------------- ---------------
Loss before Credit for Income Taxes (11,501,326) (10,997,844) (5,397,413)
Credit for Income Taxes (1,561,000) (1,850,000) (1,530,000)
----------------- --------------- ---------------
Net Loss (9,940,326) (9,147,844) (3,867,413)
Preferred Stock Dividends including amortization of beneficial
conversion feature of $1,109,589 amortized over 180 days 1,284,097
----------------- --------------- ---------------
Net Loss on Common Stock
$ (11,224,423) $ (9,147,844) $ (3,867,413)
================= =============== ===============
Loss per Share:
Basic loss per share $(1.00) $(1.13) $(0.67)
================= =============== ===============
Diluted loss per share $(1.00) $(1.13) $(0.67)
================= =============== ===============
Basic common shares outstanding 11,212,690 8,089,472 5,815,565
================= =============== ===============
Diluted common shares outstanding 11,212,690 8,089,472 5,815,565
================= =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
Additional Convertible Retained
Common Stock Paid-in Preferred Earnings
---------------------------
Shares Amount Capital Stock (Deficit)
------------ ------------ ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances - January 1, 1995 5,783,334 $5,783 $12,716,381 $1,106,849
Surrender and Retirement of Common -
Stock by Officer (36,621) (37) (192,223)
Conversion of Convertible Notes -
to Common Stock 453,366 454 1,169,737
Net Loss for the Year Ended
December 31, 1995 - - - (3,867,413)
------------ ------------ ---------------- ---------------
Balances - December 31, 1995 6,200,079 6,200 13,693,895 (2,760,564)
Surrender and Retirement of
Common Stock by Officer (92,214) (92) (670,488) -
Conversion of Convertible Notes
to Common Stock 1,143,903 1,144 3,319,108 -
Class A Warrants Exercised 2,102,000 2,102 6,954,348 -
Private Placement Warrants 7,500 8 33,742 -
Exercise of Underwriters Options 300,000 300 1,979,700 -
Common Stock Options Exercised 41,462 41 55,248 -
Issuance of Non Qualified Options, pursuant
to a consulting agreement - - 210,312 -
Retirement of Common Stock, pursuant to
a stock repurchase plan (100,000) (100) (216,400) -
Net Loss for the Year Ended
December 31, 1996 - - - (9,147,844)
------------ ------------ ---------------- --------------- ---------------
Balances - December 31, 1996 9,602,730 9,603 25,359,465 (11,908,408)
Issuance of Convertible
Preferred Stock February 1997 $3,000,000
Conversion of Preferred Stock
to Common Stock 192,925 193 289,237 (300,000)
Class A Warrants Exercised 4,517,028 4,517 6,166,483
Stock Options Plan Exercises 45,390 45 62,996
Issuance of Non-Qualified Options,
pursuant to consulting agreements 456,340
Preferred Stock Beneficial Conversion feature 1,109,589
Preferred Stock Dividends (1,284,097)
Exercise of Non-Qualified Consulting Options 155,000 155 234,845
Discounted Conversion feature on
Convertible Notes and Warrants 4,818,750
Net Loss for the year ended
December 31, 1997 (9,940,326)
------------ ------------ ---------------- --------------- ---------------
Balances - December 31, 1997
14,513,073 $14,513 $38,497,705 $2,700,000 $ (23,132,831)
============ ============ ================ =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
For the Years Ended December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (9,940,326) $ (9,147,844) $ (3,867,413)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Deferred taxes (1,561,000) (1,956,400) (400,000)
Depreciation and amortization 831,937 668,227 653,273
Amortization of debt discount 612,864 - -
Compensation cost on consultant stock options 456,340 - -
Write-down of surplus inventory 600,000 300,000 -
Provision for loss on notes receivable 1,300,000 630,000 -
Decrease (Increase) In: - - -
Accounts receivable 1,531,800 989,922 (1,947,644)
Inventory - - 2,972,875
Notes receivable 49,399 (283,893) (3,193,118)
Costs and estimated earnings in excess of billings 1,199,931 1,978,298 (1,008,812)
Prepaid expenses and other current assets 451,909 (1,119,033) (149,181)
Bonding deposits 46,315 827,691 1,510,494
Recoverable income taxes - 1,114,442 (1,088,005)
Increase (Decrease) In:
Accounts payable and accrued expenses (1,937,675) 1,361,671 (1,845,521)
Billings in excess of costs and estimated earnings 108 (833,079) 853,584
Income taxes payable - - (477,600)
---------- ---------- ----------
Net cash used in operating activities (6,358,398) (5,469,998) (7,987,068)
---------- ---------- ----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (305,533) (574,832) (639,417)
Investment in affiliate (415,000) (1,300,000) -
Investment in and advances to unconsolidated affiliates (3,453,309) - -
Acquisition of other assets (567,500) (313,246) -
Loans and advances to officers (160,865) (330,768) (349,632)
----------- ---------- ---------
Net cash used in investing activities (4,902,207) (2,518,846) (989,049)
----------- ----------- ---------
Cash Flows from Financing Activities:
Net proceeds from convertible bond issuance - - 4,185,000
Net proceeds from convertible note issuance 2,780,000 - -
Net proceeds from convertible preferred stock issuance 2,722,500 - -
Principal payments on long-term debt (676,819) (371,109) (193,922)
Preferred stock dividends (174,508) - -
Purchase and retirement of common stock - (216,500) -
Contribution from minority interest - 258,621 -
Repurchase of minority interest (258,621) - -
Proceeds from exercise of stock options and warrants 6,469,041 9,235,800 -
---------- ---------- --------
Net cash provided by financing activities 10,861,593 8,906,812 3,991,078
---------- ---------- ---------
Increase (Decrease) in Cash and Cash Equivalents (399,012) 917,968 (4,985,039)
Cash and Cash Equivalents, beginning of year 1,001,254 83,286 5,068,325
---------
Cash and Cash Equivalents, end of year $ 602,242 $ 1,001,254 $ 83,286
========= ========== =========
</TABLE>
F-5
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
For the Years Ended December 31,
1997 1996 1995
------------- -------------- ------------
<S> <C> <C> <C>
Supplementary Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 184,631 $ 65,694 $ 35,550
============= ============== ============
Income taxes
$ - $ 488,802
============= ============== ============
Supplemental Disclosure of Noncash Investing and Financing Activities:
Property, plant and equipment financing $ 961,737 $ 195,821 $ 693,324
============= ============== ============
Repayment of officer's loan through surrender of common stock $ 670,580 $ 192,260
============= ============== ============
Conversion of convertible promissory notes to common stock $ 3,320,252 $ 1,170,191
============= ============== ============
Sale to minority stockholder with stock subscription receivable $ 775,862 $ -
============= ============== ============
Cancellation of stock subscription receivable $ 775,862 $ - $ -
============= ============== ============
Conversion of preferred stock to common stock $ 300,000
============= ============== ============
Beneficial conversion feature debt discount on convertible notes $ 4,818,750
============= ============== ============
Beneficial conversion feature preferred stock $ 1,109,589
============= ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
- - -----------
IDM Environmental Corp. (collectively with its subsidiaries referred to herein
as the "Company") is a global diversified services company offering a broad
range of design, engineering, construction, project development and management,
plant operations and environmental services and technologies. The Company,
through its domestic and international subsidiaries, offers services and
technologies in three principal areas: Power Project Development and Operation,
Specialty Project Engineering and Environmental Remediation.
The Company is also active in the development and commercialization of a number
of proprietary technologies in the fields of bioremediation/superoxygenation of
water, gasification of solid wastes and soil remediation . In 1995 the Company
formed two subsidiaries to conduct business in specific regions which required
domiciled entities. During 1996 the Company formed two subsidiaries and acquired
through assignment the rights, title and interest of certain contracts and
agreements and two inactive corporations in order to conduct business in
specific regions of North and South America and East Asia.
Principals of Consolidation and Basis of Presentation
- - -----------------------------------------------------
The accompanying financial statements consolidate the accounts of the parent
company and all of its wholly owned and majority owned subsidiaries. Investments
in unconsolidated affiliated joint ventures in which ownership of the venture is
between 20% and 50% are accounted for under the equity method for balance sheet
presentation and the proportionate consolidation method for revenues and
expenses of the joint venture. Investments in affiliates representing less than
20% of the ownership of such companies are accounted for under the cost method.
Translation of Foreign Currencies
- - ---------------------------------
Assets and liabilities of foreign operations, where the functional currency is
the local currency, are translated into U.S. dollars at the fiscal year end
exchange rate. The related translation adjustments are required to be recorded
as cumulative translation adjustments, a separate component of shareholders'
equity. Revenues and expenses are required to be translated using average
exchange rates prevailing during the year. Foreign currency transaction gains
and losses, as well as translation adjustments for assets and liabilities of
foreign operations where the functional currency is the dollar, are included in
net income (loss). Foreign currency realized and unrealized gains and losses for
the years presented were not material.
Revenue Recognition
- - -------------------
The consolidated financial statements have been prepared on the basis of the
percentage of completion method of accounting. Under this method contract
revenue is determined by applying to the total estimated income on each
contract, a percentage which is equal to the ratio of contract costs incurred to
date to the most recent estimate of total costs which will have been incurred
upon the completion of the contract. Costs and estimated earnings in excess of
billings represents additional earnings over billings, based upon percentage
completed, as outlined above. Similarly, billings in excess of costs and
estimated earnings represent excess of amounts billed over income recognized.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Billings on long-term contracts are done on
a monthly basis. Unbilled amounts on long-term contracts include amounts
recognized in revenues under the percentage of completion method of accounting,
but not billed to the customer at year end. It is expected that such billings
will be made as contracts are completed. Unbilled amounts on long-term contracts
are not separately stated as they are not material. Retentions on long-term
contracts are balances billed but not paid by customers which, pursuant to
retainage provisions in contracts, are due upon completion of the contract and
acceptance by the customer. Substantially all retentions are deemed collectible
within one year.
F-7
<PAGE>
Use of Estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
- - -------------------------
For financial statement purposes, short-term investments with a maturity of
ninety days or less and highly liquid investments are considered cash
equivalents.
Inventory
- - ---------
Inventory consists of used equipment and is stated at the lower of cost
(specific identification) or market.
Unamortized Debt Discount and Issuance Costs
- - --------------------------------------------
Costs in connection with the issuance of the 7% Convertible Notes and the
Convertible Preferred Stock are amortized and charged to operations using the
straight line method over the terms of the respective issues. Upon conversion,
any unamortized costs are charged to additional paid in capital net of tax
effect.
Deferred Issue Costs
- - --------------------
Costs in connection with the issuance of the 7% Convertible Notes and the
Convertible Preferred Stock are amortized and charged to operations using the
straight line method over the term of the convertible issue. Upon conversion,
any unamortized costs are charged to additional paid in capital net of tax
effect.
Property, Plant and Equipment
- - -----------------------------
Property plant and equipment are recorded at cost. Depreciation has been
calculated using the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the term of the related lease or
the estimated useful lives of the assets. The depreciation method and estimated
useful lives of the assets are generally as follows:
Estimated Method of
Asset Useful Life Depreciation
--------- ---------------- --------------
Office equipment 3 - 10 Straight-line
Furniture and fixtures 3 - 10 Straight-line
Leasehold improvements 5 - 31.5 Straight-line
Transportation equipment 3 - 5 Straight-line
Job equipment 7 - 10 Straight-line
Costs of repairs and maintenance are charged to operations as incurred and
additions and betterments are capitalized. Upon retirement or disposition of
assets, the cost and accumulated depreciation are eliminated from the accounts
and any gain or loss is reflected in the statement of operations.
F-8
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income Taxes
- - ------------
Income taxes have been provided for based on the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Accounting for Stock-Based Compensation
- - ---------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issue to Employees" ("APB 25") in accounting for its
employee stock options plans. Under APB 25, when the exercise price of the
Company's employee stock options equals or is above the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In accounting for options granted to persons other than employees, the
provisions of Financial Accounting Standards Board Statement No. 123, "Accounts
for Stock Based Compensation" ("FASB 123") were applied. According to FASB 123
the fair value of these options was estimated at the grant date using
Black-Scholes option pricing model.
Impairment of Long-Lived Assets
- - -------------------------------
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires that if
facts and circumstances indicate that the cost of fixed assets or other assets
may be impaired, an evaluation of recoverability would be performed by comparing
the estimated future undiscounted pre-tax cash flows associated with the asset
to the asset's carrying value to determine if a write-down to market value or
discounted pre-tax cash flow value would be required.
Earnings (Loss) Per Share
- - -------------------------
As of December 31, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("SFAS No. 128") replaced the calculation of primary
and fully diluted earnings per share with Basic and Diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes the
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Diluted earnings per share reflects the potential dilution
that could occur if securities or other agreements to issue common stock were
exercised or converted into common stock. Dilutive earnings per share is
computed based upon the weighted average number of common shares and dilutive
common equivalent shares outstanding. Common stock options, which are common
stock equivalents, had an anti-dilutive effect on earnings per share and no
effect on the weighted average number of common shares. All net loss per share
amounts for all periods presented have been restated to conform to SFAS No. 128
requirements.
Reclassifications
- - -----------------
Certain reclassifications have been made to the prior year balances to conform
to the current year presentation.
F-9
<PAGE>
2. ACQUISITIONS AND INVESTMENTS IN AFFILIATES
On July 11, 1996, effective June 30, 1996, the Company, pursuant to a license
agreement entered into between the Company and Life International Products
("Life"), acquired a 10% interest in Life for $1,300,000. The Company has
recorded its investment at cost. In addition to acquiring a 10% interest, the
Company entered into an exclusive licensing agreement with Life pursuant to
which the Company shall market and employ Life's patented environmental
remediation technology for long term bioremediation of contaminated ground water
throughout North America. On November 3, 1997, the Company invested an
additional $415,000 in Life to maintain its 10% interest.
Pursuant to such license agreement, the Company agreed to fund the operation and
expenses associated with the marketing plan and allocate revenues from such
agreement for (1) repayment of Life's cost in connection with manufacturing and
(2) any actual expenses of both the Company and Life regarding the sale and
marketing of this technology. The balance (the "Net Revenues") shall be shared
between the Company and Life, 20% and 80% respectively, with a minimum net
revenue payment of $400,000 due to Life. This agreement, as amended November 1,
1996, provides that Life is to be paid this minimum net revenue relating to and
for the period of amendment to October 1, 1998. Subsequent to such time, the
Company and Life agree to negotiate in good faith as to future minimum revenues
and agreement terms. For the year ended December 31, 1997, no revenues have been
recognized.
On July 19, 1996 the Company, through a newly formed 90% owned subsidiary,
Global Waste & Energy, Inc. ("Global Delaware"), a Delaware corporation, entered
into an agreement with Enviropower Industries Inc. (formerly Continental Waste
Conversion, Inc. ("CWC").) Pursuant to this agreement, Global Delaware acquired,
in exchange for a 10% interest in Global Delaware and a loan through a wholly
owned subsidiary of Global Delaware of $160,000 (Canadian) or approximately
$116,550 (U.S.), the exclusive worldwide rights (excluding Canada) to CWC's
proprietary Kocee Gas Generator waste treatment technology that converts
municipal solid waste, including tires and plastics into electrical energy. In
addition, the Company committed to loan up to $1,350,000 over a four month
period to Global Delaware to carry on this newly acquired waste-to-energy
business. F-9
2. ACQUISITIONS AND INVESTMENTS IN AFFILIATES (continued)
At closing the Company made an initial loan of $600,000 to Global Delaware
repayable upon demand with interest at 9.25%. As of December 31, 1997 the
Company had loaned a total of $2,491,000 to Global Delaware. The consolidated
financial statements include results of operations of Global Delaware and its
subsidiaries from July 19, 1996, and therefore all intercompany loans and
transactions have been eliminated within the consolidated financial statements
of the Company.
In conjunction with the July 19, 1996 agreement, Global Delaware formed a wholly
owned Alberta, Canada subsidiary, Global Waste & Energy, Inc. ("Global Alberta")
and through this company acquired from CWC through assignment the rights, title
and interest of certain contracts and agreements and two inactive corporations
domiciled in El Salvador and East Asia. These companies were acquired to market
and develop systems relating to the disposal of domestic, industrial and
agricultural waste and generation of electrical energy by means of gas generator
technology.
On October 18, 1996, Global Alberta entered into a subscription agreement with a
minority investor, pursuant to which the minority investor had committed to
purchase a 45% interest in the El Salvador corporation for approximately
$1,000,000 U.S. As of December 31, 1996, $258,621 had been received from the
minority investor. During 1997 the Company repurchased from this investor their
45% equity interest for their initial investment of $258,621 and a cancellation
of the stock subscription receivable.
As further discussed in Note 11, CWC has filed a claim disputing the agreements
against the Company. On March 20, 1998 Enviropower Industries Inc. filed an
assignment in bankruptcy. As a result, the Company wrote off the $116,550 loan
as of December 31, 1997.
F-10
<PAGE>
During 1996 and 1997, the Company entered into joint venture agreements for the
purposes of completing construction realted projects, totalling approximately
$20,225,000, specifically for work to be performed on the Eastside Resevoir
Project for the Water District of Southern California and building
decommisioning and equipment removal at IBM Microelectronics Hudson Valley
Research Park, East Fishkill, N.Y.
These joint ventures, in which the Company holds equity interest at 49% and 50%,
are accounted for using the equity method of accounting for balance sheet
presentation and are presented in the balance sheet classification "Investments
in and Advances to Unconsolidated Affiliates". The Company has included their
proportionate share of revenues and expenses related to these joint ventures
within its statement of operations for the year ended December 31, 1997.
Included with revenues and direct job costs are $3,303,968 and $3,040,476,
respectively.
3. UNUSUAL JOB COSTS
The Company recorded a one-time pre-tax charge of $3,300,000 in the fourth
quarter of 1995. This charge arose from a contract interpretation issue with one
of its international customers with regard to transportation costs. The dispute
specifically related to the overseas transportation costs which were outside the
ordinary and typical business activities of the Company. The Company does not
anticipate entering into any future contracts that require the Company to have
responsibility for overseas transportation costs. The Company absorbed these
costs to avoid the expense and uncertainty of mediation, arbitration and
litigation, and in anticipation of a significant amount of business expected to
be awarded to the Company by the customer in the future. It was recorded as a
separate line item in the Consolidated Statement of Operations for the year
ended December 31, 1995, because of its "unusual" nature.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31,
1997 1996
------ ------
Trade accounts receivable
$ 4,594,408 $ 5,826,208
Allowance for doubtful accounts (500,000) (200,000)
-------------- ---------------
$ 4,094,408 $ 5,626,208
============== ===============
5. NOTES RECEIVABLE
On September 29, 1995, the Company entered into two agreements for the sale of
equipment inventory with Universal Process Equipment, Inc. and their affiliate,
Bethlehem Corporation (collectively "UPE"), a non-public company with principle
operations in North America, and one of the world's largest marketers of new and
processed equipment. Pursuant to the terms of such agreements, the Company sold
substantially all of its glass lined equipment and process equipment for an
aggregate minimum consideration of $4 million. The purchase price of such
equipment is payable from one third of the net sales proceeds of such equipment
received by UPE, which amount may exceed $4 million. The unpaid portion of the
purchase price of such equipment shall bear interest at the average LIBOR base
rate over the previous twelve month period and any amounts not previously paid
under the agreement shall be payable in full on September 29, 2000. At December
31, 1996 the average twelve month rate was 5.53%. At December 31, 1997 and 1996,
$3,211,153 and $3,144,476, respectively, was outstanding (including interest).
During the fourth quarter of 1997 and 1996 management provided a $1,200,000 and
a $630,000 reserve against the outstanding balance.
F-11
<PAGE>
On June 7, 1996, the Company loaned $250,000 to Solucorp Industries, Ltd.
("Solucorp"), an environmental company with which the Company had entered into a
September 7, 1995 Joint Marketing and Operation Agreement relating to the cross
marketing of Solucorp's soil remediation process and the Company's products and
services. The note executed June 7, 1996 (and further amended October 4, 1996),
is secured by shares of Solucorp's common stock. The terms of the note as
amended require the repayment of principal with interest at 10.25% per annum in
eleven consecutive monthly payments of $22,448 commencing November 1, 1996, with
an initial payment of $23,202 due upon the signing of the amended agreement. At
December 31, 1997, $216,457 remains outstanding (including interest) and is
included within current portion of Note Receivable net of a $100,000 allowance
for uncollectability.
Total interest income earned from these notes for the years ended December 31,
1997, 1996 and 1995 was $107,879, $184,394 and $44,523, respectively.
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to the billing status of uncompleted contracts is as
follows:
December 31,
1997 1996
------ ------
Costs incurred on uncompleted contracts
$ 10,108,306 $ 15,683,597
Estimated earnings (loss) 2,331,313 (1,917,659)
--------------- ---------------
12,439,619 13,765,938
Less: Billings to date 12,070,400 12,196,680
--------------- ---------------
$ 369,219 $ 1,569,258
=============== ===============
Included in the accompanying balance sheets under the following captions:
<TABLE>
December 31,
1997 1996
------ ------
<S> <C> <C>
Costs and estimated earnings in excess of billings
$455,823 $ 1,655,754
Billings in excess of costs and estimated earnings (86,604) (86,496)
------------ ------------
$ 369,219 $ 1,569,258
============== =============
</TABLE>
F-12
<PAGE>
7. INVENTORY
Inventory consists of the following:
December 31,
1997 1996
----- ------
Purchased equipment ready for sale
$ 582,517 $ 1,182,517
============= =============
During the fourth quarter of 1997 and 1996, management provided a write-down
against the Company's inventory of surplus power generating equipment of
$600,000 and $300,000, respectively. Management believes the write-downs were
necessary due to the lack of sales activity and delays in the utilization of
this equipment within projects currently being negotiated by the Company.
The profitability of the Company's surplus equipment and scrap sales may be
impacted in the future by potential inventory related uncertainties. Because of
the nature of the inventory items purchased and sold by the Company, ownership
of such inventory items is not evidenced by documents of title. Further, because
of the Company's practice of acquiring surplus equipment from customers in
connection with the performance of jobs and because of the expense of relocating
and storing such items, many inventory items are held pursuant to joint venture
arrangements at the joint venture partner's site pending the sale of such items.
Because such inventory practices do not lend themselves to typical inventory
control procedures, the Company may be susceptible to incurring inventory
related losses arising from fraud, theft or claims of third parties. The Company
is aware of no such losses to date and would assert its rights against the party
from whom any items of inventory were purchased in the event of third party
claims with respect to title to inventory items. Accordingly, no additional
valuation reserves with respect to potential inventory losses have been
established.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
December 31,
1997 1996
------ ------
<S> <C> <C>
Office equipment $ 403,846 $ 401,771
Furniture and fixtures 494,117 398,377
Leasehold improvements 1,018,885 1,150,853
Transportation equipment 778,011 795,719
Job equipment 4,872,313 3,704,740
Land Improvements 131,968 -
-------------- --------------
7,699,140 6,451,460
Less: Accumulated depreciation and amortization 4,422,024 3,708,810
--------------- ---------------
$3,277,116 $2,742,650
=============== ===============
</TABLE>
During the year ended December 31, 1997, $148,526 in depreciation expense was
charged to job costs.
F-13
<PAGE>
9. LONG-TERM DEBT
7% Convertible Notes, Due September, 1997
- - -----------------------------------------
During the quarter ended September 30, 1995, the Company completed a $5,000,000
private placement offering of 7% convertible notes pursuant to Regulation S
under the Securities Act of 1933, as amended. The notes were due September 15,
1997. The holders of the notes were entitled, at their option, to convert on or
after November 15, 1995 one third of the original principal amount of the notes
into the shares of common stock of the Company at a conversion price for each
share equal to the lessor of the closing bid price of the common stock on
September 15, 1995 ($5.00) or 82% of the market price of the common stock at the
date of conversion. The remaining two thirds of the principal amount of notes
could be converted on the same terms, one third after December 15, 1995 and one
third after January 15, 1996, respectively. In the event the notes are converted
within one year of their issuance, no interest shall be payable on the converted
portion of such shares. As of December 31, 1997, all the notes had been
converted into 1,597,269 shares of the Company's common stock.
Due to the lack of a fixed conversion price or other mechanism to limit the
total number of shares exercisable upon conversion of the debt, an inadvertent
violation of the rules applicable to NASDAQ National Market Securities was
determined to have occurred during the first quarter of 1996. To remedy such
problem, the Company imposed a cap on conversions which could not be exceeded
unless the shareholders of the Company first approved the issuance of shares on
conversion in an aggregate amount exceeding 20% of the outstanding shares on the
date of the convertible note issuances. Consequently, the balance of the
Convertible Notes outstanding at March 31, 1996 amounting to $1,750,000 were
subject to a cap on conversions imposed by the Company to assure compliance with
NASDAQ rules. The Company submitted a proposal to its shareholders at its 1996
annual shareholders meeting to permit the conversion of the remaining
Convertible Notes. The proposal was approved and the remaining Notes became
convertible with the conversion price being reduced from 82% of the closing bid
price to 80% of such price and all interest accrued on such Convertible Notes
being payable in shares of common stock.
9. LONG-TERM DEBT (continued)
In connection with the issuance of the convertible notes, the Company paid total
offering costs of approximately $815,000. Such costs have been capitalized as
deferred issuance costs and are being amortized over the term of the notes. To
the extent the notes were converted, all or an allocable portion of such costs
were charged against paid in capital net of tax effect. As of December 31, 1996,
$201,775 was amortized and $613,225 of unamortized deferred issuance costs and
($103,668) in accrued interest (net of the tax effect of $69,117) was charged
(credited) to paid in capital in connection with the conversion of the
$5,000,000 of convertible notes.
7% Convertible Notes, Due January 1999
- - --------------------------------------
On August 13, 1997, the Company completed a private placement of $3,025,000 of
7% Convertible Notes (the "Convertible Notes") and 2,675,000 three year Warrants
(the "Three Year Warrants").
The Convertible Notes are convertible into Common Stock at the lesser of (i)
$2.75 per share or (ii) 75% of the average closing bid price of the Common Stock
during the five trading days prior to conversion. The Three Year Warrants are
exercisable for a three year period at the lesser of $3.00 per share or the
lowest conversion price of the Convertible Notes. Conversion of the Convertible
Notes and exercise of the Three Year Warrants was subject to the issuance of a
maximum of 1,997,130 shares of Common Stock on conversion unless the
shareholders of the Company approved issuance beyond that level upon conversion.
Shareholder approval of issuance beyond 1,997,130 was received on November 4,
1997. Further, the Company has the right, upon notice to the holders, to redeem
any Convertible Notes submitted for conversion at a price of $2.75 or less at
125% of the principal amount of such Convertible Notes. The Convertible Notes
pay interest at 7% payable quarterly and on conversion or at redemption in cash
or Common Stock, at the Company's option. In the event that a registration
statement covering the share underlying the Convertible Notes has not been
declared effective within 90 days or 180 days after the issuance of the
Convertible Notes, the interest rate on the Convertible Notes shall be increased
to 18% and 24%, respectively, from those dates until such a registration
statement becomes effective. As a registration was not declared effective within
the 90 days required under the terms of the agreement, the company incurred
$46,215 in additional interest. On January 8, 1998
Long-term debt consists of the following:
<TABLE>
December 31,
1997 1996
------ ------
<S> <C> <C>
Debentures:
7% convertible notes, due January 1999 $ 3,025,000 $ -
Notes Payable:
Note, payable in monthly installments of $2,650 through February 1997, -
secured by equipment 5,300
Note, payable in monthly installments of $1,207 including
interest at approximately 8.25% per annum through September 2000, secured by equipment 42,249 55,528
Note, payable in monthly installments of $27,316 including
interest at approximately 7.9% per annum through November 1997, secured by equipment - 277,040
Note, payable in monthly installments of $547 including interest
at approximately 11.9% per annum through February 1998, secured by equipment 912 5,930
Note, payable in monthly installments of $1,082 including interest at approximately
24% per annum through April, 2001, secured by equipment 28,730
Capital Lease Obligations:
Capital lease, payable in monthly installments of $3,569 including interest approximately
11.15% per annum through May 2000, secured by equipment 109,070 144,517
Capital lease, payable in monthly installments of $1,508 including interest approximately
11.4% per annum through September 1998, secured by equipment 12,080 26,846
Note, payable in monthly installments of $793 including interest at approximately 10.2%
per annum through February 2000, secured by equipment 16,803 -
Capital lease, payable in monthly installments of $35,513 including interest at approximately
10.7% per annum through March 1999, secured by equipment 471,631 -
Capital lease, payable in monthly installments of $6,614 including interest at approximately
10.7% per annum through October 1999, secured by equipment 118,604 -
-------------- ----------
3,825,079 515,161
Less: Current portion 3,566,393 351,127
-------------- ----------
$ 258,686 $ 164,034
============== ==========
</TABLE>
F-15
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. LONG-TERM DEBT (continued)
At December 31, 1997, maturities of long-term debt (including capital lease
obligations) are as follows:
1998 $ 3,566,393
1998 186,710
2000 56,976
2001 15,000
-----------
$ 3,825,079
============
10. PROVISION (CREDIT) FOR INCOME TAXES
Credit for income taxes is as follows:
December 31,
1997 1996 1995
------ ------ ------
Current:
Federal $ - $ - $ (940,200)
State - - (189,800)
Foreign - - -
--------------- --------------- --------------
- - (1,130,000)
--------------- --------------- --------------
Deferred:
Federal (1,906,000) (1,530,000) (273,700)
State 230,000 (205,000) (126,300)
Foreign 115,000 (115,000) -
--------------- --------------- --------------
(1,561,000) (1,850,000) (400,000)
--------------- --------------- --------------
$ (1,561,000) $ (1,850,000) $ (1,530,000)
=============== =============== ==============
F-16
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. CREDIT FOR INCOME TAXES (continued)
The Company's effective tax rate was (13.6%) in 1997 and (16.8%) in 1996.
Reconciliation of these rates and the U.S. statutory rates are summarized as
follows:
<TABLE>
Years Ended December 31,
1997 1996 1995
------ ------ ------
Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Taxes at
Statutory rate $ (3,910,000) (34.0%) $ (3,739,000) (34.0)% $(1,835,100) (34.0%)
State taxes net of
federal tax effect (480,500) (4.2) (551,000) (5.0) (211,800) (3.9)
Foreign tax loss
carryforward 390,500 3.4 291,000 2.6 - -
Increase in
valuation allowance 2,479,300 21.6 2,175,100 19.8 418,700 7.8
Other (48,800) (0.4) (26,100) 0.2 98,200 1.8
--------------- ---------- --------------- ----------- --------------- -----------
$ (1,561,000) (13.6%) $ (1,850,000) (16.8%) $ (1,530,000) (28.3%)
=============== ========== =============== =========== =============== ===========
</TABLE>
Certain items of income and expense are recognized in different years for
financial reporting and income tax purposes. Deferred income taxes are provided
in recognition of these temporary differences. The components of these deferred
income tax assets are as follows:
<TABLE>
December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Deferred Tax Assets:
Accounts and notes receivable allowances $ 1,028,800 $ 351,000 $ 84,000
Inventory allowance 381,000 126,900 -
Other inventory cost 20,000 19,800 19,800
Net operating loss carryforward 9,135,400 5,143,900 967,500
Fixed assets (148,300) (131,300) -
Other 110,100 44,500 -
--------------- ------------ ------------
10,527,000 5,554,800 1,071,300
Valuation allowance (6,357,000) (2,945,800) (418,700)
--------------- ------------ ------------
Total deferred tax assets $ 4,170,000 $2,609,000 $ 652,600
=============== ============ ============
</TABLE>
At December 31, 1997 the Company had net operating loss carryforwards for
federal income tax purposes of approximately $19,550,000, of which approximately
$2,350,000 expires in the year 2010, $9,060,000 in the year 2011 and the balance
of $8,150,000 in the following year. 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 difference become
deductible and the net operating losses can be carried forward. In determining
such projected future taxable income, management has considered the Company's
historical results of operation, the current economic environment within the
Company's core industries and future business activities which the company has
positioned itself. Management believes the Company will realize taxable income
in future years. However, based on the Company's substantial losses over the
past 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 $6,357,000 has been
established by management as a reduction of the Company's deferred tax assets of
$10,527,000. Management believes that the net deferred asset of $4,170,000 will
be realized through future taxable income.
F-17
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES
Employment Contracts and Agreements
- - -----------------------------------
On February 1, 1996, and effective January 1, 1996, Joel A. Freedman and Frank
A. Falco each entered into employment agreements, superseding their prior
employment agreements, with the Company on substantially identical terms.
Pursuant to such agreement, Mr. Freedman and Mr. Falco each receive (i) a base
salary of $250,000 per year plus 2% of operating profits; (ii) bonuses as
determined by the Board of Directors; and (iii) participation in any employee
benefit plans and fringe benefit arrangements generally available to the
Company's employees. For purposes of computing the salary of Messrs. Freedman
and Falco, operating profits are defined as net income from operations before
deduction of interest expense, income taxes, depreciation and amortization and
other non-cash charges to income.
In addition to their cash compensation, Messrs. Freedman and Falco will receive
certain bonuses in the form of common stock of the Company (the "Stock Bonus")
if the Company meets certain earnings criteria. Pursuant to such Stock Bonus
arrangements, the Company will issue stock to Messrs. Freedman and Falco in an
aggregate amount of up to 15% of the total issued and outstanding shares of
common stock of the Company as measured at the time(s) of issuance. The criteria
for issuing such shares is as follows: (i) if pre-tax net income for any one of
the years from 1994 to 2005 equals or exceeds $2,500,000, shares in an amount
equal to 5% of total issued and outstanding common stock of the Company shall be
issued; (ii) if pre tax net income for any one of the years from 1994 to 2005
equals or exceeds $3,500,000, shares equal to 5% of total issued and outstanding
common stock of the company shall be issued; and (iii) if pre-tax net income for
any one of the years from 1994 to 2005 equals or exceeds $6,000,000, shares
equal to 5% of total issued and outstanding common stock of the Company shall be
issued. For purposes of determining satisfaction of the above criteria, each of
the criteria may only be satisfied in one of the measuring years but two or more
of such criteria may be satisfied in the same year (e.g. pre-tax earnings of $6
million in any one year will satisfy each of the three criteria thus resulting
in the issuance of the full 15%, but pre-tax earnings of $2.5 million in each of
the years will only satisfy the first criteria for one year thus resulting in
the issuance of only 5% of the possible 15%). Pre-tax net income for each year
shall be determined, and the right to receive shares shall vest, on April 30
following each fiscal year. In computing pre-tax net income for purposes of
determining whether the above criteria has been satisfied, any charges to
earnings arising solely as a result of the issuance of shares pursuant to the
stock bonus arrangement shall be excluded.
On February 18, 1998 they each entered into the second amendment of the
employment agreement wherein the stock bonus provision was deleted in its
entirety and replaced with a stock option grant. The Company granted to each
Messrs. Freedman and Falco a five year option to purchase from the Company Two
Million Two Hundred Fifty Thousand (2,250,000) shares of the common stock of the
Company, $0.001 par value at an exercise price of $3.719 per share, the market
value of the Company's common stock at the date of grant. The Company obtained a
fairness opinion and valuations report from independent sources that estimated
the fair market value for each of these options to be $7,017,750 at the grant
date using the Black Scholes value option pricing model.
For the years ended December 31, 1997, 1996 and 1995 the compensation expense
for the two officers, including board approved bonuses, was $480,000, $480,000
and $250,000 each, respectively. For 1996, the board approved bonuses to be paid
to Mr. Freedman and Mr. Falco to increase their minimum guaranteed cash
compensation to $480,000 each.
The employment agreements prohibit Mr. Freedman and Mr. Falco from competing,
directly or indirectly, with the Company or disclosing confidential matters with
respect to the Company for two years after termination of employment. Each of
such agreements expires on March 31, 2005 and are thereafter automatically
extended for one-year periods unless there is a notice of termination from
either the Company or the employee.
F-18
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
In the event of their disability, Messrs. Freedman and Falco are entitled to
continue their full salary at the date of disability for a period of one year
after which time the Company may terminate the employment of such disabled
employee without further compensation. In the event of death during the term of
employment, the estate of Mr. Freedman and Mr. Falco, as appropriate, shall be
entitled to three months salary. In the event of the termination of Mr.
Freedman's or Mr. Falco's employment within one year of the occurrence of
various change in control events, or in the event of termination of their
employment by the Company for any reason other than death or disability, the
Company must pay or provide to Mr. Freedman and/or Mr. Falco, as appropriate;
(i) a lump sum payment equal to 2.99 times his average annual gross income from
the company for the five tax year period ending before the date of such
termination; (ii) a lump sum payment equal to three times the value of all
"in-the-money" stock options held by such persons at the date of termination;
and (iii) continued participation in all employee benefit programs for a period
of three years, provided that the employee may, at his election, receive a lump
sum cash payment equal to the value of such benefits in lieu of continued
participation in such benefit plans. Additionally, in the event of a change in
control during the term of their contracts, Messrs. Freedman and Falco will be
deemed to have earned in full the Stock Bonuses provided for in their employment
contracts. As used in the employment agreements of Messrs. Freedman and Falco, a
"change in control" is defined to be (i) the acquisition of 15% of the Company's
common stock; (ii) a change in majority composition of the Board of Directors
within any two year period; or (iii) a failure to elect either of such employees
to the Board when such employee is standing for election; provided, however,
that such events shall not constitute a change in control if a majority of the
Directors immediately prior to such "change in control" approve the transaction
or event otherwise constituting a "change of control."
On July 19, 1996, Global Alberta entered into employment agreements with the two
principle officers of Global Alberta for terms through June 30, 1999. Pursuant
to such agreement, the two officers each are to receive an annual salary of
$240,000 (Canadian) through the term of the agreement. The annual salary in U.S.
dollars is approximately $168,000, utilizing the exchange rate existing at
December 31, 1997.
On February 11, 1996, the Company entered into agreements with its executive
employees pursuant to which such employees have agreed to maintain the
confidentiality of certain information and have agreed to not compete with the
Company within 250 miles of the Company's principal places of business for a
period of three years following the termination of such persons' employment with
the Company. Additionally, the Company has entered into agreements with each of
its executive officers, other than Messrs. Freedman and Falco, which provide
that such officers shall be entitled to; (i) a lump sum payment equal to 2.99
times his average annual gross income from the company for the three tax-year
period ending before the date of such termination; (ii) a lump sum payment equal
to three times the value of all "in-the-money" stock options held by such
persons at the date of termination; and (iii) continued participation in all
employee benefit plans or programs for a period of three years, provided that
the employee may, at his election, receive a lump sum cash payment equal to the
value of such benefits in lieu of continued participation in such benefit plans.
For purposes of such agreements, a change in control is defined in the same
manner as in the employment agreements of Messrs. Freedman and Falco, except
that failure of either Mr. Freedman or Mr. Falco to be elected when standing for
election as a director shall not constitute a "change in control" for purposes
thereof.
In addition to the foregoing employment and change of control arrangements, the
Company's 1993 and 1995 Stock Option Plans provide that all outstanding options
shall become fully vested and exercisable in the event of a change in control.
Litigation
- - ----------
The Company is periodically subject to lawsuits and administrative proceedings
arising in the ordinary course of business. Management believes that no pending
lawsuits or administrative proceeding is likely to have a material adverse
effect on the condition or results of operations of the Company.
F-19
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
- - ----------------------
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and Health
Administration ("OSHA") issued a willful citation and notification of penalty in
the amount of $147,000 on the Company in connection with the accidental death of
an employee of one of the Company's subcontractors on the United Illuminating
Steel Point Project job site in Bridgeport, Connecticut. A complaint was filed
against the Company by the Secretary of Labor, United States Department of Labor
on September 30, 1996. The Company is contesting the Citations and Notification
of Penalty.
In November of 1996, a shareholder filed a class action lawsuit against the
Company and certain directors and officers of the Company. The suit, filed in
the Superior Court of New Jersey, Middlesex County, 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 seeks 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.
Prior to the oral argument before the Court on defendants' motion to dismiss the
amended complaint, the parties reached an agreement in principle to settle all
claims, subject to notice to the class, hearing before the Court and Court
approval. It is contemplated that, for settlement purposes only, the parties
will stipulate to a settlement class consisting of all persons (excluding
defendants) who purchased the Company's securities from March 8, 1996 through
June 5, 1997, and that the action will be dismissed and appropriate releases
provided in consideration for a payment to the stipulated settlement class of by
the Company's insurer. Management expects that the matter will be fully resolved
this calendar year.
On April 1, 1997, Enviropower Industries Inc., formerly Continental Waste
Conversion Inc. ("Enviropower"), commenced an action in court in Calgary,
Alberta (Action No. 9701-04774) against IDM Environmental Corp., Global Waste &
Energy Inc., formerly Continental Waste Conversion International, Inc., a
Delaware Corporation ("Global Delaware"), Global Waste and Energy, Inc.,
formerly Continental Waste Conversion International Inc., an Alberta Corporation
("Global Alberta") together with two former officers and directors of
Enviropower who are now employed by Global Alberta. IDM owns 90% of the issued
and outstanding shares of Global Delaware. Global Alberta is a wholly owned
subsidiary of Global Delaware. The action arose from the agreements entered into
between Enviropower and IDM on or about July 19, 1996 (the "Agreements"), which
provided, among other things, for the grant to Global Alberta of Enviropower's
right, title and interest in certain worldwide marketing and sales agreements
and to an exclusive, irrevocable license granted to Global Delaware to market
and use certain technology outside Canada in connection with the environmentally
safe conversion of certain domestic industrial and agricultural solid waste into
energy (the "Technology"). Enviropower is seeking to set aside the Agreements on
the alleged basis that its shareholders did not approve the transaction. In
addition, Enviropower is claiming damages for loss of its right to market and
use the Technology outside of Canada resulting in an alleged estimated loss of
$30 million. Enviropower also seeks indemnification for liabilities allegedly
incurred by Global Alberta in the name of Enviropower in the amount of $363,000,
a declaration that all profits, interest and benefits arising from the
Agreements be paid to Enviropower, punitive damaged of $1 million, costs and
interest plus such further and other relief as is more particularly set out in
the Statement of Claim.
At present, while Enviropower has filed a Notice to Produce documents and Notice
to Select an Officer on May 30, 1997, it has not advanced the claim in any
respect subsequent to that time, in large part due to its apparent insolvency.
On March 20, 1998, Enviropower filed an assignment in bankruptcy.
IDM, Global Alberta and Global Delaware are vigorously defending this matter.
Currently, an application for security for costs is scheduled to be heard on
April 8, 1998. IDM seeks an Order compelling Enviropower to post security for
the costs it will likely incur in defending against Enviropower's frivolous
claim. If the court orders that security must be posted and if Enviropower fails
to do so, an Order to dismiss the action will probably be entered. The Company
believes this claim is without merit and intends to continue to vigorously
contest it.
F-20
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Operating Leases
- - ----------------
The Company currently leases its office and warehouse facilities from L&G
Associates ("L&G"), a related partnership owned by the principal shareholders of
the Company, as further discussed in Note 13, Related Parties. The Company has
also entered into leases for other facilities outside of New Jersey under
operating lease agreements with terms ranging from two to five years.
A schedule of the future minimum payments under operating leases is as follows:
Related Other
Year ending December 31, Party Operating
------------------------ ------- -----------
1998 295,032 191,310
1999 295,032 183,986
2000 295,032 177,108
2001 295,032 123,237
2002 295,032 -
Thereafter 2,655,288 -
--------------- ---------------
$ 4,130,448 $ 675,641
=============== ===============
As further discussed in Note 13, the Company incurred renovation and
construction cost at their New Jersey facility which premises are leased from a
related party. The cost of these improvements, totaling approximately $448,000,
by agreement entered into in 1994 and amended May 16, 1996, will be charged over
fifteen (15) years, through May 31, 2011, in lieu of lease payments. The cost
allocation is reflected as amortization at a rate equal to the lease terms.
Other
- - -----
The Company is contingently liable to sureties under general indemnity
agreements. The Company agrees to indemnify the sureties for any payments made
on contracts of suretyship, guaranty or indemnity. The Company believes that all
contingent liabilities will be satisfied by their performance on the specific
bonded contracts involved.
12. RETIREMENT SAVINGS PLAN
In July of 1992, the Company amended an existing profit sharing plan to convert
such plan to a retirement savings plan (the "401(k) Plan") under section 401(k)
of the Internal Revenue Code. The 401(k) Plan generally covers all employees of
the Company who have completed two years of service with the Company. Employees
may elect to defer, in the form of contributions to the 401(k) Plan, up to 15%
of their annual compensation, subject to the federal maximum limit. The Company
may, at its own discretion, contribute to the plan. The Company did not
contribute to the 401(k) Plan during the years ended December 31, 1997, 1996 and
1995.
F-21
<PAGE>
13. RELATED PARTIES
Officer Loans and Advances
- - --------------------------
From time to time the Company has made loans and advances to the two principal
shareholders, directors and officers of the Company.
F-21
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. RELATED PARTIES (continued)
On September 1, 1995, Joel Freedman, the President and Chief Executive Officer
of the Company, surrendered to the Company 36,621 shares of his common stock of
the Company at $5.25 per share, the average closing market price for the
previous month, as payment in full of loans from the Company in the amount of
$192,260. Such shares have been canceled.
At December 31, 1995, the Company had a receivable due from Frank Falco,
chairman of the Board of Directors and Chief Operating Officer of the Company,
of $552,479 including interest at 7% per annum. On April 1, 1996, Mr. Falco
surrendered to the Company 92,214 shares of his common stock of the Company at
$7.272 per share, the average closing market price for the previous month, as
payment in full of loans from the Company in the amount of $670,580, the then
current balance. Such shares have been canceled.
At December 31, 1997, the company has receivables due from Mr. Freedman and Mr.
Falco for $7,965 and $361,576, respectively, including interest at 7% per annum,
which is expected to be repaid during 1998.
Leases
- - ------
The Company leases its offices and yard storage facilities from L & G
Associates, a related partnership owned by the principal stockholders of the
Company.
On March 1, 1993, the Company entered into a five year lease agreement on such
property, which includes two additional parcels of land. Pursuant to such lease,
the Company will pay base rent of $270,000 annually subject to annual
adjustments based on the consumer price index, plus costs of maintenance,
insurance and taxes.
In 1994, the Company and L&G Associates ("L&G") entered into an agreement
regarding the construction and/or renovation of expanded facilities on the
premises presently leased by the Company from L&G and the renovation and leasing
of an adjoining property. The expanded facilities were needed to support current
operations and anticipated future growth. The Board of Directors formed the
Building Committee to review the terms and fairness of such proposed expansion.
In November of 1994, the parties agreed in principal with respect to the terms
of the proposed expansion and the Building Committee determined that such
expansion met the Company's needs and was on terms which were fair to the
Company. Based on such agreement and determination, the Company in November of
1994 commenced renovation and construction on such sites of which one facility,
office space (7,600 square feet), was completed during the third quarter of
1995, and the second facility, warehouse space (5,700 square feet), was
completed during the third quarter of 1996. Renovation of such office space by
the company at an approximate cost of $303,000 constitutes payment in full of
rent for the initial term of the lease of such office space. The Company,
however, shall be responsible for all taxes, utilities, insurance and other
costs of occupying the office space during the initial term. Construction of
such warehouse space by the Company at an estimated cost of $145,000.
Leases
- - ------
constitutes payment in full of rent for the initial term of the lease of such
warehouse space. The Company, however, shall be responsible for all taxes,
utilities, insurance and other costs of occupying the warehouse space during the
initial term. The total cost of the renovations was to be amortized over the
initial terms of the lease. On May 16, 1996 the leases were amended and extended
15 years to May 31, 2011. The amortization associated to the cost of the
renovation was extended through the terms of the modified lease. Amortization
expense related to these costs for the years ended December 31, 1996, 1995 and
1994 was $42,014, $24,991 and $0, respectively. For the years ended December 31,
1997, 1996 and 1995 the rent paid was $302,412, $292,884 and $285,050,
respectively. Future minimum rental payments are reflected in Note 11,
Commitments and Contingencies.
F-22
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company earned more than 10% of its revenue from a different customer in
both 1996 and 1995. In 1997 the Company earned more than 10% of its revenue from
each of two different customers. For the years ended December 31, 1997, 1996 and
1954 the revenues were $8,443,000, $2,745,000 and $12,900,000, respectively.
Concentrations of credit risk with respect to trade receivables is limited due
to the large number of customers comprising the Company's customer base. As
discussed in Note 5 the Company has a note receivable from UPE which is not
expected to be fully collected within the coming year, therefore there is a
concentration of credit risk.
15. STOCKHOLDERS' EQUITY
Preferred Stock
- - ---------------
In July of 1993, the Company offered and sold ten units at $50,000 per unit, or
an aggregate of $500,000. Each unit consisted of 500 shares of Series A
Preferred Stock, 6,000 shares of common stock and 5,000 warrants, exercisable to
purchase one share of common stock at $5 per share until July 31, 1996. The
preferred stock had a 9% per annum cumulative dividend, payable quarterly. The
holders of the Series A Preferred Stock had the right to "put" such shares to
the Company at a price of $100 per share after the Company attained a net worth
of $3,000,000 or more or at any time after January 15, 1994. The Company had the
right to redeem the Series A Preferred Stock at $100 per share on or after
August 1, 1995. The Company had also agreed to include the shares underlying the
warrants included in such units in any registration statement filed by the
Company following the Company's initial public offering at no cost to such unit
holders. On April 29, 1994, the Company redeemed all of the outstanding
Preferred Stock at the request of the preferred shareholders.
On July 14, 1997, the Company filed an amendment to its corporate charter
authorizing it to issue up to 1,000 shares of Preferred Stock, $1.00 par value.
Convertible Preferred Stock
- - ---------------------------
On February 12, 1997 (the "closing date") the Company entered into a private
placement wherein it offered and sold 300 shares of $10,000 Series "B"
Convertible Preferred Stock (the "preferred shares") in private transactions to
selected investors who qualify as "accredited investors" (within the meaning of
Rule 501(a) promulgated under the Securities Act of 1933, as amended). The
preferred shares will be convertible into shares of the Company's common stock
beginning on the 91st calendar day after the closing date according to the
following:
Lower of x or y
x y
Calendar Days Closing Date Conversion Date
After Closing Average Times Average Times
91 - 120 120% 82%
121 - 150 110% 79%
151 - 180 100% 76%
180 100% 73%
The conversion date average is the average closing bid price of the common stock
as calculated over the five trading day period ending on the trading day
preceding the date on which the holder transmits (by telecopier) his notice to
convert. Each preferred share will be convertible into the Company's common
stock (the "conversion shares") determined by dividing $10,000 by the applicable
conversion price. The preferred shares mature on February 12, 2000, and on that
date each preferred share then outstanding shall automatically convert into
conversion shares at the then current conversion price. The preferred shares pay
an annual 7% dividend. The dividends are payable only upon conversion or
redemption of the preferred shares and are payable either in shares of common
stock (the "dividend shares") at the average market price of the common stock
over the five trading days preceding the conversion date or in cash, at the
option of the Company.
The Company agreed to register the dividend shares, the conversion shares and
the penalty shares in a registration statement filed by the Company at no cost
to the holders of such shares. The registration statement was declared effective
by the Commission on January 9, 1998.
The Company shall have the option to redeem any conversion for which the
conversion price is less than $1.80 per share for cash in the amount of $12,200
per preferred share plus accrued dividends.
In connection with this transaction the Company paid a fee of $195,000 and
$25,000 in expenses to the placement agent. In addition, the Company granted
100,000 warrants to the placement agent. Each warrant is exercisable to purchase
one share of common stock at $2.40 per share, as amended by agreement dated
November 21, 1997 commencing on February 12, 1998 and expiring on February 12,
2002. The Company has granted demand and piggy-back registration rights to the
holders of these warrants.
During the year-ended December 31, 1997, 30 shares with a stated value of
$300,000 were converted into 192,925 shares of the Company's common stock.
Common Stock
- - ------------
On June 22, 1993, the Company filed an amended and restated Certificate of
Incorporation to give effect to a 30,000 for 1 stock split and to simultaneously
reduce the post-split authorized shares of common stock to 20,000,000 shares,
$.001 par value and to authorize 1,000,000 shares of preferred stock, $1.00 par
value. All references to number of shares, except shares authorized, and to per
share information in the financial statements, have been adjusted to reflect the
stock split on a retroactive basis.
On June 9, 1997 at the Company's annual stockholders meeting, the shareholders
approved a proposal to amend the restated Certificate of Incorporation to
increase the number of authorized shares of common stock to thirty million
shares.
In January of 1994, the principal shareholders of the Company surrendered for
cancellation an aggregate of 666,666 shares of common stock. All references to
number of shares, except shares authorized, and to per share information in the
financial statements, have been adjusted to reflect the surrender and
cancellation of such shares on a retroactive basis.
The Company completed an initial public offering of 3,450,000 units(including
units sold pursuant to the underwriter's overallotment options) in April of
1994. Each Unit consisted of one share of the Company's common stock and one
Class A Warrant. The Company received $11,792,588 from the proceeds of the
offering, after the payment of all offering costs.
On September 1, 1995, Joel Freedman, a principal shareholder, director and Chief
Executive Officer of the Company surrendered 36,621 shares of his common stock
in repayment of his officer's loan.
From November 1995 through December 31, 1996, the Company issued 1,597,269
shares of common stock in exchange for the cancellation of $5,000,000 of the
Company's 7% convertible notes.
On April 1, 1996, Frank Falco, a principal shareholder, director and Chief
Operating Officer of the Company, surrendered 92,214 shares of his common stock
in repayment of his officer's loan.
15. STOCKHOLDERS' EQUITY (continued)
F-23
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On November 15, 1996, the board of directors of the Company approved a stock
repurchase plan whereby the Company may, from time to time, repurchase on the
open market shares in its common stock in an amount up to $750,000. During the
year ended December 31, 1996, the Company repurchased for retirement 100,000
shares at a price of $216,500.
During the year-ended December 31, 1997, $300,000 of the Company's Preferred
Stock were converted into $92,925 shares of the Company's common stock.
Common Stock Purchase Warrants and Options
- - ------------------------------------------
The Company has authorized and in July of 1993, issued 50,000 warrants (the
"Private Placement Warrants") to purchase common stock. The Private Placement
Warrants are exercisable to purchase one share of common stock per warrant at a
price of $5.00 per share until August 1, 1996 and are not redeemable. In January
of 1994, the Company granted to the holders of the Private Placement Warrants
"piggy-back" registration rights pursuant to which the holders of such warrants
may include the shares underlying such warrants in any registration statement
subsequently filed by the Company at no cost to the holders of the Private
Placement Warrants. During the year ended December 31, 1996, 7,500 Private
Placement Warrants were exercised, 7,500 shares were issued in connection with
the exercises and resulted in net proceeds to the Company of $33,750. The
remaining 42,500 Private Placement Warrants expired and were canceled.
The Company's Class A Warrants are separately transferrable and entitle the
holder to purchase two shares of common stock at $4.50 per share (subject to
adjustment, which occurred). The Class A Warrants are exercisable commencing on
April 20, 1995 and expiring April 20, 1999. Any or all of the Class A Warrants
may be redeemed by the Company at a price of $.05 per warrant, upon the giving
of 30 days written notice and provided that the closing bid price of the common
stock for a period of twenty (20) consecutive trading days ending within ten
(10) days of the notice of redemption has equaled or exceeded $9.00 per share.
During the year ended December 31, 1996 and 1997, 1,051,000 and $2,258,514 Class
A Warrants were exercised, 2,102,000 and 4,517,028 shares were issued in
connection with the exercises and resulted in net proceeds to the Company of
$6,956,450 and $6,171,000.
During the year ended December 31, 1997, 2,258,514 Class A Warrants were
exercised, 4,517,028 shares were issued, resulting in $6,171,000 net proceeds to
the Company.
In connection with the Offering, the Company sold to the Underwriter for nominal
consideration, an option for the purchase of up to 300,000 units (the "option
units"). Each option unit consisted of one share of the Company's common stock
and one Class A Warrant. Each option unit was exercisable at a price of $6.60
per option unit during the period beginning April 20, 1996 and continuing until
April 20, 1999. The option units could be exercised as to all or any lesser
number of option units and contained provisions which required, under certain
circumstances, the Company to register the option units underlying such options
for sale to the public. The option units were nontransferable except to officers
of the Underwriter, members of the underwriting group and their respective
officers and partners. The option unit exercise price and the number of option
units covered by the option were subject to adjustment to protect the holders
thereof against dilution in certain events. During May 1996, all the option
units were exercised and the company received net proceeds of $1,979,700 and
issued 300,000 shares of the Company's common stock. As of December 31, 1996 all
300,000 Class A Warrants issued in connection with the underwriter option
remained outstanding.
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------------------
On June 17, 1993, the Company adopted the IDM Environmental Corp. 1993 Stock
Option Plan (formerly International Dismantling & Machinery Corp. 1993 Stock
Option Plan) (the "Stock Option Plan"). Pursuant to the Stock Option Plan, the
Company has reserved 475,000 shares of common stock for issuance pursuant to the
grant of incentive stock options and nonqualified stock options.
15. STOCKHOLDERS' EQUITY (continued)
F-24
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On April 11, 1994, the Board of Directors granted options under the Company's
1993 Stock Option Plan to certain employees and a Director to purchase 445,400
and 5,000 shares, respectively, of the Company's common stock at $4.00 per
share, the fair market value of the Company's common stock at the date of grant.
The options are incentive stock options, except for the Director's stock option
which is a nonqualified stock option. The options are exercisable until April
2004. Twenty percent of the options vest three months from the date of grant.
The balance of the options vest at a rate of twenty percent per year on each of
the four anniversary dates subsequent to the grant of the options.
On June 2, 1994, the Company granted a total of 5,000 non qualified stock
options to two of the directors to purchase common stock at $6.25 per share, the
fair market value of the Company's common stock at the date of the grant. The
options vest at the same rate as the initial grant.
On December 28, 1994, the Company granted options to certain employees to
purchase 29,700 shares of the Company's common stock at $4.38 per share, the
fair market value of the Company's common stock at the date of the grant. On
August 9, 1995, the Company granted an option to a new employee to purchase
5,000 shares of the Company's common stock at $5.25 per share, the fair market
value of the Company's common stock at the date of grant. The options vest at
the same rate as the first grant.
On January 8, 1996, the Company amended the terms of its 1993 Stock Option Plan
to add provisions allowing for the cashless exercise of options issued under the
plan and providing for the automatic vesting of all options granted under the
plan in the event of certain changes in control of the Company. Pursuant to such
cashless exercise provisions, holders of options may, as payment of the exercise
price, have IDM withhold the number of shares of common stock at the then fair
market value of the Company's common stock, less the exercise price, of which is
equal to the aggregate exercise price of the shares of common stock issuable
upon exercise of the option. Under such provision of the accelerated vesting,
notwithstanding any vesting schedule set forth in any individual option
agreement, all options granted under the 1993 Plan will become fully vested and
exercisable in the event a person or group, other than Joel Freedman or Frank
Falco, acquire in excess of 15% of common stock of IDM unless such acquisition
is approved by the Board.
On January 8, 1996, the Company's Compensation Committee and Board of Directors
adopted and approved a new stock option plan for the Company, the IDM
Environmental Corp. 1995 Stock Option Plan (the "1995 Plan"), under which stock
option awards may be made to employees, directors and consultants of the
Company. The 1995 Plan became effective on the date it was adopted by the Board
of Directors, subject to the approval of the Company's shareholders, and it will
remain effective until the tenth anniversary of the effective date unless
terminated earlier by the Board of Directors. Pursuant to the plan, the Company
has reserved 500,000 shares of common stock for issuance pursuant to the grant
of incentive stock options and non qualified stock options. On January 8, 1996,
the Company granted options to certain employees and consultants to purchase
69,000 shares of the Company's common stock at $2.94 per share, the fair market
value of the Company's common stock at the date of the grant (41,500 have
vested). In addition, on January 8, 1996, the Company approved, effective
November 20, 1995, the granting of 40,000 options to purchase common stock at
$3.72 per share, the fair market value of the Company's common stock at the date
of the grant, to certain consultants (all options were vested). The balance of
the 69,000 options vest at a rate of twenty percent per year on each of the four
anniversary dates subsequent to the grant of the options. Also on January 8,
1996, the Company granted 75,000 options each to Messrs., Falco and Freedman at
$3.23 per share, 110% of the fair market value of the Company's common stockat
the date of grant.
On May 23, 1996, the Company granted vested options to the outside directors, a
consultant and an employee to purchase 50,000 shares at $8.25 per share, the
fair market value of the Company's common stock at the date of grant.
On June 28, 1996 the Company adopted and approved a new stock option plan (the
"1996 consulting options") under which nonqualified stock options have been
granted to a consultant for the right to acquire 50,000 shares of its common
stock at
F-25
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$3.23 per share. The options, which are fully vested and exercisable through
June 28, 2006, were granted pursuant to a consultant agreement that expires on
June 30, 1997. The fair market value of these shares at the date of grant was
$7.44. The difference between the exercise price and the fair market value of
the Company's common stock at date of grant (the "intrinsic value") reflects the
compensation for the consulting services.
On May 22, 1997, the Company granted vested options to certain of its employees
to purchase 52,950 shares at $2 a share, the fair market value of the Company's
common stockat the date of grant. In addition, the Company agreed to reprice all
options granted on or before May 22, 1997 to the same$2 per share.
On June 10, 1997, the Company granted vested options to three of its outside
directors for each to purchase 5,000 shares at $2.5312, the fair market value of
the Company's common stock at date of grant.
On July 23, 1997, the Company granted vested options in the amount of 5,000
shares for a consultant, and 5,000 shares for each of three officers at $2.5625,
the fair market value of the Company's common stock at date of grant. In
addition, the Company granted a vested option to purchase 100,000 shares each
for Mr. Falco and Mr. Freedman at $2.81875 per share, 110% of the fair market
value of the Company's common stock at the date of grant.
On August 26, 1997, the Company granted a vested option to its proposed nominee
for director for 5,000 shares at $4.6875, the fair market value of the Company's
common stock at the date of grant.
During 1997 45,390 options issued under the 1993 and 1995 stock option plans
were exercised resulting in net proceeds of $63,042.
During 1997 the Company issued to six consultants options to purchase 395,000
shares of the Company's common stock at exercise prices ranging from $1.25 to
$4.50. In accordance with FAS 123 the fair value of these options were estimated
at the grant date using the Black-Scholes value option pricing model resulting
in the recording of $456,340 as compensation costs of consultants options.
During 1997 155,000 of these options were exercised resulting in net proceeds to
the Company of $235,000.
As referred to in Note 1, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123 ("FASB 123"), "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company's 1993 and 1995 Incentive Stock Option Plans have authorized the
granting of options to key employees and management personnel for up to 975,000
shares of the Company's common stock. Options granted have terms between 5 and
10 years and become fully exercisable ranging from 0 to 4 years of continued
employment.
Pro forma information regarding net income and earnings per share is required by
FASB 123, and has been determined as if the Company had accounted for the
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of implementation of FASB 123
using a Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995, respectively, with ranges as follows:
<TABLE>
1997 1996 1995
------ ----- ------
<S> <C> <C> <C>
Risk-Free interest 5.65% 4.39 - 6.40% 5.65 - 6.72%
Dividend yields 0% 0% 0%
Volatility factors of the expected market price of the Company's
Common Stock .914% .720 - .865% .594 - .700%
Expected life of options 1 - 5 years 2 - 5 years 4 - 5 years
</TABLE>
Fair values for future options are to be estimated at the date of grant.
F-26
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options. In management's opinion existing stock option valuation
models do not provide a reliable single measure of the fair value of employee
stock options that have vesting provisions and are not transferable. In
addition, option pricing models require the input of highly subjective
assumptions, including expected stock price volatility.
Common Stock Purchase Warrants and Options (continued)
- - -----------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. In accordance with
FASB 123, only stock options granted during the years ended December 31, 1997,
1996 and 1995 have been included for the Company's pro forma information as
follows:
<TABLE>
1997 1996 1997
------ ------ -----
<S> <C> <C> <C>
Pro forma net loss $(11,885,575) $(9,700,064) $(3,882,441)
Pro forma loss per share:
Primary $(1.06) $ (1.20) $(.067)
Fully diluted $(1.06) $ (1.20) $(.067)
</TABLE>
The Company recognized $0, $63,094 and $0 (net of tax effect and relating to the
1996 consulting options) of compensation expense for the years ended December
31, 1997, 1996 and 1995, respectively. An additional $661,152, $552,220 and
$15,028 of compensation expense (net of tax effect) would be recognized under
implementation of FASB 123.
A summary of changes in common stock options under the 1993 plan during 1997,
1996, 1995 and 1994 is as follows:
<TABLE>
Weighted
Average
Number Price per Exercise
of Shares Share Price
----------- ---------- ----------
<S> <C> <C> <C>
January 1, 1994 - - -
Granted during 1994 485,100 $2.00 $2.00
Canceled during 1994 (30,521) 4.00 4.00
------------
Outstanding at December 31, 1994 454,579 2.00
Granted during 1995 5,000 2.00 2.00
Canceled during 1995 (4,050) 4.00 4.00
------------
Outstanding at December 31, 1995 455,529 2.00
Canceled during 1996 (63,967) 4.00 4.00
Exercised during 1996 (20,910) 4.00 4.00
------------
Outstanding at December 31, 1996 370,652
Granted during 1997 92,950 $2.00 - $4.69 $2.08
Canceled during 1997 (20,168) 2.00 2.00
Exercised during 1997 (38,759) 2.00 2.00
------------
Outstanding at December 31, 1997 404,675
============
Options exercisable at December 31, 1997 340,779 $2.00 - 4.69 $2.09
============
Available for Future Grant 10,652
============
</TABLE>
F-27
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Common Stock Purchase Warrants and Options (continued)
- - -----------------------------------------------------
A summary of the 1995 plan activity which occurred during 1997 and 1996 is as
follows:
<TABLE>
Weighted
Average
Number of Price per Exercise
Shares Share Price
--------- ---------- -------
<S> <C> <C> <C>
Outstanding, January 1, 1996 - - -
Granted during 1996 309,000 $2.00 $2.00
Exercised during 1996 (20,552) $3.72 3.72
Canceled during 1996 (9,448) $3.72 3.72
--------------
Outstanding at December 31, 1996 279,000 2.00
Granted during 1997 200,000 $2.82 2.82
Exercised during 1997 (6,631) 2.00 2.00
Canceled during 1997 (3,369) $2.00 2.00
--------------
Outstanding at December 31, 1997 469,000
===============
Options Exercisable at December 31, 1997 458,000 $2.36
===============
Available for future grants 3,817
===============
</TABLE>
In addition, as of December 31, 1996, the 50,000 options granted under the 1996
consulting options remain outstanding at a weighted average exercise price of
$3.23.
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996 for the 1993 plan, 1995 plan and the 1996 consulting
options were as follows:
1997 1996 1995
----- ------ ------
Stock Prices Equal to Exercise Price 1.29 3.51 2.30
Stock Prices in Excess of Exercise Price 2.53 5.20 -
Stock Prices Less than Exercise Price 0.78 1.28 -
F-28
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS' EQUITY (continued)
Shareholder's Rights Plan
- - -------------------------
On April 1, 1996, the Board of Directors adopted and approved a "Shareholder
Rights Plan" in order to preserve for stockholders the long-term value of the
Company in the event of a take-over. To put the Plan into effect, the Board
declared a dividend of one Right for each share of common stock outstanding to
stockholders of record at the close of business on April 1, 1996. Each right
represents the right to purchase one one-hundredth of a share of a new series of
preferred stock without voting rights par value $1.00 per share. The exercise
price for each right is $20.00. Each right expires December 31, 2005.
The rights are not exercisable and are not transferrable apart from the
Company's common stock until the tenth day after such time as a person or group
acquires beneficial ownership of 15% or more of the Company's common stock or
the tenth business day (or such later time as the board of directors may
determine) after a person or group announces its intention to commence or
commences a tender or exchange offer the consummation of which would result in
beneficial ownership by a person or group of 15% or more of the Company's common
stock. As soon as practicable after the rights become exercisable, separate
right certificates would be issued and the rights would become transferrable
apart from the Company's common stock. In the event a person or group were to
acquire a 15% or greater position in the Company, each right then outstanding
would "flip in" and become a right to receive that number of shares of common
stock of the Company which at the time of the 15% acquisition had a market value
of two times the exercise price of the rights. The acquirer who triggered the
rights would become excluded from the "flip-in" because his rights would become
null and void upon his triggering the acquisition. The rights are redeemable by
the Company's Board of Directors at a price of $.01 per right at any time prior
to the acquisition by a person or group of beneficial ownership of 15% or more
of the Company's common stock. The redemption of the rights may be effective at
such time, on such basis, and with such conditions as the board of directors in
its sole discretion may establish. Thus, the rights would not interfere with a
negotiated merger or a white knight transaction, even after a hostile tender
offer has been commenced.
F-29
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. Subsequent Events
Series C 7% Convertible Preferred Stock
- - ---------------------------------------
(a) 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.
(b) The securities were issued to five accredited investors.
(c) The aggregate sales price of such securities was $3,600,000.
Commissions totaling 10% were paid in connection with the placement.
(d) The securities were offered pursuant to Regulation D. The offer was
directed exclusively to a limited number of accredited investor without general
solicitation or advertising and based on representations from the investors that
such investors were acquiring for investment The securities bear legends
restricting the resale thereof.
(e) The Series C Preferred Stock is convertible into Common Stock at the
lesser of (i) $4.50 per share or (11) 75% of the average closing bid price of
the Common Stock during the five trading days prior to conversion. The Four Year
$5.00 Warrants are exercisable for a four year period at the lesser of $5.00 per
share or the lowest conversion price of the Series C Preferred Stock. Conversion
of the Series C Preferred Stock and exercise of the Four Year $5.00 Warrants is
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 Four Year
$5.00 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 Four
Year $5.00 Warrants at the pre-tax profit such holders would have realized had
the Four Year $5.00 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 or $2.75 of 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.
The Company also granted an immediately exercisable option to a consultant to
purchase 1,200,000 shares of common stock at an exercise price of $3.719 per
share, the fair market value at the date of grant. The options expire on
February 18, 2000. Neither the option nor the shares of common stock have been
registered under the Securities Act of 1933, as amended.
F-30
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Lock-Up Warrants
- - ----------------
(a) On February 11, 1998, the Company issued 1,270,000 Three Year $4.50 Warrants
(the "Lock-Up Warrants").
(b) The Lock-Up were issued to three accredited investors.
(c) 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.
(d) The Lock-Up were offered pursuant to Section 4(2). The offer was directed
exclusively to a limited number of accredited investor without general
solicitation or advertising and based on representations from the investors that
such investors were acquiring for investment. The securities bear legends
restricting the resale thereof
(e) The Lock-Up Warrants are exercisable for a three year period at $4.50 per
share.
F-31
Exhibit 23.1
CONSENT OF SAMUEL KLEIN AND COMPANY
We consent to the incorporation by reference in Registration Statements No.
33-92972, 333-04703 and 333-09445 of IDM Environmental Corp. on Form S-8 and in
Registration Statement No. 333-28485 on Form S-3 of our reports dated April 8,
1998 appearing in this Annual Report on Form 10-K of IDM Environmental Corp. for
the year ended December 31, 1997.
/s/ Samuel Klein and Company
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
April 15, 1998
b:/ms/accountantconsent.idm/idm98
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 602,242
<SECURITIES> 0
<RECEIVABLES> 4,594,408
<ALLOWANCES> 500,000
<INVENTORY> 582,512
<CURRENT-ASSETS> 11,833,213
<PP&E> 7,699,140
<DEPRECIATION> 4,422,024
<TOTAL-ASSETS> 27,150,705
<CURRENT-LIABILITIES> 8,812,632
<BONDS> 0
0
2,700,000
<COMMON> 14,513
<OTHER-SE> 15,364,874
<TOTAL-LIABILITY-AND-EQUITY> 27,150,705
<SALES> 17,921,899
<TOTAL-REVENUES> 17,921,899
<CGS> 17,649,365
<TOTAL-COSTS> 17,649,365
<OTHER-EXPENSES> 11,261,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 512,768
<INCOME-PRETAX> (11,501,326)
<INCOME-TAX> (1,561,000)
<INCOME-CONTINUING> (9,940,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,940,326)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
