SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-23900
IDM ENVIRONMENTAL CORP.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2194790
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
396 Whitehead Avenue, South River, New Jersey 08882
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(Address of principal executive offices)
(908) 390-9550
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(Registrant's Telephone Number, Including Area Code)
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(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- ------
As of May 12, 1998, 17,749,525 shares of Common Stock of the issuer were
outstanding.
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
----------------------------------------
INDEX
Page
Number
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997........................................ 1
Consolidated Statements of Operations - For the
three months ended March 31, 1998 and March 31, 1997......... 2
Consolidated Statements of Cash Flows - For the
three months ended March 31, 1998 and March 31, 1997......... 3
Notes to Consolidated Financial Statements................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................... 13
SIGNATURES .............................................................. 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
ASSETS 1998 1997
--------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,668,624 $ 602,242
Accounts receivable 3,846,175 4,094,408
Notes receivable - current 116,457 116,457
Inventory 582,517 582,517
Costs and estimated earnings in excess of billings 696,794 455,823
Bonding deposits - 9,157
Due from officers 424,299 369,541
Prepaid expenses and other current assets 1,590,027 1,433,068
--------------- ----------------
Total Current Assets 10,924,893 7,663,213
Investments in and Advances to Unconsolidated Affiliates 3,806,564 3,453,309
Investment in Affiliate, at cost 1,715,000 1,715,000
Notes Receivable - long term 1,381,155 1,381,155
Debt Discount and Issuance Costs 330,000 4,610,166
Deferred Income Taxes 4,570,000 4,170,000
Property, Plant and Equipment 3,105,085 3,277,116
Other Assets 880,746 880,746
--------------- ----------------
$ 26,713,443 $ 27,150,705
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 577,322 $ 3,566,393
Accounts payable and accrued expenses 5,417,656 5,159,635
Billings in excess of costs and estimated earnings 133,155 86,604
--------------- ----------------
Total Current Liabilities 6,128,133 8,812,632
Long-Term Debt 188,365 258,686
--------------- ----------------
Total Liabilities 6,316,498 9,071,318
--------------- ----------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, authorized 30,000,000 shares
$.001 par value, issued and outstanding 17,634,525
in 1998 and 14,513,073 in 1997 17,634 14,513
Additional paid-in capital 46,655,670 38,497,705
Convertible preferred stock, authorized
1,000,000 shares $1.00 par value
Series B, Issued and outstanding 0 in 1998 and 270
shares in 1997, stated at conversion value of
$10,000 per share - 2,700,000
Series C, Issued and outstanding 3,600 shares,
stated at conversion value of $10,000 per share
less unamortized beneficial conversion feature of $3,226,000 374,000 -
Retained earnings (deficit) (26,650,359) (23,132,831)
--------------- ----------------
20,396,945 18,079,387
--------------- ----------------
$ 26,713,443 $ 27,150,705
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the Three Months Ended March 31,
1998 1997
----------------- --------------
<S> <C> <C>
Revenue:
Contract income $5,168,758 $3,661,164
Sale of equipment - 31,800
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5,168,758 3,692,964
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Cost of Sales: -
Direct job costs 4,752,323 3,989,508
Cost of equipment sales - 21,284
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4,752,323 4,010,792
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Gross Profit (loss) 416,435 (317,828)
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Operating Expenses:
General and administrative expenses 3,847,615 2,167,654
Depreciation and amortization 133,780 156,059
------------- ------------
3,981,395 2,323,713
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Loss from Operations (3,564,960) (2,641,541)
Other Income (Expense)
Interest income(Expense) (194,525) 57,244
------------- ------------
Loss before Credit for Income Taxes (3,759,485) (2,584,297)
Credit for Income Taxes (400,000) (450,000)
------------- ------------
Net Loss (3,359,485) (2,134,297)
Preferred Stock Dividends including $104,000 and $289,726
amortization of beneficial conversion feature in 1998 and 1997.
Total amounts of $3,330,000 and $1,109,589 for 1998 and 1997 158,043 316,767
------------- ------------
Net Loss on Common Stock ($3,517,528) ($2,451,064)
============= ============
Loss per Share:
Basic Loss per share ($0.21) ($0.26)
============= ============
Diluted Loss per share ($0.21) ($0.26)
============= ============
Basic common shares outstanding 16,498,069 9,602,730
============= ============
Diluted common shares outstanding 16,498,069 9,602,730
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
For the Three Months Ended March 31,
1998 1997
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (3,359,485) ($2,134,297)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes (400,000) (450,000)
Depreciation and amortization 172,031 138,351
Amortization of debt discount and issuance costs 101,581 -
Compensation cost of consultant stock options 1,871,400 -
Decrease (Increase) In:
Accounts receivable 248,233 2,892,733
Notes receivable - (3,228)
Costs and estimated earnings in excess of billings (240,971) (195,756)
Prepaid expenses and other current assets (156,959) 139,752
Bonding deposits 9,157 46,474
Increase (Decrease) In:
Accounts payable and accrued expenses 589,995 1,472,590
Billings in excess of costs and estimated earnings 46,551 71,350
-------------- --------------
Net cash used in operating activities (1,118,467) (967,211)
-------------- --------------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment - (31,987)
Proceeds from disposal of property, plant and equipment - 17,707
Investment in and advances to unconsolidated affiliates (353,255) -
Acquisition of other assets - (173,147)
Loans and advances to officers (54,758) (46,801)
-------------- --------------
Net cash used in investing activities (408,013) (234,228)
-------------- --------------
Cash Flows from Financing Activities:
Net proceeds from convertible preferred stock issuance 3,240,000 2,780,000
Principal payments on long-term debt (190,630) (150,514)
Long term debt borrowing 156,238 -
Preferred stock dividends (54,043) (27,041)
Proceeds from exercise of stock options and warrants 1,441,297 -
--------------
--------------
Net cash provided by financing activities 4,592,862 2,602,445
-------------- --------------
Increase in Cash and Cash Equivalents 3,066,382 1,401,006
Cash and Cash Equivalents, beginning of period 602,242 1,001,254
-------------- --------------
Cash and Cash Equivalents, end of period $ 3,668,624 $ 2,402,260
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Continued)
<TABLE>
For the Three Months Ended March 31,
1998 1997
-------------- --------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 214,374 $ 47,118
============== ==============
Income taxes - -
============== ==============
Supplemental Disclosure of Noncash Investing and Financing Activities:
Conversion of convertible promissory notes to common stock $ 3,025,000 $ 2,828,037
============== ==============
Conversion of preferred stock to common stock $ 2,700,000 -
============== ==============
Beneficial conversion feature of convertible preferred stock $ 3,330,000 $ 1,109,589
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of IDM Environmental Corp. and all of its wholly owned and
majority owned subsidiary companies. The December 31, 1997 balance sheet
data was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The
interim financial statements and notes thereto should be read in
conjunction with the financial statements and notes included in the
Company's Form 10-K for the year ended December 31, 1997. In the opinion of
management, the interim financial statements reflect all adjustments of a
normal recurring nature necessary for a fair statement of the results for
the interim periods presented. The current period results of operations are
not necessarily indicative of results which ultimately will be reported for
the full year ending December 31, 1998.
2. CONTINGENCIES
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration ("OSHA") issued 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.
Also in connection with this accidental death, the employee's estate filed
a complaint for wrongful death against the subcontractor and the Company on
February 11, 1997. The estate seeks damages in the amount of $45 million.
The Company is being defended by the subcontractor's insurance carrier
pursuant to the subcontractor's obligation to defend and indemnify the
Company with respect to the actions of its (subcontractor's) employees and
agents. The Company will be fully indemnified for any liability, if any,
for any potential judgement or settlement in this matter and, therefore,
the action is not expected to have any material effect.
In November of 1996, a shareholder filed a class action lawsuit against the
Company and certain directors and officers of the Company. The suit, filed
in the Superior Court of New Jersey, Middlesex County, as subsequently
amended in June 1997, alleges that the Company disseminated false and
misleading financial information to the investing public between March 8,
1996 and November 18, 1996 and 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 by the Company's insurer.
Management expects that the matter will be fully resolved in 1998.
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.
5
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. CONTINGENCIES (Continued)
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
damages 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 in April 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.
3. EARNINGS PER SHARE
The Company is calculating earnings per share to comply with the recent SEC
staff position on accounting for securities issued with beneficial
conversion features. This accounting requires that the Company reflect the
difference between the market price of the Company's common stock and the
applicable conversion rate on the convertible Series B preferred stock as a
dividend at the issue date (the beneficial conversion feature was
$1,109,589) and was amortized as a dividend over a 180 day period from
February 12, 1997, the issue date of the convertible preferred stock. The
180 day period was due to the increasing discount percentage up to 180 days
after closing (from 18% discount to 27%). The beneficial conversion feature
on the Series C preferred Stock is $3,330,000 and is being amortized over
four years.
4. CONVERTIBLE PREFERRED STOCK SERIES C AND "LOCK-UP WARRANTS"
On February 13, 1998, the Company sold 3,600 shares of Series C 7%
Convertible Preferred Stock and 2,350,000 Four Year $5.00 Warrants. 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.
6
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. CONVERTIBLE PREFERRED STOCK SERIES C AND "LOCK-UP WARRANTS" (Continued)
On February 11, 1998, the Company issued 1,270,000 Three Year $4.50
Warrants (the "Lock-Up Warrants"). The Lock-Up Warrants were issued to
three accredited investors. The Lock-Up Warrants were issued in conjunction
with the execution of Lock-Up Agreements by the holders of $3.00 Warrants
of the Company whereby the holders of such warrants agreed not to resell
any shares underlying those warrants prior to July 30, 1998. The Lock-Up
Warrants were offered pursuant to Section 4(2) of the Securities Exchange
Act of 1933, as amended. The offer was directed exclusively to a limited
number of accredited investors without general solicitation or advertising
and based on representations from the investors that such investors were
acquiring for investment. The securities bear legends restricting the
resale thereof. The Lock-Up Warrants are exercisable for a three year
period at $4.50 per share.
5. STOCKHOLDERS' EQUITY
During the quarter ended March 31, 1998, the remaining 270 shares of Series
C Convertible Preferred Stock were converted, resulting in the issuance of
an aggregate of 1,359,441 shares of common stock.
Additionally, during the quarter, the remaining $3,025,000 of 7%
Convertible Notes were converted, resulting in the issuance of an aggregate
of 1,152,669 shares of common stock. Debt discount of $60,681 was amortized
as additional interest expense on the convertible notes during the quarter
ended March 31, 1998. The unamortized balance of debt discount in the
amount of $4,045,205 and the unamortized balance of deferred issuance costs
of $260,223 were charged to paid in capital upon conversion of the
convertible notes to common stock.
During the quarter ended March 31, 1998, 658,462 Class A Warrants were
exercised resulting in net proceeds to the Company of $1,439,297.
Additionally, during the quarter, 1,000 stock options were exercised
resulting in proceeds to the Company of $2,000.
6. CONSULTANT STOCK OPTIONS
During the quarter ended March 31, 1998, the Company granted immediately
exercisable options to consultants to purchase 1,220,000 shares of common
stock at the market price of the Company's common stock at the date of
grant. The Company recorded a non-cash compensation expense of $1,871,400
during the quarter in connection with the grant of those options.
7
<PAGE>
Item 2. Management's Discussion and Analysis Of Financial Condition And Results
Of Operations.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in this
report.
Material Changes in Results Of Operations
The Company's total revenues increased by approximately 40% from $3,693,000 for
the quarter ended March 31, 1997 to $5,169,000 for the quarter ended March 31,
1998. Contract service income increased during the quarter by 41% from
$3,661,000 in 1997 to $5,169,000 in 1998. The increase in contract service
revenues in 1998 over 1997 is attributable to an increase of approximately one
million dollars in our project in our Oak Ridge office.
Direct job costs increased by approximately 19% from $3,990,000 for the quarter
ended March 31, 1997 to $4,752,000 for the same period in 1998. The primary
elements of such increase in job costs were job salaries and material and
supplies. The increase in job costs was attributable to the increase in contract
service revenues during the quarter.
While total revenues increased by 40% for the quarter, general and
administrative expenses increased 77.5 % from $2,168,000 during the quarter
ended March 31, 1997 to $3,848,000 during the same period in 1998. The increase
in general and administrative expense was attributable to $1.9 million expense
recorded in February, 1998 for options granted to consultants to purchase
1,220,000 shares of common stock of the Company at the market price of the
Company's common stock at the date of the grant.
In addition to its operating income and expenses, the Company reported net
interest expense of $195,000 for the quarter ended March 31, 1998 as compared to
net interest income of $57,000 for the same period in 1997. The decrease in net
interest income/expense was attributable to $124,000 in interest expense
recorded on the convertible notes in 1998.
As a result of the foregoing, the Company reported a loss before taxes of
$3,759,000 and a net loss of $3,359,000 for the quarter ended March 31, 1998 as
compared to a loss before taxes of $2,584,000 and a net loss of $2,134,000 for
the same quarter in 1997.
The net loss attributable to common stock was increased by the preferred stock
dividends $54,000 in 1998 and $29,000 in 1997, and an accounting "deemed
dividend" of $104,000 and $290,000 in 1998 and 1997 arising from the
amortization of the beneficial conversion feature of the Company's Preferred
Stock. The Company is calculating earning per share to comply with the recent
SEC staff position on accounting for securities issued with beneficial
conversion features. This accounting requires that the Company reflect the
difference between the market price of the Company's common stock and the
applicable conversion rate on the convertible preferred stock as a dividend at
the issue date (the beneficial conversion feature totaled $3,330,000 and
$1,109,589 in 1998 and 1997, respectively) and amortize the dividend over a 180
day period from the issue date for the Series B Preferred Stock and four years
for the Series C Preferred Stock.
Material Changes in Financial Condition, Liquidity and Capital Resources.
At March 31, 1998, the Company had working capital of approximately $4.8
million, including a cash balance of $3.7 million. This compares to a working
capital deficit of $1.1 million and a cash balance of $0.6 million at December
31, 1997. The increase in working capital and cash is attributable to the
conversion to common stock of $3,025,000 in notes payable classified as a
current liability at December 31, 1997 and the receipt of net proceeds of
$3,240,000 from the Series C Preferred Stock which was partially offset by the
loss for the period.
Approximately $0.7 million of working capital consisted of unbilled costs and
estimated earnings on ongoing projects. Such amounts are expected to be received
during 1998 as projects progress with all such amounts being payable to the
Company by the completion of such projects.
8
<PAGE>
Also included in the Company's working capital balance at March 31, 1998 was
$0.6 million of surplus equipment inventory (net of a $0.9 million valuation
reserve) held for sale which gross inventory level was identical to that
reported at December 31, 1997. The inventory reflects the Company's sale of
substantially all of its surplus equipment inventory, other than generators, to
UPE in connection with the formation of a marketing alliance with UPE during
1995. The Company's remaining inventory consists of nineteen (19) generator sets
with a total electrical capacity of 242,500 kilowatts per hour (KWH). The
estimated market price of the Company's generator inventory is twelve million
dollars. Twelve (12) of the generators are steam driven and range in size from
12,500 kilowatts to 33,000 kilowatts (KW). Seven (7) of the generators are
diesel driven and range in size from 1,000 to 9,000 kilowatts (KW). These
generator sets should not be considered as obsolete or outdated inventory since
its design and technology has not changed much over the years. They are very
long lead items (15-18 months), experience and project specific and as such they
are not to be compared with disposable items. It is the Company's intent to
incorporate this inventory in future projects.
The Company had available at December 31, 1997, approximately $19,775,000 of
operating loss carry-forwards that may be applied against future taxable income.
$2,350,000 of such losses expire in the year 2010 , $9,225,000 in the year 2011,
and the balance the following year. Based on the reported loss to date it will
take approximately $13.4 million dollars in future taxable income to recover the
reported deferred tax asset of $4,570,000 at March 31, 1998. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible and the net operating losses can be carried
forward. In determining such projected future taxable income, management has
considered the Company's historical results of operation, the current economic
environment with the Company's core industries and future business activities
which the company has positioned itself. Management believes the company will
realize taxable income in future years. However, based on the company's
substantial losses over the past three years, the current contract commitments
in the backlog, and carry forward limitations governed by state, federal and
foreign tax agencies, management believes it is more likely than not that the
Company will not realize its entire net deferred tax asset. A valuation
allowance of $6,757,000 has been established by management as a reduction of the
Company's deferred tax assets of $11,327,000. Management believes that the net
deferred tax asset will be realized through future taxable income, primarily
from the substantial revenue to be derived from projects such as the 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 March
31, 1998.
The Company's accounts receivable decreased by 6.1% from 1997 to 1998. Such
decrease in accounts receivable was attributable to normal seasonal business
activity. Accounts receivable as a percentage of quarterly revenues was a
comparable 74% and 87% in 1998 and 1997, respectively. Year-end receivables as a
percentage of fourth quarter revenue increased substantially from 53.0% in 1994
to 103.5% in 1995 and 88% in 1996. The ratio dropped to 53% at December 31, 1994
because the Company received a $4,184,000 payment on a major contract on
December 23, 1994. If this payment had been received after year end, the ratio
would have been a more comparable 98.4%.
Unbilled revenue as a percentage of quarterly contract income was 0% at December
31, 1993, 31% at December 31, 1994, 56% at December 31, 1995 and 26% at December
31, 1996, 11% at December 30, 1997 and 13% at March 31, 1998. Also, accounts
payable have constantly decreased since 1994 whereas accounts receivable and
unbilled revenues have increased substantially during this period. Prior to
going public in April 1994, most of the Company's revenues were generated in the
private sector. Many of these contracts had substantial initial mobilization
payments and generated positive cash flow during the life of the contract. Since
then the Company has been successful, as a result of its growth strategy, in
obtaining a number of government contracts at major Department of Energy and
Department of Defense sites. This work was obtained as a direct result of
opening three new regional offices. The experience with these contracts has been
negative cash flows until we near contract completion. This is due to the
requirement that we submit a schedule and a schedule of values at the beginning
of the job and bill according to the percent complete of each item in the
schedule of values - not the costs we have incurred. Our jobs of any size are at
a risk of being front end cost loaded when there is little progress to report
(i.e., we cannot bill until the structure is demolished). The Company is aware
of this problem and is trying to remedy it by maximizing mobilization costs in
the schedule of values, requiring subcontractors to bill on the same basis and
aggressively negotiating better (less front end cost loaded) schedules of
values.
9
<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).
Other items impacted the Company's cash flows during 1998. The Company carried
out several non-cash transactions and transactions with subsidiaries not
reflected in the Company's cash flow statements. Among the non-cash transactions
entered into during 1998 were (1) the conversion of $2.7 million of convertible
preferred stock into common stock and (2) the conversion of $3.025 million of
convertible notes payable to common stock. Transactions with subsidiaries during
1998 related principally to the capitalization of various subsidiaries formed to
deploy the Company's Kocee Gas Generator technology. At March 31, 1998, the
Company had loaned $2.8 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 March 31, 1998, the Company had no bank debt and
no significant long-term debt and was funding its operations entirely through
cash on hand and operating cash flow.
In February of 1997, the Company sold 300 shares, or $3.0 million, of Series B
Convertible Preferred Stock to provide funding for the Company's East Dam
project and other projects on which the Company commenced work during the first
half of 1997. The Series B Preferred Shares were convertible into Common Stock
commencing 91 days after issuance at the lesser of (i) 120% of the average
closing price of the Common Stock over the five trading-day period preceding
closing ($2.67) or 82% of the average closing price of the Common Stock over the
five trading-day period preceding conversion for conversion occurring between
the 91st and 120th day following closing, (ii) 110% of the average closing price
of the Common Stock over the five trading-day period preceding closing ($2.475)
or 79% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring between the
121st and 150th day following closing, (iii) 100% of the average closing price
of the Common Stock over the five trading-day period preceding closing ($2.225)
or 76% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring between the
151st and 180th day following closing, and (iv) 100% of the average closing
price of the Common Stock over the five trading-day period preceding closing
($2.225) or 73% of the average closing price of the Common Stock over the five
trading-day period preceding conversion for conversion occurring on or after the
181st day following closing. The Series B Preferred Shares paid a 7% dividend
payable on conversion or at redemption in cash or Common Stock, at the Company's
option. As of March 31, 1998, all of the Convertible Preferred Stock had been
converted resulting in the issuance of 1,552,366 shares of common stock.
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 were convertible into Common Stock at the lesser of (i)
$2.75 per share or (ii) 75% of the average closing bid price of the Common Stock
during the five trading days prior to conversion. The 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 had the right, upon notice to
the holders, to redeem any Convertible Notes submitted for conversion at a price
of $2.75 or less at 125% of the principal amount of such Convertible Notes. The
Convertible Notes paid interest at 7% payable quarterly and on conversion or at
redemption in cash or Common Stock, at the Company's option. In the event that a
registration statement covering the shares underlying the Convertible Notes had
not been declared effective within 90 days or 180 days after the issuance of the
Convertible Notes, the interest rate on the Convertible Notes would increase to
18% and 24%, respectively, from those dates until such a registration statement
became effective. The registration statement was declared effective in January
9, 1998. The amount of additional interest expense was $54,500. As of March 31,
1998, all of the Convertible Notes had been converted resulting in the issuance
of 1,152,669 shares of common stock.
10
<PAGE>
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 was being amortized over the three year life of the debt.
During 1997, $600,000 was amortized and recorded as interest expense. During
1998, $61,000 was amortized prior to conversion of the notes, at which time the
balance was charged to paid in capital.
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 aggregate sales
price of such securities was $3,600,000. Commissions totaling 10% were paid in
connection with the placement. The Series C Preferred Stock is convertible into
Common Stock at the lesser of (i) $4.50 per share 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 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 Warrants were issued in conjunction with
the execution of Lock-Up Agreements by the holders of $3.00 Warrants of the
Company whereby the holders of such warrants agreed not to resell any shares
underlying those warrants prior to July 30, 1998. The Lock-Up Warrants are
exercisable for a three year period at $4.50 per share.
On 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 370,000 Class A
Warrants issued in connection with the Company's initial public offering were
outstanding and exercisable at March 31, 1998. Such warrants are exercisable to
purchase two shares of common stock each for a price of $9.00, or $4.50 per
share. The warrants are exercisable until April of 1999 unless earlier called.
The Company may call the warrants if the closing bid price of the common stock
equals or exceeds $9.00 for a period of twenty consecutive trading days.
Exercise of the warrants would provide gross proceeds to the Company of
approximately $3.3 million and result in the issuance of 0.7 million shares.
There can be no assurance, however, when, if ever, any or all of the warrants
will be exercised.
11
<PAGE>
In addition to its funding requirements to support ongoing operations, the
Company has committed substantial capital resources to implementation of the
Company's strategic initiative known as "Vision 2000." The focus of Vision 2000
is to position the Company as a leading participant in the global energy market
and in the nuclear facility decommissioning and site revitalization market. The
development and initial implementation of Vision 2000 initiatives have required
substantial capital expenditures on the Company's part and can be expected to
continue to require substantial capital expenditures in the future. In
particular, the Company's first energy project, the Miravalle Power Project in
El Salvador, is expected to cost approximately $55 million to develop and will
require substantial funding beyond that which the Company can presently provide.
The Company has entered into an initial agreement with two subsidiaries of
Caterpillar, Inc. pursuant to which it is anticipated that Caterpillar will
participate as an equity investor in the Miravalle Power Project. The Company is
also in discussion with a major project financing source with respect to the
provision of debt financing for the balance of the cost above the contributions
of the Company and Caterpillar. The Company's ability to successfully bring the
Miravalle Power Project on line and implement its other Vision 2000 initiatives
is substantially dependent upon its ability to secure project financing and
other financing. While the Company believes that it will be able to attract
adequate financing to develop the Miravalle Power Project and its other
anticipated projects, the Company has no definitive commitments to provide
financing for those projects and there is no assurance that such financing will
be available. Other than funding Vision 2000 initiatives and the Company's
bonding and other job costs, the Company does not anticipate any substantial
demands on the liquidity or capital resources of the Company during the
following twelve months.
Management believes that the Company's working capital is sufficient to meet the
Company's anticipated needs, other than project financing requirements discussed
above, for at least the following twelve months, including the performance of
all existing contracts of the Company. However, as the Company is presently
pursuing bids on multiple large projects, the Company may be required to seek
new bank lines of credit or other financing in order to facilitate the
performance of jobs if the volume and size of projects being performed by the
Company increases substantially. While the Company is conducting ongoing
discussions with various potential lenders with a view to establishing available
bank lines of credit if and when needed to support future growth, the Company
presently has no commitments from any bank or other lender to provide financing
if such financing becomes necessary to support growth.
Certain Factors Affecting Future Operating Results
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference include the following: possible fluctuations in the growth and demand
for energy in markets in which the Company may seek to establish energy
production operations; intense competition for establishment of energy
production operations in growing economies; currency, economic, financing and
other risks inherent in establishing energy operations in foreign markets;
uncertainty regarding the rate of growth in demand for nuclear decommissioning
and site revitalization services; continued delays in awarding and commencing
contracts; delays in payment on contracts occasioned by dealings with
governmental and foreign entities; changes in accepted remediation technologies
and techniques; fluctuations in operating costs associated with changes in
project specifications and general economic conditions; substantial fluctuations
in revenues resulting from completion and replacement of contracts and delays in
contracts; economic conditions affecting the ability of prospective customers to
finance projects; and other factors generally affecting the timing and financing
of projects. In addition to the foregoing, the following specific factors may
affect the Company's future operating results.
At March 31, 1998, the Company was on-site on projects with a total left in
value of services yet to be performed of $27 million. The largest projects on
which the Company was on-site at March 31, 1997 were the East Dam project in
Southern California with an approximate value of services to be performed of $12
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.
12
<PAGE>
In addition to remediation and plant relocation projects on which the Company is
presently bidding or negotiating, the Company during 1997 entered the energy
production and services market. The Company expects to begin energy projects and
nuclear decommissioning projects at various prospects by as early as the second
half of 1998. In addition to the Miravalle Power Project, the Greifswald Nuclear
Plant Decommissioning and Site Revitalization Project and the Georgia Power
Project described in the Company's Form 10-K for the year ended December 31,
1997, the Company, through May 15, 1998, had entered into preliminary agreements
with respect to the development and operation of (i) a 100-ton per day
industrial waste processing and energy production facility in Taipei, Taiwan;
and (ii) a 1,750 ton per day municipal and industrial waste-to-energy power
plant in Szczecin, Poland.
While the Company anticipates that entry into the energy production and nuclear
facilities decommissioning and site revitalization market will provide
significant opportunities for sustainable growth in both revenues and operating
profits, entry into those markets requires substantial capital commitments and
involves certain risks. Undertaking energy production and nuclear
decommissioning projects can be expected to require capital expenditures of as
little as several million dollars to hundreds of millions of dollars per
project. The Company does not currently have the necessary capital resources to
undertake such ventures without third party financing. The Company anticipates
that it will take on equity partners and seek third party debt financing to
finance substantial portions of the projects which it expects to undertake.
While the Company has been successful in attracting substantial partners in both
its El Salvador energy project and its German nuclear decommissioning/site
revitalization project, the Company has no commitments from potential partners
and financing sources to provide funding for future projects and there is no
assurance that such partners and financing sources will be available, or will
provide financing on acceptable terms, if and when the Company commences future
projects.
Impact of Inflation
Inflation has not been a major factor in the Company's business since inception.
There can be no assurances that this will continue. However, it is anticipated
that any increases in costs to the Company can be passed on to its customers in
the form of higher prices.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IDM ENVIRONMENTAL CORP.
Dated: May 15, 1998 By: /s/ Joel Freedman
-------------------------
Joel Freedman, President
Dated: May 15, 1998 By: /s/ Michael B. Killeen
-------------------------
Michael B. Killeen, Principal
Financial and Accounting Officer
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,668,624
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<RECEIVABLES> 3,846,175
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