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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-23900
IDM ENVIRONMENTAL CORP.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2194790
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
396 Whitehead Avenue, South River, New Jersey 08882
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(Address of principal executive offices)
(732) 390-9550
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(Registrant's telephone number, including area code)
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(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of May 10, 1999, 3,055,295 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, 1999 and
December 31, 1998..................................................1
Consolidated Statements of Operations - For the three months ended
March 31, 1999 and March 31, 1998..................................2
Consolidated Statements of Cash Flows - For the three months ended
March 31, 1999 and March 31, 1998 .................................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........13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................13
SIGNATURES .................................................................14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 57,496 $ 384,292
Accounts receivable 1,362,342 2,572,951
Notes receivable - current 367,198 367,198
Inventory 582,517 582,517
Costs and estimated earnings in excess of billings 1,697,872 1,900,336
Prepaid expenses and other current assets 1,300,542 906,137
----------- ----------
Total Current Assets 5,367,967 6,713,431
Investments in and advances to unconsolidated affiliates 1,687,089 2,454,521
Investment in affiliate, at cost 1,853,125 1,853,125
Debt discount and issuance costs - 16,124
Property, plant and equipment 2,870,383 3,133,404
Other assets 979,925 979,925
----------- ----------
$12,758,489 $ 15,150,530
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 287,520 $ 622,794
Accounts payable and accrued expenses 5,949,148 6,578,070
Billings in excess of costs and estimated earnings 108,698 -
----------- ----------
Total Current Liabilities 6,345,366 7,200,864
Long-term debt 51,189 64,544
----------- ----------
Total Liabilities 6,396,555 7,265,408
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Commitments and Contingencies
Stockholders' Equity:
Common stock, authorized 7,500,000 shares $.01 par value, issued
and outstanding 3,055,295 in 1999 and 2,947,298 in 1998 30,553 29,473
Additional paid-in capital 57,514,142 57,215,536
Convertible preferred stock, authorized 1,000,000 shares $1.00 par value
Series RR, Issued and outstanding 215 shares in 1999 and in 1998,
stated at a conversion value of $1,000 per share 215,000 215,000
Retained earnings (deficit) (51,397,761) ( 49,574,887)
----------- ----------
6,361,934 7,885,122
----------- ----------
$ 12,758,489 $ 15,150,530
=========== ==========
</TABLE>
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The accompanying notes are an integral part of these consolidated
financial statements.
1
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IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the Three Months Ended March 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Contract income $ 2,428,878 $ 5,168,758
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2,428,878 5,168,758
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Cost of Sales:
Direct job costs 2,276,002 4,752,323
---------- ----------
2,276,002 4,752,323
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Gross Profit 152,876 416,435
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Operating Expenses:
General and administrative expenses 1,820,874 3,847,615
Depreciation and amortization 127,515 133,780
Equity in net loss of unconsolidated partnerships 8,711 -
---------- ----------
1,957,100 3,981,395
---------- ----------
Loss from Operations (1,804,224) (3,564,960)
Other Income (Expense):
Interest income (expense) (14,887) (3,176,686)
---------- ----------
Loss before Provision (Credit) for Income Taxes (1,819,111) (6,741,646)
Provision (Credit) for Income Taxes - (400,000)
---------- ----------
Net Loss (1,819,111) (6,341,646)
Preferred Stock Dividends including amortization of beneficial
conversion feature of $0 in 1999 and $104,000 in 1998. 3,763 158,043
---------- ----------
Net Loss on Common Stock ($1,822,874) ($6,499,689)
========== ==========
Loss per Share:
Basic Loss per share ($0.61) ($3.94)
========== ==========
Diluted Loss per share ($0.61) ($3.94)
========== ==========
Basic common shares outstanding 2,966,925 1,649,807
========== ==========
Diluted common shares outstanding 2,966,925 1,649,807
========== ==========
</TABLE>
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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 Month Ended March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss on common stock ($1,822,874) ($6,499,689)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes - ( 400,000)
Depreciation and amortization 150,543 172,031
Amortization of debt discount and beneficial conversion feature 16,124 3,187,742
Dividend on convertible preferred stock 3,763 54,043
Compensation cost of consultant stock options - 1,871,400
Equity in net loss of unconsolidated affiliates 8,711 -
Decrease (Increase) In:
Accounts receivable 1,210,609 248,233
Costs and estimated earnings in excess of billings 202,464 (240,971)
Prepaid expenses and other current assets (394,405) (156,959)
Bonding deposits - 9,157
Increase (Decrease) In:
Accounts payable and accrued expenses (632,686) 535,952
Billings in excess of costs and estimated earnings 108,698 46,551
---------- ----------
Net cash used in operating activities (1 ,149,053) (1,172,510)
---------- ----------
Cash Flows from Investing Activities:
Disposal of property, plant and equipment 112, 478 -
Investment in and advances from (to) unconsolidated affiliates 758,722 (353,255)
Loans and advances from (to) officers - (54,758)
---------- ----------
Net cash provided by (used in) in investing activities 871,200 (408,013)
---------- ----------
Cash Flows from Financing Activities:
Net proceeds from convertible preferred stock issuance - 3,240,000
Long term debt borrowing - 156,238
Principal payments on long-term debt (83,507) (190,630)
Proceeds from exercise of stock options and warrants 34,564 1,441,297
---------- ----------
Net cash (used in) provided by financing activities (48,943) 4,646,905
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (326,796) 3,066,382
Cash and Cash Equivalents, beginning of period 384,292 602,242
---------- ----------
Cash and Cash Equivalents, end of period $ 57,496 $3,668,624
========== ==========
</TABLE>
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The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Continued)
<TABLE>
For the Three Months Ended March 31,
1999 1998
--------- ----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 15,599 $ 214,374
======== ========
Income taxes $ - $ -
======== ========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Repayment of stockholder's loan through issuance of common stock $265,122 $ -
======== =========
Conversion of convertible promissory notes to common stock $ - $3,025,000
======== =========
Conversion of preferred stock to common stock $ - $2,700,000
======== =========
Beneficial conversion feature of convertible preferred stock $ - $3,330,000
======== =========
</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
(Unaudited)
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of IDM Environmental Corp. and all of its wholly owned and
majority owned subsidiary companies. The December 31, 1998 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, 1998. 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, 1999.
2. CONTINGENCIES
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration ("OSHA") issued wilful citations and notification of
penalty in the aggregate amount of $147,000 on the Company in connection
with the accidental death of an employee of one of the Company's
subcontractors on the United Illuminating Steel Point Project job site in
Bridgeport, Connecticut. A complaint was filed against the Company by the
Secretary of Labor, United States Department of Labor on September 30,
1996. A hearing was conducted in the matter in April, 1997. In June 1998,
the Company received a copy of the written decision filed by OSHA's Review
Commission. The Commission vacated the first alleged wilful citation, but
affirmed each of the second and third wilful citations, imposing a penalty
in the amount of $70,000 for each citation. The Company strongly objects to
the Commission's finding on the basis that it cannot be sustained as
matters of fact or law and has filed a timely Notice of Appeal with the
OSHA Review Commission for Discretionary Review, which body has accepted
jurisdiction of the matter on administrative appeal. The Company is
contesting the Citations and Notification of Penalty.
Also in connection with this accidental death, the employee's estate filed
a complaint for wrongful death against the subcontractor and the Company on
February 11, 1997. The estate seeks damages in the amount of $45 million.
The Company is being defended by the subcontractor's insurance carrier
pursuant to the subcontractor's obligation to defend and indemnify the
Company with respect to the actions of its (subcontractor's) employees and
agents. The Company will be fully indemnified for any liability, if any,
for any potential judgement or settlement in this matter and, therefore,
the action is not expected to have any material effect on the Company's
consolidated financial statement.
In July of 1998, the Company, it's subsidiary, Global Waste & Energy and
certain affiliates and officers were named as co-defendants in a cause of
action styled Kasterka Vrtriebs GmbH v. IDM Environmental Corp., et al,
filed in the Court of Queen's Bench of Alberta, Judicial District of
Calgary. The plaintiff, Kasterka, has alleged that the Company and it's
affiliates breached a marketing agreement that had been entered between
Kasterka and Enviropower. The plaintiff has alleged that the defendants
failed to supply the required plans and specifications relating to the
gasification technology originally developed by Enviropower Industries,
Inc., formerly Continental Waste Conversion, Inc., and that, as a result,
Kasterka was unable to manufacture and market gasification units in the
territories designated in the marketing agreement. Kasterka has asserted a
variety of claims for damages in the aggregate amount of approximately $42
million. The Company believes the suit is without merit and intends to
vigorously contest the cause of action.
5
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. CONTINGENCIES (Continued)
In September of 1998, the Company was named as a defendant in a cause of
action styled Balerna Concrete Corporation, et al. v. IDM Environmental
Corp., et al, filed in the United States District Court of Massachusetts
(Case No. 98CV11883ML). The plaintiffs alleged that the Company, and
others, engaged in a pattern of illegal conduct to divert funds from the
plaintiffs through the operation of a concrete finishing business. The
plaintiffs have asserted various claims under RICO, common law fraud,
conversion, breach of contract and others basis seeking damages in an
amount expected to exceed $450,000. The Company believes the suit is
without merit and intends to vigorously contest the cause of action.
3. CONVERTIBLE PREFERRED STOCK SERIES RR
On August 11, 1998, the Company sold 1,500 shares of Series RR 6%
Convertible Preferred Stock. The securities were issued to one accredited
investor. The aggregate sales price of such securities was $1,500,000.
Commissions totaling 10% were paid in connection with the placement. The
securities were offered pursuant to Regulation D. The offer was directed
exclusively to a single accredited investor without general solicitation or
advertising and based on representations from the investor that such
investor was acquiring for investment.
The Series RR Preferred Shares are convertible into Common Stock at the
lesser of (i) $22.50 per share or (ii) 75% of the average closing bid price
of the Common Stock during the five trading days prior to conversion. The
Preferred Shares pay an annual dividend of 6% payable semi-annually or on
conversion or at redemption in cash or Common Stock, at the Company's
option. During the year ended December 31, 1998, 1,285 shares of Series RR
Preferred Stock were converted into 359,981 shares of the Company's common
stock. Subsequent to December 31, 1998, demand for conversion or redemption
of the remaining 215 shares of Series RR Preferred Stock had been
submitted. As of May 12, 1999, negotiations were ongoing with the holder of
the Series RR Preferred Stock with respect to the deferral of payment of
the redemption price or conversion of the remaining shares of Series RR
Preferred Stock pending the receipt by the Company of funding to pay the
redemption price or until the annual shareholders meeting when approval of
conversions above the 360,000 share cap would be solicited.
4. EARNINGS PER SHARE
The Company is calculating earnings per share to comply with the recent SEC
staff position on accounting for securities issued with beneficial
conversion features. This accounting requires that the Company reflect the
difference between the market price of the Company's common stock and the
applicable conversion rate on the convertible preferred stock (note
payable) as a dividend (interest expense) at the issue date and amortize
from the issue date of the convertible security. Earnings per share as
reported for the period ended March 31, 1998 reflects the following:
-- The beneficial conversion feature of the Company's convertible notes
and related warrants was $4,818,750 and was recorded as additional
interest expense from August 13, 1997, the issue date of the
convertible notes, to March 4, 1998, the date the last convertible
note was converted into common stock. $3,106,000 was recorded for the
three months ended March 31, 1998.
6
<PAGE>
5. STOCKHOLDERS'EQUITY
Reverse Stock Split
-------------------
On March 11, 1999, the Company's Board of Directors authorized a 1 for 10
reverse stock split of its common stock effective April 16, 1999 for
shareholders of record at the close of business on April 16, 1999 and
amended the par value of the common stock to $.01. All shares and per-share
amounts in the accompanying consolidated financial statements have been
restated to give effect to the 1 for 10 reverse stock split.
Reverse Split and Extension of Class A Warrants
-----------------------------------------------
In April 1999, the Company's Board of Directors authorized a 1 for 10
reverse split of the Company's outstanding Class A Warrants effective April
16, 1999 and an extended the term of those warrants to April 2000.
Loans by Warrant Holders
------------------------
During November, 1998, the holders of certain $30.00 Warrants, Lock-Up
Warrants and Reload Warrants loaned $671,023 to the Company. The loans may
be credited against the exercise price of those Warrants. As of December
31, 1998, $265,122 was still outstanding. During March, 1999, 97,525 of the
$30.00 warrants were converted into 97,525 shares of common stock. The
exercise price of the warrants paid in full the loan outstanding.
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 the Results of Operations for the Three Months ended March
31, 1999 Compared with Three Months ended March 31, 1998
Revenues. The Company's total revenues decreased by approximately 53% from
$5,169,000 for the quarter ended March 31, 1998 to $2,429,000 for the quarter
ended March 31, 1999. The decrease in contract service revenues in 1999 from
1998 is primarily attributable to a decrease in revenue on the East Dam project,
which produced revenues of approximately $2.2 million during the first quarter
of 1998 as compared to none for the first quarter of 1999.
Cost of Sales. Direct job costs decreased by approximately the same percentage
as the revenue, 52.1%, from $4,752,000 for the quarter ended March 31, 1998 to
$2,276,000 for the same period in 1999. The decrease in job costs was primarily
attributable to completion of the East Dam project. The primary elements of such
decrease in job costs were job salaries and materials and supplies.
General and Administrative Expense. While total revenues decreased by 53.0% for
the quarter, general and administrative expenses decreased 52.7% from $3,848,000
during the quarter ended March 31, 1998 to $1,821,000 during the same period in
1999. The decrease in general and administrative expense was primarily
attributable to a $1.9 million expense recorded in February, 1998 for options
granted to consultants to purchase 122,000 shares of common stock of the Company
at the market price of the company's stock at the date of grant.
Depreciation and amortization. Depreciation and amortization expense decreased
by approximately 4.5% from $134,000 in 1998 to $128,000 in 1999. The decrease in
depreciation and amortization expense was primarily attributable to a decrease
in amortization of deferred issuance costs.
Interest Expense. In addition to its operating income and expenses, the Company
reported net interest expense of $15,000 for the quarter ended March 31, 1999 as
compared to net interest expense of $3,177,000 for the same period in 1998. The
decrease in net interest income/expense was attributable to $3,106,000 in
interest expense recorded on the convertible notes and related warrants in 1998.
This amount represented the amortization of the beneficial conversion feature of
the convertible notes and warrants.
Miscellaneous. During the first quarter of years 1998 and 1999 no provision was
made for post retirement benefits subject to FAS 106.
As a result of the foregoing, the Company reported a loss before taxes of
$1,819,000 and a net loss of $1,819,000 for the quarter ended March 31, 1999 as
compared to a loss before taxes of $6,742,000 and a net loss of $6,342,000 for
the same quarter in 1998.
The net loss attributable to common stock was increased by the preferred stock
dividends totaling $4,000 in 1999 and $54,000 in 1998, and an accounting "deemed
dividend" of $104,000 in 1998 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 SEC staff position on accounting for
securities issued with beneficial conversion features. This accounting required
that the Company reflect the difference between the market price of the
Company's common stock and the applicable conversion rate on the convertible
preferred stock as a dividend at the issue date (the beneficial conversion
feature totaled $3,830,000 in 1998) and amortize the dividend over the 180 day
period from the issue date for the Series B Preferred.
8
<PAGE>
Liquidity and Capital Resources
At March 31, 1999, we had a working capital deficit of approximately $1.0
million and a cash balance of $58,000. This compares to a deficit in working
capital of $.5 million and a cash balance of $0.4 million at December 31, 1998.
The changes in working capital and cash were primarily attributable to a
combination of the loss incurred during 1999 and the affects of (1) a decrease
in accounts receivable of $1.2 million, (2) a decrease in accounts payable of
$.6 million, and (3) a cash flow from the investment and advances from an
unconsolidated affiliate of $.8 million.
Approximately $1.7 million of working capital consisted of unbilled costs and
estimated earnings on ongoing projects. Such amounts are expected to be received
during 1999 as projects progress with all such amounts being payable to the
Company by the completion of such projects.
Also included in the working capital balance at March 31, 1999, 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, 1998. The 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 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 their 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 our intent to incorporate this inventory in future
projects.
At December 31, 1998, we had approximately $30 million of operating loss
carry-forwards that may be applied against future taxable income. $2.3 million
of such losses expire in the year 2010, $9.1 million in the year 2011, $8.6
million in the year 2012 and the balance the following year. Based on our
continuing operating losses, we wrote-off our deferred tax asset during 1998 and
no such assets was reflected at March 31, 1999.
Accounts receivable decreased by 46% from $2.6 million at December 31, 1998 to
$1.4 million at March 31, 1999. The decrease was attributable to the decrease in
revenue from $5.5 million in the fourth quarter of 1998 to $2.4 million on the
first quarter of 1999.
We require substantial working capital to support our ongoing operations. As is
common in the environmental services industry, payment for services rendered are
generally received pursuant to specific draw schedules after services are
rendered. Thus, pending the receipt of payments for services rendered, we 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.
Operations were historically funded through a combination of operating cash
flow, term notes and bank lines of credit. Since April of 1994, we have carried
no bank debt and have funded operations principally through the sale of equity
securities and securities convertible into equity securities. At March 31, 1999,
we had no bank debt and no significant long-term debt and were funding
operations entirely through cash on hand and operating cash flow.
Other than funds provided by operations and the potential receipt of funds from
the exercise of outstanding warrants, we presently have no sources of financing
or commitments to provide financing. A total of approximately 34,000 Class A
Warrants (after giving effect to the April 1999 reverse split) issued in
connection with our initial public offering were outstanding and exercisable at
March 31, 1999. Such warrants are exercisable to purchase two shares of common
stock each for a price of $90.00, or $45.00 per share. The warrants were
originally exercisable until April of 1999 unless earlier called. We declared a
1-for-10 reverse split of our Common Stock and Class A Warrants effective April
16, 1999 and extended the term of the Class A Warrants to April of 2000.
Exercise of the warrants would provide gross proceeds of approximately $3.1
million and result in the issuance of approximately 70,000 shares after giving
effect to the reverse split. However, given the current price of the Company's
Common Stock, it is not expected that the Class A Warrants will be exercised in
the near future.
9
<PAGE>
In November of 1998, we paid $600,000 to acquire a 49% interest in Kortman
Polonia, a Polish company with substantial real estate holdings. Kortmann
Polonia has initiated discussions with various real estate developers and major
U.S. retailers with respect to the sale of various real estate tracts and the
development and leasing of the remaining tracts.
In addition to funding requirements to support ongoing operations, we have
committed substantial capital resources to implementation of the strategic
initiative known as "Vision 2000." The focus of Vision 2000 is to position the
Company as a leading participant in the global energy and waste treatment 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 and can be expected to continue to require
substantial capital expenditures in the future. Direct investments in potential
energy and waste treatment projects undertaken under the Vision 2000 initiative,
excluding corporate overhead allocable to such initiative, totaled approximately
$9 million at December 31, 1998. Capital expenditures and other outlays to bring
proposed projects to an operational state are expected to far exceed the
investment to date. In particular, the proposed El Salvador Power Project, is
expected to cost approximately $55 million to develop and will require
substantial funding beyond that which the Company can presently provide. We have
entered into discussions with several potential equity investors in the El
Salvador Power Project. We are also in discussion with a major project financing
source with respect to the provision of debt financing for the balance of the
cost above the contributions of the Company and its equity partner. Similarly,
in connection with our acquisition of a controlling interest in the Georgia
Power Project, we agreed to perform a technical evaluation on the facility and,
depending on the results of that evaluation, to invest up to $9 million over the
life of the facility for repairs and rehabilitation. The ability to successfully
bring the El Salvador Power Project, and other similar projects, on line, carry
out any required repairs and rehabilitation on the Georgia Power Project and
implement other Vision 2000 initiatives is substantially dependent upon our
ability to secure project financing and other financing. While we believe that
we will be able to attract adequate financing to develop the El Salvador Power
Project and other anticipated projects, we have 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
bonding and other job costs, we do not anticipate any substantial demands on our
liquidity or capital resources during the following twelve months.
At March 31, 1999, we had submitted claims for additional compensation related
to change orders on various projects totaling approximately $15 million. The
most significant of these claims relate to the East Dam Project ($10.8 million)
and a DOE project in Los Alamos, New Mexico which was completed in 1997 ($2.8
million). We are presently aggressively pursuing collection of these claims and
expect that we will be able to collect substantially all amounts claimed if we
continue to pursue such claims through litigation, if necessary. However, it is
possible that we will compromise some of our claims for additional compensation
accepting lesser amounts in favor of a more timely resolution of such claims and
the receipt of funds with respect to the same. Our claim with respect to the
East Dam Project has been approved by our general contractor on the project but
has not, as yet, been approved by the project owner. Our general contractor
agreed in the first quarter of 1999 to release our retainage on the project
($750,000). There can be no certainty as to the amount, if any, which we will
receive with respect to our claims on change orders and when, if ever, we will
receive such amounts.
In March of 1999, our management appeared before a Nasdaq hearing panel
regarding the possible de-listing of our common stock for failure to maintain a
minimum bid price of at least $1.00. In order to address the deficiency in
minimum bid price, we proposed and have approved a 1-for-10 reverse split of our
common stock and warrants to be effective April 16, 1999. On May 7, 1999 NASDAQ
informed us of their decision that because of the Company's failure to comply
with the minimum $5,000,000 market value of public float requirement for the
past 37 consecutive trading days as of that date, that effective with the open
of business of May 11, 1999, the company's securities were transferred from the
National Market to the SmallCap Market, pursuant to the maintenance criteria. We
believe that our working capital, combined with the expected receipt of funds
from the resolution of certain change orders and litigation, is sufficient to
meet our 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 there is no assurance as to
the timing or amount of the receipt of funds from change orders, litigation or
other sources, we may be required to seek new bank lines of credit or other
financing in order to facilitate the performance of jobs. While we are
conducting ongoing discussions with various potential lenders with a view to
establishing available credit facilities, we presently have no commitments from
any bank or other lender to provide financing if such financing becomes
necessary to support operations.
10
<PAGE>
Year 2000 Issue
We recognize the need to ensure that our operations, as well as those of third
parties with whom we conduct business, will not be adversely impacted by Year
2000 software failures. Software failures due to processing errors potentially
arising from calculations using the year 2000 date are a known risk. We are
addressing this risk to the availability and integrity of financial systems and
the reliability of operational systems through a combination of actions
including a review of all software applications, desktop equipment network, and
telecommunications products used by the Company to determine if they are Year
2000 compliant. We will also send questionnaires to our major customers and
suppliers to assess their Year 2000 readiness, review all contacts for year 2000
liability and will develop remediation and contingency plans where appropriate.
We expect to complete this work by this end of the second quarter 1999.
The costs of achieving Year 2000 compliance to date have been immaterial to our
financial position, results of operations or cash flows. We do not anticipate
that additional amounts incurred in connection with our Year 2000 compliance
program will be material to our financial condition or results of operations.
Due to the uncertainties involved, we cannot predict the impact of the Year 2000
on our operations. Achieving Year 2000 compliance is dependent on many factors,
some of which are not within our control, including without limitation, the
continuity of service provided by the government, utilities, transportation
industry and other service providers. Should one of these systems fail, or
should our internal systems or the internal systems of one or more significant
vendors or suppliers fail to achieve Year 2000 compliance, our business and
results of operations could be adversely affected.
Certain Factors Affecting Future Operating Results
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. 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: uncertainty with respect to the continued listing of our
Common Stock on Nasdaq; uncertainty with respect to our ability to finance
continued operating losses and future growth initiatives pursuant to "Vision
2000"; possible fluctuations in the growth and demand for energy and waste
treatment services in markets in which the Company may seek to establish energy
production and waste treatment operations; intense competition for establishment
of energy production, waste treatment and similar operations in growing
economies; currency, economic, financing and other risks inherent in
establishing 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 future operating results.
11
<PAGE>
At March 31, 1999, we had a backlog of approximately $7 million of signed
services contracts as compared to a backlog of approximately $8 million at
December 31, 1998. The largest projects in our backlog at March 31, 1999 were
the Oak Ridge asset recovery project, with an estimated value of services to be
performed of $4 million, and the North Rim project, with an estimated value of
services to be performed of $3 million. The Oak Ridge project began in March
1998 and the North Rim project began in May 1999 with both projects scheduled to
be completed during 1999. However, the elapsed time from the award of a contract
to commencement of services, and completion of performance, may be two or more
years. The backlog at March 31, 1999 does not include services expected to be
rendered under the EWN project in Germany. The total German government funding
for the EWN project is approximately $3.65 billion. We anticipate that we will
perform as much as $700 million of services at the EWN site over a ten year
period. We expect to finalize a comprehensive agreement for the revitalization
of the EWN site during the first half of 1999 and to be performing remediation
services during the second half of 1999. Because of the uncertainty as to the
actual start date for services at the EWN site, no estimate can be made as to
the value of services expected to be rendered during 1999.
In addition to existing contracts, we are presently bidding on, or propose to
bid on, numerous projects in order to replace revenues from projects which will
be completed during 1999 and to increase the total dollar volume of projects
under contract. We anticipate that efforts to bid on and secure new contracts
will focus on projects which can be readily serviced from the regional offices
as well as certain large international plant relocation projects and nuclear
decommissioning projects which we intend to pursue. Our regional offices,
particularly the Oak Ridge, Tennessee 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, we believe that our existing presence on adjacent
projects combined with our proven expertise and resources will allow us to
successfully bid on and perform substantial additional projects based out of our
regional offices.
In addition to remediation and plant relocation projects on which we are
presently bidding or negotiating, during 1997 and 1998 we entered the energy
production and waste treatment services market. We expect to begin energy
production and sales at our Georgia Power Project during the second quarter of
1999 and expect to begin operations at, and to receive revenues from, various
other energy and waste treatment projects and nuclear decommissioning projects
at various sites by as early as the second half of 1999.
While we anticipate that entry into the energy production, waste treatment 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, waste treatment 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. We do not currently have the necessary capital resources to undertake
such ventures without third party financing. We anticipate that we will take on
equity partners and seek third party debt financing to finance substantial
portions of the projects which we expect to undertake. While we have been
successful in attracting substantial partners in carrying out various phases of
the EWN nuclear decommissioning/site revitalization project, we have 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 we commence future projects.
There is substantial uncertain as to our ability to continue to operate as a
result of continuing losses and a lack of currently available resources to fund
future operations. In an effort to deal with these concerns, we are presently
evaluating the sale or other liquidation of various long-term assets which we
believe can provide adequate funding to support future operations. In March of
1999, we agreed to accept $300,000 in full settlement of our note receivable
from UPE relating to the sale of our surplus equipment inventory. $150,000 was
paid at closing with the balance payable in monthly installments over eight
months. We are presently evaluating the sale of properties in Poland and the
potential compromise of our claims for additional compensation on the East Dam
project as sources of additional funds. We believe that adequate funding will be
provided from the efforts described to support our operations for the
foreseeable future. However, in the absence of receipt of adequate funding from
those, or other, sources, our ability to continue to operate at the current
level is in doubt. Impact of Inflation
12
<PAGE>
Inflation has not been a major factor in our business since inception. There can
be no assurances that this will continue. However, it is anticipated that any
increases in costs can be passed on to customers in the form of higher prices.
ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27.1 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 14, 1999 By: /s/ Joel Freedman
-----------------------------
Joel Freedman, President
Dated: May 14, 1999 By: /s/ Michael B. Killeen
------------------------------
Michael B. Killeen, Principal
Financial and Accounting Officer
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