SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File No. 0-23900
IDM ENVIRONMENTAL CORP.
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(Name of registrant as specified in its charter)
New Jersey 22-2194790
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
396 Whitehead Avenue, South River, New Jersey 08882
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (732) 390-9550
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Class A Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
30,552,971 shares of common stock of the Registrant were outstanding as of
March 15, 1999. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based on the closing price on
the Nasdaq National Market, was approximately $10.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended December 31, 1998 are
incorporated by reference into Part III.
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TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS .............................................. 1
ITEM 2. PROPERTIES............................................. 18
ITEM 3. LEGAL PROCEEDINGS...................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................... 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS........................ 20
ITEM 6. SELECTED FINANCIAL DATA................................ 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................... 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...................................... 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................... 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT............................................. 33
ITEM 11. EXECUTIVE
COMPENSATION........................................... 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................. 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................................... 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 34
SIGNATURES
PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 31 of this Form 10-K.
ITEM 1. BUSINESS
IDM Environmental Corp. (the "Company") is a global, diversified services
and project development company offering a broad range of design, engineering,
construction, project development and management, and environmental services and
technologies to government and private industry clients. We utilize those same
capabilities to build, own or lease, and operate energy, waste treatment and
similar facilities. Through our domestic and international affiliates and
subsidiaries, we offer services and technologies, and operate, in three
principal areas: Energy and Waste Project Development and Management,
Environmental Remediation and Plant Relocation.
Environmental remediation services, our historical core business, encompass
a broad array of environmental consulting, engineering and remediation services
with an emphasis on the "hands-on" phases of remediation projects. We are a
leading provider of full-service turnkey environmental remediation and plant
decommissioning services and have established a track record of safety and
excellence in the performance of projects for a wide range of private sector,
public utility and governmental clients worldwide. We have melded our core
expertise in engineering, decommissioning and dismantlement services in
environmentally sensitive settings in an effort to establish a position in the
forefront of the nuclear power plant decommissioning, site remediation and
reindustrialization market.
Plant relocation services encompass a broad array of non-traditional
engineering projects, with an emphasis on plant dismantlement, relocation and
reerection. We have established the Company as a world leader in plant
relocation services employing a proprietary, integrated matchmarking,
engineering, dismantling and documentation program that provide clients with
significant cost and schedule benefits when compared to traditional alternatives
for commencing plant operations.
Our energy and waste treatment project development and management services
("Energy and Waste Services") are provided through IDM Energy Corporation and
local project subsidiaries. We actively entered the Energy and Waste Services
market in 1997 following our acquisition of the rights to utilize and deploy the
proprietary "G-2" solid waste gasification technology and rights under an
accompanying power purchase agreement to deploy that technology in the
construction and operation of a 30 MW waste-to-energy project in El Salvador.
Since our entry into the Energy and Waste Services market, we have aggressively
pursued opportunities to build, own and operate conventional and other energy
and waste treatment facilities. We completed the acquisition of our first
operating energy facility, a 42 MW hydroelectric plant, in the Republic of
Georgia, in the first quarter of 1999. With the change in control of our
distribution partner in El Salvador, our planned energy facility in El Salvador
has been revised to increase the capacity of the facility from 30 MW to 60 MW.
At year-end 1998, we had acquired the plant site and all required construction
permits, had completed all conceptual engineering studies and design of the
plant and were involved in negotiations to sell energy in excess of the 30 MW
presently under contract and to secure a fuel supply and financing for the
project. We expect to finalize all arrangements for the construction and
operation of the expanded energy facility in El Salvador during 1999 with
operating energy facilities expected to be connected to the local grid in El
Salvador in 2000. We have also entered into a memorandum of understanding
pursuant to which construction and operation of a waste treatment facility in
Taiwan is expected to commence during 1999. Additionally, we are aggressively
pursuing additional energy and waste treatment facility "build, own and operate"
opportunities in Asia, Eastern Europe, Central and South America and expect to
bring additional facilities on-line beginning in 1999. In addition to our
current and planned ownership and operation of energy and waste facilities, we
offer a broad range of Energy and Waste Services to government and private
industry clients, including project design and development, engineering, and
operation and management for conventional and other energy and waste treatment
projects. See "Energy and Waste Project Development and Management Services."
The Company is a New Jersey corporation formed in 1978. Our principal
offices are located at 396 Whitehead Avenue, South River, New Jersey 08882,
telephone number (732) 390-9550.
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Business Strategy
Our business has evolved, and continues to evolve, to capitalize on market
opportunities. We have added strategic capabilities and resources through the
years to move the business from its roots as a demolition and deconstruction
company to a full service environmental remediation and plant relocation
services company and, now, an energy and waste treatment project developer,
manager, owner and operator. Supplementing our strengths and capabilities in our
core businesses, we have added strategic investments in technologies, with both
industrial and consumer applications, and real estate holdings.
In 1997, we began to implement a strategic plan to capitalize on our
strengths and market opportunities to position the Company as a global leader in
providing services and technologies in selected high growth markets with an
emphasis on developing recurring revenue streams. The core elements of our
strategic plan are (1) aggressive entry into the global energy production and
waste treatment development and plant management market, (2) narrowing the focus
of our environmental remediation services to emphasize specialized services and
technologies in high growth, high margin niche markets, and (3) emphasizing our
multi-disciplinary expertise and relationships to generate growth in demand for
plant relocation services. We believe that our ability to respond to
opportunities in the market and deploy a broad array of technologies and
expertise in a rapid and cost effective manner provides a competitive advantage
in efforts to achieve the elements of our strategic plan.
Central to our strategy is a commitment to generating long-term recurring
revenue streams as a foundation for our other project specific activities.
International energy production and waste treatment projects are the core of our
planned recurring revenue streams. Our entry into the energy production and
waste treatment markets began with the acquisition, in 1997, of the proprietary
"G-2" waste gasification technology and rights under an accompanying power
purchase agreement to deploy that technology in the construction and operation
of a 30 MW waste-to-energy project in El Salvador. Privatization of the
Salvadorean distribution company, combined with a decision to modify the nature
of the project to a more traditional energy production facility and increase the
capacity of the plant, has resulted in delays in the commencement of
construction of the facility and the anticipated commencement of operations of
the plant. We anticipate that arrangements for the purchase of fuel, sale of
excess energy and financing of the plant will be finalized during 1999 and that
construction of the plant will begin in 1999 with the plant becoming operational
in 2000. On completion, we expect to own an interest in the facility which is
expected to generate substantial ongoing revenues and operating profits for the
Company in addition to development fees which we expect to realize from the
project. In conjunction with our energy project in El Salvador, we expect to
develop expertise in energy project operations and maintenance services which
can be deployed in future energy projects.
In conjunction with our initial efforts in El Salvador, we have identified
a number of potential energy projects, waste treatment projects and
waste-to-energy projects for future development and are committed to identifying
additional project opportunities in the future. We completed the acquisition of
our first operating energy facility, a 42 MW hydroelectric plant, in the
Republic of Georgia, in the first quarter of 1999. We believe that one or more
of the current energy and waste projects under discussion will come to fruition
during 1999 and 2000 and that the commencement of operations in the Republic of
Georgia and, ultimately, in El Salvador will add to our profile as an energy
project developer, owner and operator allowing us to aggressively pursue
additional opportunities to add to our recurring revenue base from the
development and operation of energy and waste treatment projects. See "Energy
and Waste Project Development and Management Services."
Within our historical environmental remediation services offerings, our
strategy is to concentrate our efforts on highly specialized environmental
projects where competition is less intense, profit margins are generally higher
and proprietary technology and engineering expertise are valued at a premium.
With the growth and evolution of the environmental remediation market in the
1990's, various segments of the remediation market have reached maturity and
have become characterized by intense competition and minimal operating margins.
While we continue to be active in the environmental remediation market, we
expect that bidding or negotiating of future remediation contracts will be
limited to special situations in which higher margins can be generated by the
deployment of proprietary technologies and the utilization of specialized
engineering services. In particular, we are aggressively pursuing opportunities
involving the decommissioning and remediation of large commercial nuclear power
facilities, which market we believe to be in an early growth stage.
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In the plant relocation services area, we will continue to emphasize our
ever broadening expertise in an array of project engineering disciplines and the
establishment of strong relationships to drive demand for our services. With our
record of sourcing, dismantling, relocating and reerecting process plants and
other facilities as a timely and cost effective alternative to the construction
of new facilities, we believe that the demand for such services, particularly in
growing economies outside of the United States and western Europe, will continue
to grow and that we will be a leading provider of those services worldwide.
Supplementing our core business operations, we have historically sought
out, and will continue to seek out, opportunities which are compatible with our
existing expertise and capabilities to enhance our recurring and nonrecurring
revenues. Illustrative of such opportunities are (1) our investment in Life
International Products ("Life"), (2) our formation of Seven Star International
Holdings, Inc. ("Seven Star") to distribute Life water products in southeast
Asia and to pursue other opportunities in southeast Asia, (3) acquisition by
Seven Star of a license covering the bottling rights and distribution of the
Life superoxygenation process in southeast Asia, and (4) our acquisition of an
interest in Kortmann Polonia, a Polish company with substantial real estate
holdings. See "Other Services, Products and Investments."
Industry Background
Environmental Services Industry. The environmental remediation industry,
for all intents and purposes, emerged in the 1970's from the enactment of the
"Superfund" legislation in 1976 and, subsequently, the Resource Conservation and
Recovery Act ("RCRA") legislation in 1984. These landmark and far-reaching
pieces of legislation made owners responsible and liable for the environmental
damage caused by the present and past operations and established a strict
framework to regulate certain materials, designated as hazardous by regulation,
from cradle to grave.
Virtually overnight, many corporations faced billions of dollars in
potential liabilities that were nearly impossible to quantify. In addition, many
owners faced significant capital and operational cost increases to bring current
operations into full compliance with the new regulations, or face large
penalties, even potential shutdowns. The impact of these factors to the
corporate "bottom line" forced owners to undertake immediate action to assess
the extent of the problem and quickly move to quantify these liabilities.
Federal regulations mandated a prescriptive and bureaucratic process for
the performance of site cleanups. This process consisted of an
investigative/assessment phase, followed by a detailed engineering and design
phase, finally culminating in the "hands-on" implementation phase. The first
phase consisted of the following major tasks: Preliminary Assessments/Site
Investigations (PA/SI), Remedial Investigations/Feasibility Studies (RI/FS),
Engineering Evaluations/Cost Analysis (EE/CA) and lengthy, often contentious and
controversial, public hearings that would ultimately lead to the formal
selection of a specific Remedial Action Alternative that would be legally set
forth in a Record of Decision (ROD) document following approvals by Federal,
State and local regulators. The implementation of the selected Remedial Action
Alternative would involve two major phases, the Remedial Design phase and the
Remedial Action phase. Each of these phases would be performed by a different
company. The combination of undefined liabilities and the threat of a growing
regulatory enforcement environment, quickly created a market for environmental
services in the billions of dollars annually, that grew at double digit rates.
Throughout the 1980s, the government continued to impose new regulations
and expand the National Priority List (NPL) of "Superfund" sites to more than
1,200 sites. With a seemingly unbounded demand for these services, the industry
saw a quantum increase in the number of companies providing these services.
During this period, billions of dollars were spent for environmental remediation
services, but very few actual cleanups were completed.
As the 1980s drew to a close, the unbridled growth of the industry came to
an abrupt halt as a result of several major factors, including (1) questioning
by government administrators and owners of the validity of a process that cost
so much money and yielded virtually no tangible results, (2) recognition that
the cost associated with achieving regulatory-imposed cleanup standards, that
would require that all sites be restored to "pristine" conditions regardless of
location or future use, would be impossible to bear, even by the government, and
(3) technological and operational advances, including the completion of plant
modifications to reduce or eliminate the generation of hazardous wastes, the
implementation of large scale waste minimization programs, the application of
advanced treatment technologies and the advancements in computer technology that
allow for the cost-effective application of analytical risk assessments to
preclude the need for further cleanup actions.
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As the industry has been transformed in the 1990s, in recent years, the
environmental remediation industry has been characterized by an increasing
number of well-capitalized competitors, reduced government enforcement of
environmental regulations and regulatory uncertainty. This has resulted in
reduced commercial spending on environmental cleanup and intense pricing
competition for hazardous waste cleanup projects. Lower demand in the private
sector has been offset to some extent by new major project opportunities in the
public sector, primarily comprehensive cleanup projects at U.S. Department of
Defense ("DOD") and Department of Energy ("DOE") installations, which require a
broad range of project management and field execution skills, limiting the
number of potential bidders. With the shift in the environmental remediation
industry during the 1990s, successful industry participants must possess (1) the
ability to undertake complex cleanup actions involving multiple contaminants and
multiple contaminated media under a single integrated contract, (2) the ability
to deploy advanced cleanup technologies to reduce the cost and schedule of the
cleanup action as well as eliminate future potential liability for a site owner,
and (3) the ability to incorporate assessment and analytical tools into the
cleanup project as a way to reduce costs, ensure full compliance with the laws
and regulations, ensure safety and maintain the project focused towards
completion. Ultimately, consumers of environmental services in the present
environment look for completion of site cleanups quickly, safely and at the
lowest cost.
With the expanded focus on cleanup of DOD and DOE installations, DOD and
DOE have become the largest customers for environmental remediation services in
the U.S. during the 1990s and are expected to continue to be such for the
foreseeable future. DOE is responsible for managing a program charged with the
cleanup of the vast U.S. nuclear weapons complex. Funding for the DOE nuclear
weapons cleanup program is approximately $5.8 billion annually, of which an
estimated $1 billion is devoted to "hands-on" work. DOD and the Army Corps of
Engineers are responsible for managing a program charged with the cleanup and
downsizing of the vast complex of military bases, command centers, research and
development facilities and defense production plants under the jurisdiction of
the DOD. Funding for the DOD cleanup program, including funding for the Base
Realignment and Closure program, is approximately $2.9 billion annually, of
which an estimated $400 million is devoted to "hands-on" work. Both the DOE and
DOD cleanup efforts have evolved in recent years to place a growing emphasis on
completion of "hands-on" cleanup work and implementation of innovative
privatization, investment recovery, reindustrialization and other measures
designed to complete cleanup projects in the minimum amount of time and at the
lowest net cost to the agencies.
In addition to DOD and DOE cleanup projects, which represent the most
concentrated market segments within the United States for environmental
remediation services, state and local government managed and funded cleanups and
private sector owned and financed cleanups represent distinct markets for
environmental services in the U.S. State and local government cleanup projects
are estimated to represent a $600 million annual market, of which an estimated
$100 million are devoted to "hands-on" work. Domestic private sector cleanup
projects are estimated to represent a $8.6 billion annual market, of which an
estimated $1.7 billion are devoted to "hands-on" work.
Outside of the U.S., the enactment of stringent environmental regulations
in the industrialized nations of Europe and in industrialized and newly
industrialized Pacific Rim nations has created a new and growing market for
environmental remediation services, with international cleanup projects
estimated at $7 billion annually, of which an estimated $1 billion are devoted
to "hands-on" work.
Plant Relocation Services Industry. The plant relocation industry is a
highly specialized niche market business. Large scale plant relocations came
into popularity in the 1970s. The relocation of process plants as a viable
option to acquisition or on-site construction of new facilities has grown
rapidly in recent years with the industrialization of underdeveloped countries,
particularly in Eastern Europe, Asia and South America. It has been our
experience that the acquisition and relocation of existing facilities can cost
one-half or less of the cost of acquiring new facilities. Additionally, as most
large plants and facilities require substantial lead time to manufacture and
deliver, facilities can typically be brought operational in a significantly
shorter time period where a suitable plant can be identified, acquired and
relocated as compared to the time required to manufacture new facilities.
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While information as to the worldwide scope and size of the plant
relocation industry is not readily available, we believe that a substantial
majority of the demand for such services is outside of the United States. We
believe that demand for plant relocation services in Asia has been temporarily
curtailed as a result of the currency crisis experienced in that region during
the second half of 1997 and into 1998. However, we believe that the cost and
time benefits associated with plant relocations will result in strong growth in
demand for those services over the next decade.
The plant relocation market is served by a variety of engineering and
construction firms which typically offer plant relocation services as an
additional service to customers. We believe that we are one of the few
competitors in the plant relocation industry offering those services as a
primary service as opposed to an additional service. Because of our experience
in sourcing and relocating plants and our emphasis on providing plant
relocations as a primary service, we believe that we are widely recognized as a
leader in the worldwide plant relocation services market.
Energy and Waste Treatment Services Industry. Worldwide, the energy and
waste treatment industries are diverse and growing increasingly competitive. We
believe that economic development in the previously underdeveloped nations of
Eastern Europe, Asia and South and Central America has created, and will
continue to produce, growing demand for electrical power in those markets. In
the waste treatment market, a wide variety of factors have contributed to a
growing worldwide demand for innovative and cost-effective long-term waste
treatment and disposal alternatives. The driving forces behind the growth in
demand for such alternatives include: (1) identification of solid waste disposal
as a top priority of the U.S. Environmental Protection Agency ("EPA"), (2) the
enactment of tax credits and disposal taxes in the U.S. as a means of
discouraging land filling in favor of "clean" technologies, (3) the advent of
proven waste-to-energy technologies, (4) the enactment of international
legislation restricting the export of industrial wastes from "rich" nations for
disposal in lesser developed nations, and (5) the increase in waste produced as
a result of the explosive growth in urban areas in developing nations.
While many of the developing nations' energy needs are served by various
independent energy producers, distributors and state, municipal and privately
owned utilities, it is our belief that the energy needs of many of those nations
are not currently met. Likewise, while we believe that waste treatment is a
growing concern globally, economic development in the previously underdeveloped
nations of Eastern Europe, Asia and South and Central America has created, and
is expected to continue to produce, the greatest growth in demand for proven,
safe and cost-effective waste treatment solutions in those markets. While many
of the developing nations' waste treatment and disposal needs are served by
landfilling and various alternatives offered by municipal and private operators,
it is our belief that the waste treatment needs of many of those nations are not
currently met.
In an effort to capitalize on the perceived growth in demand for electrical
power and waste treatment alternatives in developing nations, as well as
opportunities to deploy our proprietary waste-to-energy technology and inventory
of generators, we have actively entered the energy and waste treatment markets.
We have acquired our first energy facility, a hydroelectric plant in the
Republic of Georgia, and have formed alliances and entered into agreements with
various strategic and financing partners and industrial consumers and local
governments to construct, own and operate energy production facilities in
Eastern European and Central American markets and waste treatment facilities in
Taiwan. While other energy producers may currently serve those markets or enter
into those markets, we have entered into, or expect to enter into power purchase
agreements ("PPAs") in each of those markets whereby industrial or governmental
concerns will guarantee the purchase of all or a substantial portion of the
energy produced by such facilities. We believe that the successful commencement
of energy production and waste treatment operations in Georgia and Taiwan will
make additional opportunities to construct and operate energy and waste
treatment facilities available as the industrialization of underdeveloped
countries progresses. See "Energy and Waste Project Development and Management
Services."
While we see substantial opportunities in the international energy and
waste treatment markets, those markets are subject, and will continue for the
foreseeable future to be subject, to a variety of risks and uncertainties. The
energy market and waste treatment market are niche markets which are served by a
relatively small number of large competitors operating in multiple markets and
having substantially greater resources than the Company and by many local
producers and operators having established relationships with local industry and
government. In addition to competitive risks, the operation of energy and waste
treatment facilities and the entry into new markets is subject to local economic
and political risks which may severely effect the demand for energy and waste
treatment services and the ability to finance projects and pay for energy
production and waste treatment services in underdeveloped nations. See
"Competition - Energy Services" and "- Waste Treatment Services."
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Environmental Remediation Services
General. We offer a variety of specialized environmental services with an
emphasis on plant decontamination and decommissioning. Many of the projects
which we undertake are "cross-disciplinary" in nature, involving one or more
elements of dismantling, hazardous waste remediation, radiological remediation,
asbestos abatement, plant relocation and other related services. Our services
are generally offered on a "lump sum" basis wherein we bid to perform a complete
job for a predetermined price or on a "time and material" basis wherein we are
paid certain predetermined hourly or per day rates for services plus a charge
for materials used. We also provide services on a "cost plus" basis where we are
paid for all costs incurred plus a predetermined fee or profit margin without
regard to the time required to perform the job. While the majority of our
projects are priced on a "lump sum" basis, we generally will not bid on such
projects without an in-depth understanding of the scope of such projects.
Many contracts awarded to us require a surety bond. Our ability to obtain
bonding and the amount of bonding required is determined by our net worth,
annual revenues and liquid working capital and the number and size of jobs being
performed. The larger the project and/or the more projects in which we are
engaged, the greater our bonding, net worth and liquid working capital
requirements. The bonding requirements which we must satisfy vary depending upon
the nature of the job to be performed. We generally pay a fee to bonding
companies which typically averages three percent of the amount of the contract
to be performed with the percentage decreasing as our net worth increases.
Because such fees are generally payable at the beginning of a job, we must
maintain sufficient working capital reserves to permit us to pay such fees and
secure bonding prior to commencing work on a project. Additionally, bonding
companies will require us to provide as security for the bonding company liquid
working capital, consisting of cash and accounts receivable, in amounts based on
the size of the contract in question. For projects not involving radiological
remediation, we must generally have available liquid working capital in an
amount equal to 12.5% of the contract amount in order to secure bonding. With
respect to jobs involving radioactive materials, the total bonding available to
us is generally based on having available liquid working capital in an amount
equal to 20% of the contract amount.
Where we have adequate bonding capacity to perform a job, an experienced
member of our management team will analyze the project and develop preliminary
plans, schedules and cost estimates in order to prepare a bid. If we obtain a
contract to perform the job being bid on, the management team, working from the
preliminary plans, schedules and cost estimates, will develop detailed work
plans, schedules and cost estimates to perform the job. Such planning will
include securing proper equipment and materials and staffing the jobs with
properly trained and experienced personnel to perform the job in a safe,
efficient, competent and timely manner.
Actual on-site services are supervised by our employees pursuant to the
detailed plans developed by management. Work is subcontracted to third parties
based upon a large number of factors including safety, efficiency, competency
and scheduling.
In order to assure the safety, quality and timeliness of our projects and
to assure our ability to perform projects, we provide extensive training to our
entire full-time workforce and go to great efforts to retain our trained
workforce, many of whom have been with us since inception. By maintaining an
experienced workforce and cross-training our dismantlers, riggers, ironworkers,
equipment operators, laborers, superintendents and foremen in OSHA 1910.120
hazardous waste procedures, asbestos abatement, radiological remediation and
other related skills, our workforce can address virtually every situation which
may arise in a remediation project. We believe this level of training and
expertise in each of the major areas of remediation is unique to the Company.
In addition to stringent safety and performance standards and procedures
implemented to assure safety, quality and timeliness, we have established strict
guidelines for the handling and disposal of hazardous materials. Such
guidelines, which are intended to protect the Company from potential liability
as a generator or transporter of hazardous materials, include strict policies
that we contract only as an agent for generators to remediate sites, that we
never sign any waste manifest and that all transportation of hazardous materials
from remediation sites be subcontracted to qualified transportation companies
with extensive insurance coverage. See "Regulation."
Our environmental services are primarily provided on a project basis in the
areas of plant dismantling and decommissioning, hazardous waste remediation,
radiological remediation and asbestos abatement.
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Plant Dismantling and Decommissioning. Plant dismantling and
decommissioning is the historical core of our operations and serves as a
foundation for each of our other specialty services. Since inception, we have
provided deconstruction services for numerous Fortune 500 companies with the
bulk of such services being provided in connection with the closure of chemical
process plants. Where facilities have been closed or abandoned due to age,
safety conditions or other factors, we have been called upon to disassemble such
facilities on a piece by piece basis. Unlike the traditional destruction of
buildings using wrecking balls and explosives, the potential release of toxic
chemicals or other hazardous substances produced or present in such facilities
requires custom dismantling services in order to assure safety and proper
identification and disposal of contaminated materials as well as the safety of
the laborers involved. Only skilled craftsmen can safely dismantle contaminated
tanks and structures in government mandated and regulated personal protective
equipment. The scope and nature of deconstruction services provided is carefully
planned based on the nature of the subject facility and the contents thereof as
well as the desires of the owner of the facility. Such services range from
dismantling single buildings and small unenclosed chemical process facilities to
the complete deconstruction of large manufacturing facilities including multiple
buildings and all equipment and machinery within such buildings or on the site.
We typically perform dismantling and decommissioning services in
conjunction with other environmental and/or related services performed by us or
by a team of providers. This multi-disciplinary team approach is expected to
expand beyond decommissioning and hazardous waste remediation and management
with our participation in a team to be formed with Duke Energy to decommission,
clean-up and re-industrialize seven nuclear power plant sites in Germany. See
"Radiological Remediation."
Hazardous Waste Remediation. Hazardous waste remediation encompasses the
clean up of a broad range of hazardous materials. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and RCRA
broadly define "hazardous substances" which, if released, may trigger reporting
and clean up obligations. The list of "hazardous substances" covered by these
laws is extensive and includes a large number of chemicals, metals, pesticides,
radiological materials, biological agents, explosives, toxic pollutants and
other materials which may produce health concerns if released into the
environment. Both CERCLA and RCRA impose stringent reporting, liability and
clean up obligations on owners and operators (including, in some cases, former
owners and operators) of sites where specified levels of hazardous substances
have been released. The most serious of these sites have been designated as
"superfund sites" under CERCLA.
Under CERCLA, the owners and operators of superfund sites at the time of a
release into the environment, and the transporters of hazardous substances, may
be designated as Potential Responsible Parties ("PRP"), many of whom are Fortune
500 companies, and, as such, may be liable for all or part of the clean up cost
at such site without regard to fault or the legality of the PRP's actions. While
PRP's may undertake clean up activities at superfund sites voluntarily or under
government compulsion, the federal government and the EPA may undertake the
clean up of some sites on its own and subsequently seek to identify and impose
liability for the cost of such clean up on PRP's. Additionally, most states have
environmental regulations comparable to, or supplementing, EPA regulations
wherein private parties can be compelled to clean up hazards or the state can
undertake the clean up of such hazards and seek reimbursement from private
parties.
We have extensive experience working with PRP's, including Allied-Signal,
Exide, NL Industries, Johnson Controls, AT&T and others, in the clean up of
hazardous waste sites, including superfund sites. Our services at such sites
have entailed a combination of the dismantling of facilities and actual
implementation of remediation techniques to the subject hazards. Many of the
projects which we have undertaken at such sites are specialty jobs wherein major
architectural engineering firms contract to have us perform complex dismantling
and deconstruction jobs and to perform actual remediation of hazardous materials
in conjunction with the dismantling process. While we maintain existing
relations with numerous private sector industrial PRP's and have performed site
assessment and actual remediation at various sites, we have established, and are
seeking to strengthen, relations with the major architectural engineering firms
which control a significant portion of the larger government projects, including
many superfund sites. Because of the general lack of expertise and experience in
dismantling and deconstruction at most of the major engineering firms, and a
growing reputation with such firms, we have been called on to serve on
remediation teams and have handled all aspects of dismantling and deconstruction
at hazardous waste remediation sites.
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Beginning with our formation of a strategic alliance with Solucorp
Industries Ltd. ("Solucorp") during the third quarter of 1995, we offer soil
remediation services which enhance our hazardous waste remediation services.
Prior to formation of the alliance with Solucorp, we offered hazardous heavy
metal soil remediation services on a limited basis because of our belief that
existing soil remediation technologies were unproven and not cost-effective.
Solucorp has developed a Molecular Bonding System ("MBS") soil remediation
technology utilized in the stabilization of hazardous heavy metal contaminated
soils, sludges and other media.
In 1996, we further expanded our hazardous waste services with the
acquisition of a license from Life pursuant to which we acquired an exclusive
license to market and employ Life's patented superoxygenation technology for
long term bioremediation of contaminated groundwater in the United States,
Canada and Mexico. Life's superoxygenation process is designed to enhance
bioremediation of contaminated groundwater by increasing the oxygen content and
the time such oxygen will remain in water as compared to traditional methods of
oxygen injection. Our license runs for a period of twelve months from the
delivery by Life of a commercially viable unit subject to renewal for successive
terms provided that we meet certain minimum revenue requirements.
Radiological Remediation. Radiological remediation services consist
primarily of the decontamination and dismantling of facilities employing or
producing radioactive materials and the removal and disposal of radioactive
materials. Typically, such services are utilized by utility companies which
operate nuclear plants, universities and other research facilities which utilize
radioactive isotopes in a variety of research projects, and the DOE and DOD
which oversee nuclear weapons production.
Utility companies have now operated nuclear plants for more than 30 years.
Because of a combination of intervention of activists, worldwide competition for
electricity customers brought about by a growing deregulated market, strict
government oversight and high operating costs, many nuclear generating
facilities have been prematurely closed. As other nuclear facilities continue to
age and public skepticism as to the safety of such facilities remains high,
additional plants are expected to close. Due to the nature of these facilities,
utility companies are expected to seek experienced dismantling and remediation
specialists to decontaminate, dismantle and decommission such facilities and to
properly handle and dispose of radioactive waste.
Universities and other research facilities also operate nuclear reactors
and utilize radioactive isotopes in research and teaching. With a decline in the
enrollment in nuclear engineering departments in recent years the utilization of
nuclear reactors and related materials in teaching has declined to the point
that some programs have been dropped or significantly curtailed. Even where
research is continuing at universities and in industry, the use of isotopes over
extended periods has created, and is expected to continue to create a market for
the disposal of radioactive materials and the decontamination of facilities. In
order to safely deal with inactive reactors and radioactive contamination,
industry and universities, sometimes under government direction, are seeking
experienced specialists to remove, decontaminate and/or dispose of abandoned
facilities and contaminated materials in and around abandoned or functioning
facilities.
Finally, the DOD and DOE oversee the operations and are responsible for the
clean up of weapons facilities across the country. Extensive remediation
activities are underway and are expected to be required for many years to come
as these facilities are closed as a result of sharply reduced nuclear weapons
production following the end of the Cold War. As with other owners and operators
of facilities having radioactive waste and contamination, the federal government
has sought, and is expected to continue to seek, experienced specialists to
decontaminate and dismantle such facilities and to remediate and dispose of
radioactive waste in a safe manner. We have skilled personnel with the necessary
experience and training to dismantle these structures in a safe, efficient and
regulatory compliant manner.
We believe that radiological remediation is the greatest potential growth
area within the environmental services industry. While the asbestos abatement
and general hazardous remediation markets have matured resulting in slower
growth in demand for those services, we believe that the greatest growth in the
radiological remediation market lies ahead. The DOD and DOE in recent years have
pressed site managers for clear progress in actually cleaning up these sites vis
a vis studying the problem. Additionally, a major market exists at nuclear
facilities in other countries, including former Soviet-bloc countries and states
in which nuclear facilities were the prevalent sources of power.
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We believe that we are well positioned to participate in the future
remediation of such facilities. We are presently on site at DOD and DOE
locations, including, among others, the Oak Ridge East Tennessee Technology Park
(the "Oak Ridge Project").
Our radiological and decommissioning services are also expected to be
deployed in connection with the provision of radiological remediation services
for six VVER 440 nuclear power plants and one small reactor plant in Germany. A
team led by Duke Energy has been selected to participate in the privatization
and re-industrialization of those sites in conjunction with the performance of
radiological remediation services. Under the terms of the project, the German
government will transfer to the Duke led team control of a state-owned
corporation, Energiewerke Nord ("EWN"), established to undertake the
decommissioning and waste management of the facilities. In addition to
decommissioning and clean-up activities, the team will revitalize and
re-industrialize the sites with the objective of creating a minimum of 1,500 new
jobs at the site and in the Greifswald and Mecklenburg Vorpommern regions. Work
involving reindustrialization of the site has commenced. Contract negotiations
for the acquisition of the state-owned corporation are ongoing and management
anticipates that a comprehensive agreement will be finalized during the second
half of 1999. Project engineering is expected to begin immediately after
execution of a definitive agreement with the decommissioning and remediation
work expected to last approximately 10 years. The German federal government has
established a reserve of DM 6.209 billion (approximately $3.65 billion) to
finance the project. The project also enjoys the support of state and local
governments which, among other things, have agreed to provide necessary
infrastructure improvements and other economic benefits to promote the
re-industrialization of the sites.
In August 1998, we entered into a Memorandum of Understanding (the
"Magellan MOU") with Magellan Biotechnology, a unit of a Taiwanese-American
high-technology holding company, which calls for the construction of an
aquaculture complex at the EWN site. Under the Magellan MOU, it is anticipated
that we will provide construction and management services relating to the
refurbishment of the buildings which will house the complex and site
infrastructure as well as providing certain equipment and materials to support
the planned operations. It is anticipated that the aquaculture complex will be
developed in two phases, beginning with a test phase designed to demonstrate the
viability of the facility followed by construction of a large scale
indoor/outdoor production facility. Construction activities on the test phase of
the aquaculture complex are expected to begin during the second half of 1999.
The total cost of developing the facility is estimated at $25 million.
In conjunction with our undertaking to revitalize and re-industrialize the
EWN site and attract jobs, during 1998, we formed a consortium with IVO
Energienlagen GmbH ("IVO"), a leading Scandinavian utility company, relating to
the planned construction and operation of a power plant at the EWN site. In
September 1998, the government of Mecklenburg Vorpommern announced that a basic
agreement and land contract had been entered into with the IDM/IVO consortium
which calls for the development and construction of a Combine Cycle Power Plant
at the EWN site which will initially produce 750 MW. With future expansion, we
expect to increase the capacity of the plant to 1,700 MW. The commencement of
construction of the power plant is subject to execution of final documentation
and satisfactory financing arrangements. Additionally, the various rights and
responsibilities of IDM and IVO relative to the development and operation of the
plant have not, as yet, been finalized. Subject to finalization of the foregoing
contractual matters, the power plant is expected to be operational by 2003. We
anticipate that IVO will assume all responsibility for development and financing
of the proposed power plant. We expect to perform other revitalization functions
necessary to support the IVO plant and expect to realize revenues from both our
revitalization efforts to support the plant and development fees relating to our
efforts to bring the IVO plant to the EWN site.
Asbestos Abatement. The EPA, and most, if not all, states, have enacted
rules and regulations governing the emission of asbestos during the renovation
or demolition of facilities as well as during manufacturing and waste disposal
operations. These regulations have effectively required inspection for and/or
abatement of asbestos prior to or in conjunction with the renovation or
demolition of buildings. Requirements imposed by real estate lenders and
practical considerations as well as disclosure laws relating to real estate
transactions have effectively resulted in asbestos inspection and, where
appropriate, abatement as a condition of most conveyances of real estate.
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We provide site assessment, planning and asbestos abatement services to
property owners desiring to remodel or sell properties or abate existing
asbestos on site for health and liability reasons. Because the handling and risk
associated with the presence of asbestos varies depending upon the use, volume
and nature of the asbestos present, we will evaluate the appropriate means of
abatement and develop a detailed plan based on such evaluation. The abatement
process may range from encapsulation of exposed asbestos to the actual physical
removal and disposal of the asbestos containing materials on the site. Such
materials may include thermal insulation used on boilers, tanks, hot and cold
water systems and heating, ventilation and air conditioning systems, surfacing
materials used for acoustical, decorative or fireproofing purposes (asbestos
sprayed or trawled on walls, ceiling and structural members) and other materials
such as floor tiles, ceiling tiles, roofing felt, concrete pipe, outdoor siding
and fabrics.
Upon development of a plan of abatement in compliance with applicable state
and federal regulations, our work crew, wearing protective clothing, head gear
and breathing apparatuses, will physically remove asbestos-containing materials
from the building. The building areas in which abatement work is being performed
are sealed off and blowers or ventilation equipment are utilized to create
negative pressure in the building to prevent the escape of airborne asbestos
from the building. Upon completion of the abatement process, the asbestos
removed is disposed of in accordance with applicable regulations by
transportation and disposal companies.
Plant Relocation Services
In addition to our historical dismantling and decommission services, we
have developed as a primary service offering the relocation and re-assembly of
plants. Plant relocation and re-erection projects are typically bid on, planned
and engineered in a manner similar to our dismantling and decommissioning
services taking into account the special demands associated with transporting
and re-erecting such facilities. We have developed proprietary techniques and
extensive expertise for dismantling, matchmarking, relocation engineering,
packaging, documentation and re-erection of entire plants. See "Environmental
Services - General."
With the growth in the economies of numerous third-world countries and
other countries which were historically non-industrialized, we believe
significant opportunities are available in the worldwide plant relocation and
re-assembly market. Because of the time and cost savings associated with
relocating existing plants as compared to purchasing and starting-up new plants,
we believe that growing industrial concerns in South and Central America,
Pacific Rim and Eastern European countries will view the acquisition and
relocation of existing plants as the preferred method of expanding operations.
Typical of such opportunities was our completion during 1996 of the acquisition,
relocation and refurbishing of a 1,400-ton-per-day ammonia plant from Lake
Charles, Louisiana to Karachi, Pakistan, a site of the largest fertilizer
producer in Pakistan.
Energy and Waste Treatment Project Development and Management Services
In 1996, we laid the groundwork for entry into the energy and waste
treatment markets. In evaluating the potential markets for our power generation
equipment inventory and opportunities for future growth and establishment of
recurring revenue streams, management identified the demand for energy and waste
treatment in emerging markets as a business opportunity with the potential to
meet each of our criteria in those regards.
After evaluating various options for entry into the energy production
market, we acquired a license from Continental Waste Conversion, Inc. ("CWC")
pursuant to which we were granted the exclusive worldwide rights (excluding
Canada) to CWC's proprietary gasification technology that can convert municipal
solid waste into electrical energy. As a result of the bankruptcy of CWC, in
1998 we acquired full and exclusive worldwide title to the CWC technology.
Through that investment, we now offer state-of-the-art solutions to municipal
waste and energy concerns worldwide. We believe that this gasification
technology offers a number of significant advantages over existing
waste-to-energy or other gasification technologies, including the production of
substantially reduced volumes of secondary waste ash and compliance with the
most stringent international clean air standards.
With the acquisition of the rights to deploy the CWC waste-to-energy
process and a strategic inventory of surplus generators, we began to actively
pursue energy production and waste treatment opportunities through the
establishment of strategic alliances and discussions with industrial concerns
and governmental entities in Central America, Eastern Europe and Asia.
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Our international energy production and waste treatment operations and
development activities are anticipated to principally involve the development,
acquisition, financing, promotion, and management of energy and waste treatment
projects in emerging markets. Our objective is to develop, finance, own and
manage integrated energy and waste treatment projects worldwide through the
utilization of our portfolio of products and services.
Our initial international activities are expected to include management of
direct and indirect ownership interests in and/or operation of energy plants in
El Salvador and the Republic of Georgia and a waste treatment facility in
Taiwan. As of the first quarter of 1999, we had completed the acquisition of our
first operating energy facility in the Republic of Georgia and were involved in
energy and waste treatment projects in early stages of development, financing or
construction in numerous other countries. The following is a brief description
of our energy and waste treatment projects which are in varying stages of
development, financing or construction; thus the information set forth below is
subject to change. In addition, these projects are, to varying degrees, subject
to all the risks associated with project development, construction and financing
in foreign countries, including without limitation, the receipt of permits and
consents, the availability of project financing on acceptable terms,
expropriation of assets, renegotiation of contracts with foreign governments and
political instability, as well as changes in laws and policies governing
operations of foreign-based businesses generally. Other than as noted below,
there can be no assurances that these projects will commence commercial
operations.
Georgia Energy Projects. In November of 1998, we, through our wholly-owned
subsidiary, IDM Energy Corporation, signed a Protocol of Intention ("POI") with
the Ministry for Fuel and Energy ("MFE") of the former Soviet state of Georgia,
replacing a previously executed POI, under which we will have the right to
acquire, design, construct, own and operate electric power facilities in the
region.
Our initial efforts in the Republic of Georgia have resulted in the
acquisition, during the first quarter of 1999, of a controlling interest in
Zages, Ltd. ("Zages"). Zages operates a 42 MW hydroelectric power plant pursuant
to a lease of that facility from the Georgian government (the "Georgia Power
Project"). Zages has entered into an Electricity Sale and Purchase Agreement
with Telasi, the electricity distribution company of Tblisi, Georgia, pursuant
to which Zages will sell and Telasi will purchase all electricity generated by
the plant for a period of six years commencing April 1, 1999. Pursuant to the
terms of our acquisition of Zages, we made an investment in Zages and have
undertaken to perform a technical examination of the plant. Zages will, in turn
attempt to negotiate an extended lease on the plant in an effort to extend the
existing five year roll-over lease into a fixed term twenty-five year lease.
Depending on the outcome of our technical examination and Zages' efforts to
extend the lease on the plant, IDM Foreign Power Incorporated, our indirect
majority-owned subsidiary, may invest, over the operating life of the plant, up
to $9 million of additional funds for rehabilitation and repair of the plant.
Telasi, which is 75% owned by AES Corporation, a leading global power
company, serves approximately 370,000 industrial, commercial and residential
customers, or roughly half of the total power needs of Georgia.
El Salvador Energy Project. In conjunction with our 1996 acquisition of a
license to exploit CWC's proprietary gasification technology, we acquired the
rights of CWC under a December 1995 Power Purchase Agreement (the "El Salvador
PPA") with Compania de Alumbrado Electrico de San Salvador, S.A. de C.V.
("CAESS") as part of a planned 30 MW waste-to-energy project in San Salvador,
the capital of El Salvador. An amended PPA was signed by CAESS and ourselves,
subject to ratification by the directors of CAESS, in 1997. Under the amended
PPA, the nature of the proposed plant was changed from a waste-to-energy
facility to a thermal facility with a capacity of 45 MW.
CAESS, which was a state-owned Salvadorean electric power distribution
company, was privatized in January of 1998 and, subsequently, a 50% interest in
CAESS was sold by the new owners to a U.S. power company. As a result of the
privatization of CAESS and the subsequent transfer of a substantial ownership
interest in CAESS, the amendment to the El Salvador PPA increasing the capacity
to 45 MW was never ratified by the board of CAESS. CAESS has, instead, entered
into discussions with us with respect to the execution of a new power purchase
agreement for 60 MW to take the place of the original 30 MW PPA.
Simultaneous with the negotiations relating to the amendment to the El
Salvador PPA, and during the delays associated with the change in control of
CAESS, we revised our plans to construct and operate an energy facility in El
Salvador to increase the capacity of the facility from 30 MW to 60 MW (the "El
Salvador Power Project"). By year-end 1998, we had acquired the plant site and
all requisite construction permits, had completed all conceptual engineering
studies and design of the plant and were involved in negotiations to sell energy
in excess of the 30 MW presently under contract and to secure a fuel supply and
financing for the project. We expect to finalize all arrangements for the
construction and operation of the expanded energy facility in El Salvador during
1999 with operating energy facilities expected to be connected to the local grid
in El Salvador by 2000.
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During 1998, we entered into an initial agreement with a major heavy
equipment manufacturer, pursuant to which it was anticipated that the
manufacturer would participate as an equity investor and lead contractor on the
El Salvador Power Project. With the change in control of CAESS and the
accompanying changes in the anticipated size and nature of the El Salvador Power
Project and delays related thereto, the obligations as between IDM and the
manufacturer lapsed. Upon finalizing arrangements for the sale of the full 60 MW
from the plant, we will attempt to secure a new financing commitment for the
project. Construction of the project is expected to commence upon finalizing the
debt financing arrangements. The plant is expected to be operational within
twelve months after commencement of construction.
Taiwan Waste Treatment Project. We have entered into a joint venture with a
leading Taiwanese waste management company to jointly develop a waste treatment
facility (the "Taiwan Treatment Plant") in Taipei, Taiwan.
The Taiwan Waste Treatment Plant was originally planned as a
100-tons-per-day industrial waste processing and energy production facility.
Plans for the Taiwan Waste Treatment Plant were altered during 1998 to develop
the facility in multiple phases, to increase the capacity of the plant to
200-tons-per-day and to convert the nature of the plant from a waste-to-energy
facility to an industrial waste treatment facility. The cost of developing the
Taiwan Waste Treatment Plant, estimated at $27 million, is expected to be funded
through conventional project financing. Several leading Taiwanese financial
institutions have expressed a strong interest in financing the project. The
venture would be among the first privately owned industrial waste treatment
facilities in Taiwan.
We are working with our Taiwanese joint venture partner to prepare a
detailed plant design. The project is expected to utilize a unique, proprietary
and commercially proven technology for the treatment of a wide range of waste
streams. Necessary steps have been initiated to secure environmental and
regulatory permits. We presently anticipate that preliminary commitments for
project financing will be secured during the first half of 1999 and that phase
one of the facility, a 10-tons-per-day demonstration unit, will be operational
by the third quarter of 1999, with phase two, a 50-tons-per-day unit, expected
to be operational by the end of 1999 and completion of phase three, bringing the
capacity of the plant to 200-tons-per day, expected in mid-2000.
Other Energy and Waste Treatment Projects. During 1998, we entered into
agreements with respect to the proposed joint development of energy projects in
Bolivia and India. We have entered into negotiations, and preliminary agreements
in India, to sell energy from those projects and have begun the licensing and
regulatory process in both countries. Present plans call for the construction
and operation of three 40 MW plants in Bolivia and, initially, a 15 MW plant in
India. Commencement of operations of each of these proposed facilities is
subject to finalizing agreements to sell energy from the plants, acquire fuel
for the plants and secure financing for construction of the plants. We intend to
seek conventional project financing for each of the plants and may seek equity
investors to minimize our investment requirements. Each of these plants is
expected to be operational within 12 months after finalizing financing for the
plant construction.
During 1998, we also entered into a series of agreements pursuant to which
we are acting as developer of various energy facilities in Germany and Poland in
which we expect to generate development fees, retained interest and/or a
combination of fees and retained interests. Included in such development
activities were our efforts in Germany pursuant to which IVO has agreed to
construct a power plant at the EWN site. See "Energy and Waste Treatment Project
Development and Management Services." We also entered into three separate
agreements pursuant to which we obtained development rights and, potentially
equity interests, in multiple power plants, an electric transmission and
distribution grid and a district heating loop in Poland. We intend to bring in
major European utility companies as controlling equity partners in each of these
projects while retaining a minority interest in the projects or receiving
development fees for our efforts.
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We are also in various stages of discussions in countries in Asia, Eastern
Europe, South and Central America with respect to the development and/or
acquisition, and operation of additional energy and waste treatment facilities.
Risk Factors. Our proposed non-domestic operations are subject to the
jurisdiction of numerous governmental agencies in the countries in which
projects are expected to be located with respect to environmental and other
regulatory matters. Generally, many of the countries in which we expect to do
business have recently developed or are in the process of developing new
regulatory and legal structures to accommodate private and foreign-owned
businesses. These regulatory and legal structures and their interpretation and
application by administrative agencies are relatively new and sometimes limited.
Many detailed rules and procedures are yet to be issued. The interpretation of
existing rules can also be expected to evolve over time. Although we believe
that our operations are, and will be, in compliance in all material respects
with all applicable environmental laws and regulations in the applicable foreign
jurisdictions, we also believe that the operations of our proposed projects
eventually may be required to meet standards that are comparable in many
respects to those in effect in the United States and in countries within the
European Community. In addition, as we acquire additional projects in various
countries, we will be affected by the environmental and other regulatory
restrictions of such countries.
Other Specialty Project Engineering Services.
In addition to our principal services, we routinely evaluate projects
requiring specialized engineering services of a multi-disciplinary nature. Where
projects require the extension of specialized engineering services across
disciplines and where we possess the disciplines required to perform those
services, we will attempt to negotiate to provide a package of specialized
services. We typically seek opportunities to perform specialty engineering
services on projects where the need to deploy expertise in multiple fields
provides favorable margins.
While our specialty project engineering services are not generally subject
to being categorized based on their non-recurring nature, typical service
offerings have included providing drilling and grouting services on the East Dam
reservoir project in California (the "East Dam Project").
Other Services, Products and Investments
We have entered into selected strategic investments and undertakings in
conjunction with, and which supplement, our core operations. Those investments
and undertakings, as of the first quarter of 1999, include (1) an equity
investment in Life, (2) our formation of Seven Star to distribute Life water
products in southeast Asia and to pursue other opportunities in southeast Asia,
(3) acquisition by Seven Star of a license covering the bottling rights and
distribution of the Life superoxygenation process in southeast Asia, and (4) our
acquisition of an interest in Kortmann Polonia, a Polish company with
substantial real estate holdings.
Life International Products, Inc. At the time of our initial acquisition of
a license from Life to utilize it's patented superoxygenation process in
bioremediation, we also acquired a ten percent (10%) equity interest in Life for
$1.3 million. In 1997, we invested an additional $375,000 in Life and, in 1998,
we acquired additional shares of Life from Joel Freedman, our President and
Chief Executive Officer, for $178,125.
Seven Star International Holding, Inc. During 1997, we acquired a fifty
percent (50%) interest in Seven Star, a BVI company. We contributed $300,000 to
the capital of Seven Star and Jin Xin (Holding), Inc. ("Jin Xin") contributed
$300,000 to Seven Star. Seven Star was formed to exploit opportunities to
deliver western products and technologies in Asia.
In December of 1997, Seven Star entered into its initial venture agreeing
to acquire the exclusive rights to distribute beverages incorporating, and
otherwise exploit, Life's superoxygenation process in a territory consisting of
the People's Republic of China (including Hong Kong), Taiwan, Indonesia and
Singapore. Pursuant to the terms of the license, Seven Star paid a minimum
guarantee payment in the amount of $400,000 to Life and will pay ongoing
royalties based on a percentage of revenues realized from licensing of the Life
process, subject to certain minimum royalty requirements. Seven Star intends to
distribute Life products directly in selected territories and to sublicense the
Life process in other territories. Sublicensing arrangements are expected to
generate initial sublicensing fees and ongoing minimum royalties from potential
sublicensees in amounts sufficient to recoup at least the minimum guarantee
payment paid by Seven Star as well as the minimum ongoing royalties.
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In December of 1997, Seven Star entered into an initial sublicense
agreement with Zheng Zhou Wo Li Beverage Limited ("Zheng Zhou Beverage")
covering a territory consisting of Zheng Zhou, Henan, in the People's Republic
of China and providing for a minimum guarantee payment of $600,000 and minimum
royalty requirements in excess of those under Seven Star's license with Life.
Zheng Zhou Beverage has begun the development of a bottling plant in Henan and
expects to begin bottling and distribution operations during the first half of
1999.
Seven Star's ability to successfully exploit the Life process and other
opportunities in Asia is subject to the numerous risks associated with operation
in Asia, including the recent currency crisis which has impaired the growth
prospects in the region, as well as the risks and uncertainties associated with
identifying, doing business with, and enforcing contracts with Seven Star's
prospective local partners and sublicensees.
Kortmann Polonia. In conjunction with our ongoing efforts to develop
waste-to-energy and other energy projects in Poland, during 1998, we were
presented with an opportunity to acquire a controlling interest in Kortmann
Polonia. Kortmann Polonia is a Polish corporation with valuable real estate
holdings. In November of 1998, we entered into an agreement to acquire a 75%
interest in Kortmann Polonia for $600,000. Shares evidencing 49% ownership of
Kortmann Polonia were transferred in November of 1998. Transfer of additional
shares bringing our interest in Kortmann Polonia to 75% is awaiting final
governmental approval.
Kortmann Polonia's real estate holdings consist of three separate tracts,
covering an aggregate of approximately 75 hectares, known as the "Medjew Site",
the "Koblaskowa Site" and the "Stepnjca Site".
The Medjew Site consists of approximately 30 hectares located on Lake
Medjew, near Szczecin, Poland. The Stepnjca Site consists of approximately 15
hectare located on the River Oder. Our present plans are to sell the Medjew Site
and the Stepnjca Site to developers.
The Koblashowa Site consists of approximately 33 hectares located 5 km from
downtown Szczecin, Poland. The site is located directly on the Autobahn
connecting Szczecin to Berlin, Germany immediately past the Polish-German
border. Kortmann Polonia has signed an agreement with Skyline Corporation, a
U.S. shopping mall developer, to develop an indoor shopping mall on the site.
Our present plans are to pursue development of a mall at the Koblashowa Site
with a view to retaining a minority interest in the mall and, possibly,
generating development fees.
We expect that from time to time in the future we will have opportunities
to invest or participate in ventures outside of, but connected to, our core
businesses. We will evaluate any such opportunities and, where we deem the
potential of such opportunities to merit participation or investment, we may
enter into additional ventures outside of our core businesses.
Marketing
In marketing our services, we rely principally on the efforts of our
operating and executive management team, particularly our Vice President of
Business Development, who regularly call upon existing and prospective
customers. Through the efforts of our management, we have established working
relationships with numerous Fortune 500 industrial concerns as well as major
national architectural engineering firms, the DOD and the DOE and many smaller
and medium size industrial and engineering firms worldwide. We supplement the
efforts of our management by advertising in international trade publications,
direct mailings to selected industrial and engineering firms, and participation
in industry conferences and trade shows.
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Regulation
Environmental Regulations. We and, in particular, our clients, are subject
to extensive and evolving environmental laws and regulations. These laws and
regulations are directly related to the demand for many of the services we offer
and often subject us to stringent regulation in the conduct of our operations.
The principal environmental legislation affecting our business and our clients
is described below.
-- Resource Conservation and Recovery Act of 1976. RCRA regulates the
treatment, storage and disposal of hazardous and solid wastes. RCRA has,
therefore, created a need generally for some of the types of services we
provide. The 1984 Hazardous and Solid Waste Amendments to RCRA ("HSWA") expanded
RCRA's scope by providing for the listing of additional wastes as "hazardous"
and lowering the quantity threshold of wastes subject to regulation. HSWA also
imposes restrictions on land disposal of certain wastes, prescribes more
stringent management standards for hazardous waste disposal sites, sets
standards for underground storage tanks and provides for "corrective" action
procedures. Under RCRA, liability and stringent management standards are imposed
on a person who is an RCRA permit holder, namely, a "generator" or "transporter"
of hazardous waste, or an "owner" or "operator" of a waste treatment, storage or
disposal facility. Both the EPA and states with authorized hazardous waste
programs can bring several types of enforcement actions under RCRA, including
administrative orders and actions seeking civil and criminal penalties. RCRA
also provides for private causes of action as an additional enforcement tool.
-- Comprehensive Environmental Response, Compensation and Liability Act of
1980. CERCLA , also known as the Superfund Act, addresses cleanup of sites at
which there has been or may be a release of hazardous substances into the
environment. CERCLA assigns liability for costs of cleanup and damage to natural
resources to any person who, currently or at the time of disposal of a hazardous
substance, owned or operated any facility at which hazardous substances were
deposited, to any person who by agreement or otherwise arranged for disposal or
treatment, or arranged with a transporter for transport of hazardous substances
owned or possessed by such person for disposal or treatment, and to any person
who accepted hazardous substances for transport to disposal or treatment
facilities or sites from which there is a release or threatened release of
hazardous substances. CERCLA authorizes the Federal government either to clean
up these sites itself or to order persons responsible for the situation to do
so. CERCLA created a fund to be used by the Federal government to pay for the
cleanup efforts. Where the Federal government expends money for remedial
activities, it must seek reimbursement from the potentially responsible parties.
Where the EPA performs remedial work with superfund dollars, it frequently sues
potentially responsible parties for reimbursement under the "cost recovery"
authority of Section 107 of CERCLA. The EPA may also issue an administrative
order seeking to compel potentially responsible parties to perform remedial work
with their own funds under the "abatement" authority of Section 106 of CERCLA.
In lieu of instigating such actions, the EPA may also seek through negotiations
to persuade such parties to perform and/or pay for any and all stages of
remedial action at a site in discharge of their liabilities under CERCLA.
CERCLA provides that transporters and persons arranging for the disposal of
hazardous waste may be jointly and severally liable for the costs of remedial
action at the site to which the hazardous waste is taken. While we attempt to
minimize such exposure by contracting only with qualified hazardous waste
transporters meeting certain minimum insurance requirements and by having the
generator select the disposal site and method there can be no assurances that we
will be successful in so limiting such exposure. Under Section 101(20)(B) of
CERCLA, when a common or contract carrier delivers a hazardous substance to a
site selected by the shipper, the carrier is not considered to have caused or
contributed to any release at such disposal facility resulting from
circumstances or conditions beyond its control.
The Superfund Amendments and Reauthorization Act ("SARA") was enacted in
1986 and authorized increased Federal expenditure and imposes more stringent
cleanup standards and accelerated timetables. SARA also contains provisions
which expand the enforcement powers of the EPA.
While there can be no assurance, management believes that, even apart from
funding authorized by RCRA and CERCLA, industry and governmental entities will
continue to try to resolve hazardous waste problems due to their need to comply
with other statutory requirements and to avoid liabilities to private parties.
Although the liabilities imposed by CERCLA are more directly related to our
clients, they could under certain circumstances apply to some of our activities,
including failure to properly design or implement a cleanup, removal or remedial
action plan or to achieve required cleanup standards and activities related to
the transport and disposal of hazardous substances. Such liabilities can be
joint and several where other parties are involved.
15
<PAGE>
-- Clean Air Act and 1990 Amendments (the "Clean Air Act"). The Clean Air
Act requires compliance with ambient air quality standards and empowers the EPA
to establish and enforce limits on the emission of various pollutants from
specific types of facilities. The 1990 amendments modify the Clean Air Act in a
number of significant areas. Among other things, they establish emissions
allowances for sulfur and nitrogen oxides, establish strict new requirements
applicable to ozone emissions and other air toxics, establish a national permit
program for all major sources of pollutants and create significant new
penalties, both civil and criminal, for violations of the Clean Air Act.
Included within the scope of the Clean Air Act are rules issued by the EPA
known as National Emissions Standards for Hazardous Air Pollutants ("NESHAP").
NESHAP specifically regulates the emission of asbestos during manufacturing and
waste disposal operations and the renovation and demolition of certain
facilities. Authority to implement and enforce NESHAP standards has been
delegated to the various states which have implemented licensing requirements,
notice requirements and procedures with respect to asbestos abatement and other
rules governing the handling and disposal of asbestos.
-- Clean Water Act of 1972 ("CWA"). Originally enacted as the Federal Water
Pollution Control Act, but renamed as the Clean Water Act in 1977, CWA regulates
the discharge of pollutants into the surface waters of the United States. CWA
established a system of minimum national efficiency standards on an
industry-by-industry basis, water quality standards, and a discharge permit
program. It also contains special provisions addressing accidental or
unintentional spills of oil and hazardous substances into waterways.
-- Other Federal and State Environmental Regulations. Our services are also
used by clients in complying with, among others, the following Federal laws: the
Toxic Substances Control Act, the Safe Drinking Water Act, the Hazardous
Materials Transportation Act and the Oil Pollution Act of 1990. In addition,
many states have passed superfund-type legislation and other regulations and
policies to cover more detailed aspects of environmental impairment and the
remediation thereof. This legislation addresses such topics as air pollution,
underground storage tanks, water quality, solid waste, hazardous materials,
surface impoundments, site cleanup and wastewater discharge. Most states also
regulate the transportation of hazardous wastes and certain flammable liquids
within their borders by requiring that special permits be obtained in advance of
such transportation.
Other Regulations. In addition to a broad array of environmental
regulations relating to our environmental service activities, our business and
proposed businesses, are subject to a variety of non-environmental regulations.
Included in the regulations which may effect our current business are
regulations governing occupational safety and health, wage, overtime and other
employment matters and dealings with governmental agencies.
Our proposed operations relating to the licensing of Life's
superoxygenation process for beverages may be subject to potential regulations
governing such matters as food and beverage safety and processes, packaging and
marketing, among other matters. Additionally, our commencement of energy
production operations may be subject to various regulations governing rates,
safety of operations, and financing, among other matters. While we anticipate
that our licensing activities related to the Life process and energy production
activities will be conducted outside of the United States in lesser developed
countries where extensive regulation may currently be lacking, it can be
expected that some of those countries will adopt extensive regulation governing
those activities similar to the United States.
Competition
Environmental Services. The environmental services industry is highly
competitive and fragmented. Because of the diverse nature of the industry, there
are many competitors, both large and small. Many segments of the industry,
including a significant portion of Superfund and other large projects, are
dominated by large national architectural engineering firms such as Bechtel,
Flour, Westinghouse, Foster Wheeler and ICF Kaiser. Additionally, many smaller
engineering firms, construction firms, consulting firms and other specialty
firms have entered the industry in recent years and additional firms can be
expected to enter the industry in the future. Many of the firms competing in the
environmental services industry have significantly greater financial resources
and more established market positions.
16
<PAGE>
While many firms are active in the environmental services industry
providing site assessment, consulting and engineering services, we believe that
the number of firms having expertise in, and offering, dismantling,
decommissioning and deconstruction services within the environmental services
industry is limited. We maintain a highly trained and qualified workforce and
have extensive experience in planning and implementing decontamination and
decommissioning projects in a safe manner. Such expertise and experience has
allowed us to successfully compete within the industry and to secure contracts
from industrial firms as well as engineering firms which lack experience in
environmental decontamination and deconstruction. Because we, unlike most
engineering firms, are staffed by experienced and skilled
decontamination/deconstruction personnel, the involvement of engineering firms
is often limited to project management with actual hands-on services being
provided by our personnel. Because of the need for certain permits and licenses,
specialized equipment, OSHA-trained employees and the need to be knowledgeable
of and to comply with federal, state and local environmental laws, regulations
and requirements, we believe there are significant barriers to entry into the
environmental dismantling, decommissioning and deconstruction business. There
can be no assurance, however, that other firms, including the major engineering
firms which control a significant portion of Superfund and government contracts,
will not expand into or develop expertise in the areas in which we specialize,
decreasing any competitive advantage which we may enjoy. We believe that our
expertise and ability to provide full service, turnkey remediation and
decommissioning services and our utilization of state-of-the-art remediation
techniques will continue to allow us to compete effectively in the environmental
services industry and to capitalize on the expected growth in demand for
services in the nuclear facilities arena.
Plant Relocation Services. Plant relocation services are a niche business
and competition within the segment is limited. We believe that we are one of the
dominant firms within such industry. While demolition and dismantling firms
offer similar services, the primary competition within the plant relocation
industry is from various large engineering firms which offer services in the
form of construction management as consultants to owners. However, most firms
which offer relocation services do so as an additional service and not as a
primary service. We advertise and market our relocation services as a primary
service. Competition with respect to other specialty project engineering
services is believed to be limited to large engineering firms. We believe that
our ability to provide highly specialized cross-disciplinary engineering
services will allow us to compete successfully in this market.
Energy Services. Due to the substantial barriers to entry into the market
and the prevalence of purchase agreements, competition within the energy market
is limited in most developing countries, including the markets in which we
expect to operate. While a variety of independent energy producers and private
and government owned utilities may provide energy in some of the markets in
which we expect to operate, it is anticipated that we will have power purchase
agreements in place in most markets which will provide contractual commitments
to purchase a significant portion, if not all, of the energy produced from our
planned facilities. Further, while we are focused on establishing a niche
position in the individual project 100 MW or less market, we believe that the
primary competitors in the energy market generally concentrate on large projects
(i.e., 200 MW or greater). Accordingly, competition for the sale of energy is
not expected to be significant for the foreseeable future in our target markets.
However, should those markets grow and undergo deregulation similar to that
experienced in the United States, it can be expected that new competitors will
enter those markets increasing pricing and competitive pressures. Further, while
established energy production operations in developing markets are expected to
be isolated from competition in the near term, competition for contracts to
provide energy in markets may be intense. In light of the opening of the United
States utility markets to competition, many participants with substantially
greater resources have actively begun efforts to establish energy operations in
developing countries around the world.
Waste Treatment Services. Due to the substantial barriers to entry into the
market and the prevalence of agreements, competition within the waste treatment
market is limited in most developing countries, including the markets in which
we expect to operate. While a variety of independent operators and private and
government owned entities may provide waste treatment in some of the markets in
which we expect to operate, it is anticipated that we will have agreements in
place in most markets which will provide contractual commitments to utilize our
facilities. Accordingly, competition for waste treatment revenues is not
expected to be significant for the foreseeable future in our target markets.
However, should those markets grow, it can be expected that new competitors will
enter those markets increasing pricing and competitive pressures. Further, while
established waste treatment operations in developing markets are expected to be
isolated from competition in the near term, competition for contracts to provide
waste treatment services in markets may be intense.
17
<PAGE>
Employees
At January 31, 1999, we employed approximately 128 full-time employees, 33
of whom were management and administrative personnel, 21 of whom were clerical
personnel and 74 of whom were field personnel. We also employ additional field
personnel on a temporary basis when needed to adequately staff projects. All of
our permanent field personnel are skilled craftsmen with an average of over ten
years service with the Company, they are OSHA-trained and asbestos trained to
perform their respective duties. We regularly hire temporary employees on
location to staff jobs performed away from the immediate vicinity of our
headquarters. We carefully review the training and qualifications of all
temporary workers to assure that all such workers are qualified to perform the
work in question. In all such instances, our supervisors and foremen will plan,
supervise and oversee all aspects of work performed by such temporary workers.
We believe that we enjoy good relations with all of our employees. None of
our permanent full-time employees are unionized or subject to collective
bargaining agreements and we have experienced no work stoppages or strikes. Some
of the temporary personnel we hire may be union members where the job in
question and local conditions as a practical matter require such personnel.
ITEM 2. PROPERTIES
Our principal offices are located on a 7.5 acre site at 396 Whitehead
Avenue, South River, New Jersey, in a 6,925 square foot two story office
building and an adjoining 7,600 square foot two story office building. Also
located on such site is a 4,248 square foot one story storage/work area and a
5,700 square foot warehouse facility. Such facilities are leased from L&G
Associates, an affiliate controlled by Joel Freedman and Frank Falco, pursuant
to a fifteen year lease expiring May 31, 2011 and providing for monthly rental
installments of $22,500, subject to annual adjustments based on the Consumer
Price Index, plus insurance, taxes and maintenance costs.
Our various subsidiaries also own real estate in Poland (Kortmann Polonia)
and El Salvador and maintain offices in various locations to support
international project activities.
We believe our properties are adequate to support our current and
anticipated operations.
ITEM 3. LEGAL PROCEEDINGS
On August 15, 1996, the U.S. Department of Labor, Occupational Safety and
Health Administration ("OSHA") issued willful citations and notifications of
penalty in the amount of $147,000 against the Company in connection with the
accidental death of a subcontractor's employee on the United Illuminating Steel
Point Project in Bridgeport, Connecticut in February, 1996. A complaint was
filed against the Company by the Secretary of Labor, United States Department of
Labor on September 30, 1996. We denied all of the allegations in the complaint.
A hearing was conducted in April, 1997 and, subsequently, OSHA's Review
Commission issued a written decision vacating the first alleged willful
citation, but affirming the second and third willful citations, and imposing a
penalty in the amount of $70,000 for each citation. A timely Notice of Appeal
was filed with the OSHA Review Commission for Discretionary Review, which body
has accepted jurisdiction of the matter on administrative appeal. We intend to
continue to vigorously contest the alleged violations and will pursue any and
all remedies available, including appellate proceedings at the U.S. Circuit
Court of Appeals, in order to overturn the decision.
On February 11, 1997, we were served with a lawsuit naming the Company as a
co-defendant in a wrongful death cause of action arising out of the accidental
death of an employee of its subcontractor, American Wrecking. The suit, styled
The Estate of Percy L. Richard, and Percy D. Richard, a minor by next of friend
Patricia Cunningham v. American Wrecking Corp. and its successors, IDM
Environmental Corp., and its successors, SECO Corp. and it successors, all joint
and individually, and all unknown persons, Case No. 2:97CV filed in the Federal
District Court for the Northern District Court for the Northern District of
Indiana, arises out of the same facts alleged in the above referenced
administrative proceeding instituted by OSHA. Plaintiff seeks damages of $45
million. We believe that the suit, as it relates to the Company, is without
merit and continue to vigorously contest the cause of action. A defense is being
provided by and through our general liability insurance carrier.
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<PAGE>
In April of 1997, we and our subsidiary, Global Waste & Energy, Inc., were
named as co-defendants in a cause of action styled Enviropower Industries, Inc.
v. IDM Environmental Corp., Global Waste & Energy, Inc., et al., filed in the
Court of Queen's Bench of Alberta, Judicial District of Calgary (Action No.
9701-04774). The plaintiff, Enviropower (formerly known as Continental Waste
Conversion International, Inc.), alleged that the license granted to the Company
to utilize and market Enviropower's proprietary gasification technology was
granted without proper corporate authority due to the lack of shareholder
approval. The plaintiff asserted the subsequent employment by Global Waste &
Energy of two former officers of Enviropower as a basis for its allegations.
Enviropower sought to have the license and all other agreements between
Enviropower and the Company declared null and void in addition to seeking
damages for alleged loss of profits and other unspecified damages. In June of
1997, we filed a separate cause of action against Enviropower seeking injunctive
relief to enforce the agreements between them and to collect amounts owed to the
Company by Enviropower. On June 20, 1997, we were successful in obtaining an
Interim Injunction Order, further extended by Order dated September 19, 1997. We
were subsequently awarded a preliminary injunction against Enviropower
recognizing our exclusive rights to the licensed technology. On or about March
20, 1998, Enviropower Industries, Inc., filed for bankruptcy in Calgary
Bankruptcy Court. The matter commenced by the Company was then stayed in
accordance with Canadian Bankruptcy law. In December of 1998, we entered into a
comprehensive settlement of the matter with the bankruptcy trustee. Pursuant to
the settlement, we paid $51,000 to the trustee in exchange for the exclusive
rights to the disputed technology, including an assignment of all patents and
pending patents, and a permanent injunction affirming our exclusive right to
such technology.
In July of 1998, we, our 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 we and our affiliates breached a marketing agreement that had
been entered between Kasterka and Enviropower. The plaintiff has alleged that
the defendants failed to supply material information relating to the
gasification technology originally developed by Enviropower and that, as a
result, Kasterka was unable to manufacture and market gasification units in the
territories designated in the marketing agreement. Kasterka has asserted a
variety of claims for damages in the aggregate amount of approximately $42
million. We believe the suit is without merit and intend to vigorously contest
the cause of action.
In September of 1998, we were named as a defendant in a cause of action
styled Balerna Concrete Corporation, et al. v. IDM Environmental Corp., et al.,
filed in United States District Court of Massachusetts (Case No. 98CV11883ML).
The plaintiffs allege that we, and others, engaged in a pattern of 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 and breach of contract, and seek unspecified damages. We
believe the suit is without merit and have filed a motion to dismiss the action,
currently pending before the Court. We intend to continue to vigorously contest
the cause of action.
In October of 1996, we commenced an action styled IDM Environmental Corp.
v. H.B. Zachry in the 166th Judicial District Court, Bexar County, Texas (Cause
No. 96-CI-14834), seeking recovery of damages including, without limitation,
attorneys fees and prejudgment interest, for breach of contract. H.B. Zachry
filed a General Denial and Counterclaim on November 15, 1996. The matter was
settled in favor of the Company for the amount of $938,412.00 on December 4,
1998.
In April of 1998, the Connecticut Surety Company ("Connecticut Surety")
commenced an action against us and a subsidiary, IDM Environmental of
Massachusetts, Inc. ("IDM of Mass."), styled Connecticut Surety Company v. IDM
Environmental Corp., et al., in Federal District Court in Massachusetts,
immediately following our advice to Connecticut Surety's representatives that
IDM of Mass. would commence an action against it on unsatisfied bond claims
relating to the default of a subcontractor, Dockside Dismantling, on the Boston
State Hospital project. On January 22, 1999, the matter was settled in favor of
the Company for $375,000.00 and an acknowledgment of acceptance of liability by
Connecticut Surety for the default of its insured.
In November of 1997, we commenced an action styled IDM Environmental Corp.
v. Kvaerner Metals, et al. in the Superior Court of New Jersey. The action
against Kvaerner Metals, formerly known as Davy International ("Davy"), and
American Home Assurance Co. concerns a completed environmental clean-up project
at American Home Products in Bound Brook, New Jersey for which we and Davy had
entered into a teaming partnership agreement providing for, among other things,
an equal sharing of all direct costs and any losses sustained on the project. We
allege that we are entitled to the sum of at least $700,000.00 representing the
share of the project losses now owed to us by Davy, as well as additional
unliquidated damages for Davy's breach of fiduciary duties owed to the teaming
partnership, and its failure to submit change order claims to recover losses
incurred by the partnership for disruption of work and for its negligence.
Discovery in the matter is continuing.
19
<PAGE>
In addition to the foregoing, we are periodically subject to lawsuits and
administrative proceedings arising in the ordinary course of business.
Management believes that the outcome of such lawsuits and other proceedings will
not individually or in the aggregate have a material adverse affect on our
financial condition, operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock (the "Common Stock") trades on The Nasdaq Stock Market
under the symbol "IDMC." The Common Stock commenced quotation on the Nasdaq
Small-Cap market following completion of our initial public offering in April of
1994. Subsequently, on August 31, 1994, the Common Stock commenced quotation on
the Nasdaq National Market System. The following table sets forth the high and
low sales prices for the Common Stock for each quarterly period during the last
two fiscal years:
High Low
------ -----
First Quarter, ended March 1997 3.188 1.656
Second Quarter, ended June 1997 2.938 0.888
Third Quarter, ended September 1997 7.313 1.875
Fourth Quarter, ended December 1997 8.625 5.063
First Quarter, ended March 1998 7.563 3.625
Second Quarter, ended June 1998 4.000 2.563
Third Quarter, ended September 1998 2.719 0.500
Fourth Quarter, ended December 1998 0.922 0.344
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 15, 1999, the bid price of the Common Stock was $.3125.
As of March 15, 1999, there were approximately 130 holders of record and
4,500 beneficial owners of the Common Stock.
We have never declared or paid any cash dividend on our Common Stock and do
not expect to declare or pay any such dividend in the foreseeable future.
We declared a 1-for-10 reverse split of our Common Stock and Class A
Warrants effective April 16, 1999. Should our Common Stock not attain a minimum
bid price of at least $1.00 following the reverse split, our Common Stock is
subject to potential de-listing from Nasdaq.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth, for the periods and at the dates indicated,
selected consolidated financial and operating data for the Company. The
financial data was derived from our consolidated financial statements and should
be read in conjunction with the audited consolidated financial statements
included in the Index to Financial Statements on page 37 of this report. See
also, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
Years ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Income Statement Data:
Operating revenues:
Contract revenues.................. $20,019 $ 17,826 $ 20,808 $ 33,866 $ 25,362
Equipment and scrap revenues....... - 96 834 5,537 3,150
Other.............................. - - - - 22
------ ------- -------- -------- -------
Total operating revenues......... 20,019 17,922 21,642 39,403 28,534
Cost of sales:
Direct job costs................... 20,258 17,002 21,492 30,433 20,449
Unusual job costs.................. - - - 3,300 -
Cost of equipment.................. - 647 943 2,977 1,651
------ ------- -------- -------- -------
Gross profit (loss)................. (239) 273 (793) 2,693 6,434
Operating expenses:
General and administrative......... 12,871 10,538 9,567 7,637 5,418
Depreciation and amortization...... 627 723 668 653 344
Equity in net loss of
unconsolidated partnerships...... 194 - - - -
------ ------- ------- -------- -------
Income (loss) from operations........ (13,932) (10,988) (11,028) (5,597) 672
Interest income (expense), net....... 4,322 (513) 30 200 (36)
------ ------- ------- -------- -------
Income (loss) before income taxes.... (18,253) (11,501) (10,998) (5,397) 636
Provision (credit) for income taxes.. 4,170 (1,561) (1,850) (1,530) 312
------ ------- ------- -------- -------
Net income (loss).................... $(22,423) $ (9,940) $ (9,148) $ (3,867) $ 324
------ ------- ------- -------- -------
------ ------- ------- -------- -------
Net income (loss) on common stock.... $(26,442) $(11,224) $ (9,148) $ (3,867) $ 324
------ ------- ------- -------- -------
------ ------- ------- -------- -------
Net income (loss) per share (1)...... $ (13.31) $ (10.01) $ (11.30) $ (6.70) $ 0.60
------ ------- ------- -------- -------
------ ------- ------- -------- -------
Weighted average shares
outstanding (1)...................1,987,264 1,121,269 808,947 581,556 557,798
--------- --------- ------- -------- -------
--------- --------- ------- -------- -------
Balance Sheet Data (at period end):
Working capital......................$ (487) $ (1,149) $ 6,122 $ 10,293 $ 12,070
Total assets........................ 15,151 27,151 22,203 22,028 22,257
Long-term liabilities................ 65 259 164 4,004 -
Minority interest.................... - - 1,034 - -
Shareholders' equity................. 7,885 18,079 13,461 10,940 13,829
</TABLE>
___________________
(1) Adjusted to give retroactive effect to a 1-for-10 reverse stock split
effective April 16, 1999.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 31 of this Form 10-K.
All per share amounts, including shares issued or issuable pursuant to
convertible securities, are adjusted to give retroactive affect to a 1 - for -
10 reverse split effective April 16 1999.
Overview
Our business has evolved, and continues to evolve, to capitalize on market
opportunities. We have added strategic capabilities and resources through the
years, and continued to do so during 1998, to move our business from its roots
as a demolition and deconstruction company to a full service environmental
remediation company and plant relocation services company and, now, an energy
project developer and manager. Our revenues were historically derived primarily
from (1) contract decontamination and decommissioning services in a broad range
of industrial and environmentally sensitive settings, including, but not limited
to, plant dismantlement and relocation services, asbestos abatement services,
and remediation of contaminated soil and groundwater; and (2) equipment and
scrap sales. Our operations have been characterized by fluctuations in revenues
and operating profits as projects begin and end. With the implementation of a
strategic shift in our business in 1997, we expect to generate a growing base of
recurring revenues and operating profits from energy and waste treatment
projects and long-term nuclear facilities decommissioning and remediation
projects while supplementing such revenues and profits with revenues from the
Company's traditional environmental services and plant relocation services
projects.
During 1998, our principal contract services related to, and substantially
all of our revenues were derived from, our East Dam Project and Oak Ridge
Project and a number of smaller projects. The Oak Ridge Project is a DOE managed
site and our most significant remediation project during 1998. We expect to
complete our current work at the Oak Ridge Project by the second quarter of 1999
and anticipate that additional work at that site will be awarded to us upon
completion of the current work. Traditional environmental services accounted for
approximately 78% of our revenues during 1998, of which approximately 67%
represented DOE, DOD and other government projects and 33% represented private
sector projects. The East Dam Project accounted for the approximately 22% of our
revenues during 1998 which were not attributable to traditional remediation
projects. The East Dam Project was completed in November of 1998.
Revenues recognized and jobs costs attributable to our contract services
during 1998 were adversely affected by unforeseeable developments at the East
Dam Project and on our project at the Boston State Hospital (the "Boston State
Hospital Project"). On the East Dam Project, the scope of our services, and our
bid, was based on preliminary project specifications established by the project
owner. The amount payable with respect to our services on that project was
subject to adjustment, up or down, based on the actual conditions encountered.
As a result of the conditions encountered, the actual drill footage of the
project was substantially less than the footage initially bid based on the
specifications provided by the project owner. At the same time, we provided
substantial additional services, as called for by the contract, as a result of
change orders. Pursuant to the contract, compensation payable with respect to
additional services resulting from change orders is subject to documentation and
negotiation at the end of the project. The reduction in drill footage resulted
in a decrease in estimated project revenues (not giving effect to amounts owing
respect to change orders). As a result, estimated revenues to be recognized from
the East Dam Project were reduced from approximately $20 million to $15 million.
While total project revenues and 1998 revenues from the East Dam Project were
less than anticipated as a result of the reduction in drill footage, job costs
attributable thereto were substantially higher than originally anticipated as a
result of the performance of additional services related to change orders. We
have submitted a claim for approximately $10.8 million as additional
compensation and cost reimbursement attributable to change orders. Pending
payment for services related to change orders, during 1998, we recognized, as
additional job costs, all costs attributable to the performance of those
services but did not recognize any revenues which might be realized from those
services. We will recognize as additional revenues, without any corresponding
job costs, all amounts received, if any, with respect to change orders at such
time as such amount is actually received.
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On the Boston State Hospital Project, we subcontracted certain portions of
the project to Dockside Dismantling Corporation ("Dockside"). Dockside defaulted
on its subcontract and abandoned the work for which it was responsible. In
addition, we were notified of certain work deficiencies for which Dockside and,
derivatively, the Company were allegedly responsible. We estimated the
additional costs to complete and correct the work of Dockside at $1.2 million
and reflected additional job costs in that amount. We made a claim against the
bond ($500,000 performance and $500,000 payment) provided by Dockside's surety
company. The surety company disclaimed coverage and litigation to collect on the
bond was initiated. In January of 1999, we settled our claim against Dockside's
surety company for $375,000 for the performance bond of which we received
$300,000 after legal fees. The $500,000 payment bond was paid directly to
Dockside's vendors and we received no funds from the payment bond. The results
of the settlement were reflected in fourth quarter 1998 results.
In the recurring revenue project arena, during 1998, we continued to invest
substantial resources in our efforts to acquire and/or build, start-up, own and
operate energy, waste treatment and other similar projects. We incurred
approximately $4 million in direct costs during 1998 in connection with our
efforts to enter those markets. At December 31, 1998, we were in advanced levels
of discussions with respect to more than a dozen potential energy, waste
treatment and similar projects and in February of 1999 we acquired our first
operating energy facility, a 42 MW hydroelectric power plant in the Republic of
Georgia. We expect to begin recognizing revenue from the Georgia Power Project
by the second quarter of 1999. Additionally, we expect to complete development
of, and to begin realizing revenues from, one or more other energy and/or waste
treatment facilities before the end of 1999. See "Business -- Energy and Waste
Treatment Project Development and Management Services."
We performed no plant relocation projects during 1998. With the financial
crises in Asia and other lesser developed regions and a dramatic downturn in the
price of oil, the demand for plant relocation services was curtailed in 1998 and
is expected to continue to be curtailed until an improvement occurs in those
regions.
In addition to our core operations, we have entered into selected strategic
investments and undertakings. Those investments and undertakings, as of the
first quarter of 1999, include (1) an equity investment in Life, (2) our
formation of Seven Star to distribute Life water products in southeast Asia and
to pursue other opportunities in southeast Asia, (3) acquisition by Seven Star
of a license covering the bottling rights and distribution of the Life
superoxygenation process in southeast Asia, and (4) our acquisition of an
interest in Kortmann Polonia. During 1998, we invested approximately $1.1
million in these ventures. We did not recognize any revenues from those ventures
during 1998 but expect to begin realizing revenues from the water distribution
operations of Seven Star and from the sale of certain real estate holdings of
Kortmann Polonia during 1999.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased by approximately 11.2% from $17.9
million for the year ended December 31, 1997 to $20 million for the year ended
December 31, 1998. Contract service income increased for the period by 12.3%
from $17.8 million in 1997 to $20 million in 1998. The increase in contract
service income was attributable to increased project volume from our Oak Ridge
office (up $6.6 million) which was partially offset by a decrease in project
volume from our Boston office (down $4.7 million). The East Dam Project
accounted for approximately $4.4 million, 22%, of revenues in 1998 and the Oak
Ridge Project accounted for approximately $3.6 million, 18%, of revenues in
1998. The environmental remediation business has been marked by increasing
competition and pressure on job margins. In light of such operating environment,
during 1998, as in 1997, we opted to only pursue specialized niche projects
where projects risks could be limited and higher margins attained. 1998 contract
service revenues exclude approximately $12.1 million of additional compensation
claimed as being owing with respect to services performed under change orders,
including $10.8 million attributable to the East Dam Project. Such additional
compensation will be recognized as revenues at such time as such amounts are
paid, if ever.
Surplus equipment and scrap sales decreased from $96,000 for the year ended
December 31, 1997 to $0 in 1998 due primarily to the sale in 1996 of
substantially all of our surplus equipment, other than generators.
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Cost of sales. Cost of sales, which includes direct job costs, cost of
equipment sales, and write-down of our surplus generator inventory, increased by
approximately 15.3% from $17.6 million for 1997 to $20.3 million for 1998.
Direct job costs increased by 19.4% during 1998 and increased from 95.4% to
101.5% of contract income. The primary elements of such increase in job costs
were materials and supplies, job salaries, subcontracting and disposal expense.
The decrease in gross margins during 1998 was attributable primarily to
unforeseeable costs incurred on several contracts, including the East Dam
Project and Boston State Hospital, where we, at December 31, 1998, were seeking
to recover an aggregate of $8.4 million of additional costs incurred as a result
of change orders from clients. The change order related job costs were
recognized in full during 1998 but no revenue attributable to those change
orders was recognized. As a result, the East Dam Project and Boston State
Hospital Project incurred negative gross margins during 1998.
As a result of the lack of sales of surplus equipment during 1998, cost of
equipment sales were $0 as compared to $47,000 during 1997.
In addition to the routine changes discussed above, cost of sales reflects
a write-down of the Company's surplus generator inventory of $600,000 in 1997.
General and administrative expense. General and administrative expenses
increased by 22.9% from $10.5 million (58.8% of gross revenues) in 1997 to $12.9
million (64.5% of gross revenues) in 1998. The increase in general and
administrative expenses was primarily attributable to (1) a $1.9 million expense
for options granted to consultants to purchase 122,000 shares of common stock
at the market price on the date of grant, (2) a $0.3 million increase in
professional fees (principally attributable to professional services relating to
efforts to commence energy and waste treatment markets in foreign countries and
increased litigation expenses) in 1998 as compared to 1997, (3) increased salary
expense, office expense and travel and entertainment expenses related to
increased activity in foreign projects, and (4) a $154,000 audit refund of
workers compensation insurance which reduced general and administrative expense
during 1997. Included in general and administrative expense was a $1 million
write-down during 1998 and a $1.2 million write-down during 1997 of the
Company's note receivable from UPE. Direct costs associated with efforts to
acquire and/or build, start-up, own and operate energy, waste treatment and
other similar projects totaled approximately $4 million during 1998 and $2
million during 1997.
Depreciation and amortization. Depreciation and amortization expense
decreased by approximately 14.3% from $0.7 million in 1997 to $0.6 million in
1998. The decrease in depreciation and amortization expense was primarily
attributable to a decrease in amortization of deferred issuance costs.
Loss from operations. Loss from operations increased to $13.9 million
during 1998 from $11 million during 1997. As a percentage of revenues, loss from
operations increased from 61.3% in 1997 to 69.5% in 1998.
Interest income and expense. Net interest expense increased from $0.5
million in 1997 to $4.3 million in 1998. The increase in interest expense was
primarily attributable to $4.2 million of amortization of the beneficial
conversion feature of the convertible notes and warrants issued during 1998.
Income taxes. The provision for income taxes totaled $4.2 million during
1998 as compared to a credit for income taxes of $1.6 million in 1997. The
increase in the income tax expense for 1998 was attributable to the write-off of
the Company's deferred tax asset in the amount of $4.2 million during 1998.
Miscellaneous. During fiscal years 1997 and 1998, no provision was made for
post retirement benefits subject to FAS 106.
As a result of the foregoing, we reported a loss before taxes of $18.3
million and a net loss of $22.4 million for 1998 as compared to a loss before
taxes of $11.5 million and a net loss of $9.9 million for 1997. The net loss
attributable to common stock was increased by the preferred stock dividends
($189,000 in 1998 and $174,000 in 1997) and an accounting "deemed dividend"
($3.8 million in 1998 and $1.1 million in 1997) arising from the amortization of
the beneficial conversion feature of preferred stock. Earnings per share has
been calculated to comply with the recent SEC staff position on accounting for
securities issued with beneficial conversion features. This accounting requires
that we reflect the difference between the market price of the common stock and
the applicable conversion rate on the convertible preferred stock as a dividend
at the issue date amortized over a period from that date until the date on which
the preferred stock becomes convertible.
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Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Total revenues decreased by approximately 17.1% from $21.6
million for the year ended December 31, 1996 to $17.9 million for the year ended
December 31, 1997. Contract service income decreased for the period by 14.4%
from $20.8 million in 1996 to $17.8 million in 1997. The decrease in contract
service income was attributable to a lower volume due to a more selective
bidding process wherein we only bid on projects with higher gross margins. The
environmental remediation business has been marked by increasing competition and
pressure on job margins. In light of such operating environment, during 1997 we
opted to only pursue specialized niche projects where projects risks could be
limited and higher margins attained. Surplus equipment and scrap sales decreased
by 85.4% from $834,000 from the year ended December 31, 1996 to $96,000 in 1997
due primarily to the sale in 1996 of $634,000 of glass lined brewery tanks.
Cost of sales. Cost of sales, which includes direct job costs, cost of
equipment sales, and write-down of our surplus generator inventory, decreased by
approximately 21.4% from $22.4 million for 1996 to $17.6 million for 1997.
Direct job costs decreased by 20.9% during 1997 and decreased from 103.3% to
95.4% of contract income. The primary elements of such decrease in job costs
were materials and supplies, job salaries, subcontracting and disposal expense.
The lower gross margins during 1996 was attributable primarily to cost overruns
on several contracts, including the Los Alamos project where we, at December 31,
1997 and December 31, 1998, were seeking to recover $2.1 million of additional
costs incurred as a result of change orders from clients.
Cost of equipment sales decreased 92.7% during 1997 and decreased from
77.1% to 49.0% of equipment revenues. The decrease in cost of equipment sales
and the increase in gross margin was attributable to the sale, in a bulk
transaction, of $634,000 in tanks mentioned previously during 1996.
In addition to the routine changes discussed above, cost of sales reflects
a write-down of the Company's surplus generator inventory of $600,000 in 1997
and $300,000 in 1996.
General and administrative expense. General and administrative expenses
increased by 9.4% from $9.6 million (44.4% of gross revenues) in 1996 to $10.5
million (58.8% of gross revenues) in 1997. The increase in general and
administrative expenses was primarily attributable to the write-down of a
portion of notes receivable from UPE ($1,200,000).
Depreciation and amortization. Depreciation and amortization expense stayed
approximately the same $0.7 million in both years.
Loss from operations. Loss from operations was basically the same in both
years ($11.0 million). As a percentage of revenues, loss from operations
increased from 50.9% in 1996 to 61.3% in 1997. The increase in loss from
operations percent of revenues was attributable to the lower volume in 1997.
Interest income and expense. Net interest expense increased from $0.0
million in 1996 to $0.5 million in 1997. The increase in interest expense was
primarily attributable to $0.7 million amortization of debt discount on the
convertible notes issued during 1997.
Income taxes. Credit for income taxes decreased from $1.9 million in 1996
to $1.6 million in 1997. The decrease in the income tax credit for 1997 was
primarily attributable to a higher valuation allowance against the net operating
loss from foreign operations.
Miscellaneous. During fiscal years 1996 and 1997, no provision was made for
post retirement benefits subject to FAS 106.
As a result of the foregoing, we reported a loss before taxes of
$11,501,000 and a net loss of $9,940,000 for 1997 as compared to a loss before
taxes of $10,998,000 and a net loss of $9,148,000 for 1996. The net loss
attributable to common stock was increased by the preferred stock dividends
($174,000) and an accounting "deemed dividend" ($1,110,000) arising from the
amortization of the beneficial conversion feature of the Series B Preferred
Stock. Earnings per share has been calculated to comply with the recent SEC
staff position on accounting for securities issued with beneficial conversion
features. This accounting requires that we reflect the difference between the
market price of the Company's common stock and the applicable conversion rate on
the convertible preferred stock as a dividend at the issue date (the beneficial
conversion feature totaling $1,109,589) and has amortized the dividend over a
180 day period from February 12, 1997, the issue date of the convertible
preferred stock.
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Liquidity and Capital Resources
At December 31, 1998, we had a working capital deficit of approximately
$0.5 million and a cash balance of $0.4 million. This compares to a deficit in
working capital of $1.1 million and a cash balance of $0.6 million at December
31, 1997. The changes in working capital and cash were primarily attributable to
a combination of the loss incurred during 1998 and the affects of (1) the
conversion into common stock of $3,025,000 of notes payable which were
classified as a current liability at December 31, 1997, (2) the receipt of $3.2
million of net proceeds from the sale of Series C Convertible Preferred Stock,
(3) the receipt of $1.35 million of net proceeds from the sale of Series RR
Convertible Preferred Stock, and (4) the receipt of $2.1 million from the
exercise of warrants and stock options.
Approximately $1.9 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 December 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 sale of substantially all surplus
equipment inventory, other than generators in connection with the formation of a
marketing alliance during 1995. The 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 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 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 December 31, 1998.
Accounts receivable decreased by 37.2% from 1997 to 1998. As a percentage
of revenues, accounts receivable decreased from 22.8% in 1997 to 12.9% in 1998.
The decrease in accounts receivable, in dollar amount and as a percentage of
revenues, was attributable to the receipt in early 1998 of payments of past due
amounts totaling $1.2 million from three customers. The deferral of such
payments from 1997 to 1998 increased both the amount of receivables and the
percentage of sales for 1997.
Unbilled revenue as a percentage of quarterly contract income was 0% at
December 31, 1993, 31% at December 31, 1994, 56% at December 31, 1995, 26% at
December 31, 1996, 11% at December 31, 1997 and 35% at December 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 our 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 DOE and DOD
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). We are aware of this problem and are trying to remedy
it by maximizing mobilization costs in the schedule of values, requiring
subcontractors to bill on the same basis and aggressively negotiating better
(less front end cost loaded) schedule of values.
26
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We previously tried to increase payment terms to vendors by paying them
after we received payment. This method was unsuccessful. Many vendors put us on
a COD basis and our D&B rating weakened because D&B's file showed "increased
slowness in the company's payment record." This lower rating hurt in attempts to
establish credit with new vendors. In an effort to establish and maintain good
relationships with our vendors, we now pay vendors within terms to fifteen days
late and hope to improve our D&B "paydex rating." The paydex rating of 60 is
much worse than the average of the lower quartile for the industry of 68 (median
for the industry is 75).
As a result of the loss incurred during 1998, operating activities used
$7.7 million in cash during 1998. We also used $1.1 million in cash for
investing activities during 1998 for (1) acquisition of additional shares of
stock of Life for $0.2 million, (2) acquisition of a 75% interest in Kortmann
Polonia for $600,000, and (3) a capital contribution to Seven Star of $300,000.
See "Business -- Other Services, Products and Investments." Cash flows from
financing activities totaled $7.1 million during 1998 and consisted principally
of (1) $2.6 million in proceeds received from the exercise of various warrants
and options, and (2) $4.6 million in net proceeds from convertible securities
issuances.
In addition to the foregoing items which impacted cash flows during 1998,
we 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 beneficial conversion feature
on the Series C and Series RR Convertible Preferred Stock of $3.8 million and,
(2) the conversion of $3.025 million of convertible promissory notes and $4.9
million of Series C and Series RR Convertible Preferred Stock into common stock.
Transactions with subsidiaries during 1998 related principally to the
capitalization of various subsidiaries formed to deploy the Kocee Gas Generator
technology. At December 31, 1998, loans to Global Waste and Energy, Inc., a 90%
owned subsidiary, for those purposes totaled $3.3 million. Such loan is
repayable on demand with interest at 9.25%.
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 December 31,
1998, we had no bank debt and no significant long-term debt and were funding
operations entirely through cash on hand and operating cash flow.
In February of 1997, we sold 300 shares, or $3.0 million, of Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to provide funding
for the East Dam Project and other projects on which work commenced during the
first half of 1997. 30 shares of the Series B Preferred Stock were converted
during 1997 resulting in the issuance of 19,292 shares of common stock. The
remaining 270 shares of Series B Preferred Stock were converted during 1998
resulting in the issuance of an additional 135,944 shares of common stock.
On August 13, 1997, we completed a private placement of $3,025,000 of 7%
Convertible Notes (the "Convertible Notes") and 267,500 three year Warrants (the
"$30.00 Warrants"). The Convertible Notes were convertible into Common Stock at
the lesser of (i) $27.50 per share or (ii) 75% of the average closing bid price
of the Common Stock during the five trading days prior to conversion. The $30.00
Warrants are exercisable for a three year period at the lesser of $30.00 per
share or the lowest conversion price of the 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. All of the
Convertible Notes were converted during 1998 resulting in the issuance of
115,267 shares of common stock.
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The value, totaling $4,818,750, of the discounted conversion feature on the
Convertible Notes and the value of the $30.00 Warrants has been accounted for as
additional interest via a debit to debt discount and a credit to
paid-in-capital. The debt discount has been calculated as the fixed discount
from the market at the date of sale based upon the common stock's trading price
of $40 per share on August 13th. This interest was being amortized over the
period from the date of issuance to the date the Convertible Notes were first
convertible, January 8, 1998, and for the $30.00 Warrants to June 30, 1998.
During 1997, $600,000 was amortized and recorded as interest expense. During
1998, $4,218,750 was charged to interest expense.
In February of 1998, we sold 3,600 shares of Series C 7% Convertible
Preferred Stock (the "Series C Preferred Stock") and 235,000 Four Year $50.00
Warrants (amended on June 2, 1998 to $37.50)(the "$37.50 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 was
convertible into Common Stock at the lesser of (i) $45.00 per share (amended on
June 2, 1998 to $32.50) or (ii) 75% of the average closing bid price of the
Common Stock during the five trading days prior to conversion. The $37.50
Warrants are exercisable for a four year period at the lesser of $37.50 per
share or the lowest conversion price of the Series C Preferred Stock. The Series
C Preferred Stock paid dividends at 7% per annum payable quarterly and on
conversion or at redemption in cash or Common Stock, at the Company's option.
All 3,600 shares of Series C Preferred Stock were converted during 1998
resulting in the issuance of 640,747 shares of Common Stock.
In February of 1998, we issued 127,000 Three Year $45.00 Warrants (the
"Lock-Up Warrants"). The Lock-Up Warrants were issued in conjunction with the
execution of Lock-Up Agreements by the holders of $30.00 Warrants 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 $45.00 per share.
In June of 1998, we issued 26,688 $60.00 and 26,688 $67.50 Warrants (the
"Reload Warrants"). The Reload Warrants were issued as an inducement for early
exercise by the holders of certain $30.00 Warrants and are exercisable to the
extent of one $60.00 Warrant and one $67.50 Warrant for each $30.00 Warrant
previously exercised. The $60.00 Warrants and $67.50 Warrants are exercisable
for a period of one year commencing June 8, 1998 to purchase Common Stock at
$60.00 and $67.50 per share, respectively. Exercise of the $60.00 Warrants and
$67.50 Warrants is subject to the restrictions that the holders, individually,
will not beneficially own in excess of 4.99% of the Common Stock following any
exercise.
In August of 1998, we sold 1,500 shares of Series RR 6% Convertible
Preferred Stock (the "Series RR Preferred Stock"). The aggregate sales price of
such securities was $1,500,000. Commissions totaling 10% were paid in connection
with the placement. The Series RR Preferred Stock is 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.
Conversion of the Series RR Preferred Stock is subject to the issuance of a
maximum of 360,000 shares of Common Stock on conversion unless the shareholders
of the Company have approved issuance beyond that level upon conversion. In the
absence of shareholder approval of issuances above 360,000 shares, the holders
of the Series RR Preferred Stock remaining outstanding if and when 360,000
shares have been issued will have the right to demand redemption of the Series
RR Preferred Stock at 120% of the principal balance outstanding. The Series RR
Preferred Stock pays an annual dividend of 6% payable semi-annually or on
conversion or at redemption in cash or Common Stock, at the Company's option. As
of December 31, 1998, 1,285 of the shares of Series RR Preferred Stock had been
converted resulting in the issuance of an aggregate of 359,981 shares of 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
March 15, 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.
During the fourth quarter of 1998, we agreed to amend the terms of certain
warrants to reduce the exercise price of those warrants for certain warrant
holders who had indicated a willingness to exercise currently outstanding
warrants. Pursuant to such agreement, the exercise price of those warrants was
reduced to $3.30 per share until December 31, 1998, and $10.00 thereafter, and
the Company obtained the right to call the warrants for redemption. In total,
the exercise prices were reduced on 117,651 of the $30.00 Warrants, 67,000 of
the Lock-Up Warrants, 15,750 of the $60.00 Reload Warrants, and 15,750 of the
$67.50 Reload Warrants.
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During 1998, a total of 243,731 warrants were exercised resulting in net
proceeds to the Company of $2,620,000.
Also during 1998, Frank Falco, Chairman of the Board of Directors and Chief
Operating Officer of the Company, paid the Company $490,000, which represented
payment in full of all amounts due from officers to the Company.
Other than funds provided by operations and the potential receipt of funds
from the exercise of outstanding warrants, 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
December 31, 1998. 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 foreseeable future.
In addition to funds used to support ongoing operations, we utilized funds
to make various strategic investments during 1998. Funds utilized for strategic
investments during 1998 have been principally invested in (1) Seven Star, (2)
Kortmann Polonia, and (3) implementation of strategic initiatives designed to
facilitate entry into the market for recurring revenue projects ("Vision 2000").
See "Business -- Business Strategy" and "-- Other Services, Products and
Investments."
In January of 1998, we made a $300,000 payment representing our one half
share of the capital of Seven Star. Seven Star is a joint venture between the
Company and Jin Xin and is incorporated in The British Virgin Islands. Seven
Star has entered into a license agreement with 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, and elsewhere in
southeast Asia. The license agreement requires a minimum royalty of $400,000 for
the first year which was paid upon execution of the license agreement.
In November of 1998, we paid $600,000 to acquire a 75% 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.
29
<PAGE>
At December 31, 1998, 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. We expect a decision
from Nasdaq during April. If our stock is ultimately de-listed from Nasdaq, our
ability to raise capital through the sale of equity securities may be adversely
impacted. As we sold equity securities on multiple occasions in recent years to
finance operating losses, de-listing of our common stock could be expected to
have a material adverse effect on our cost of capital and ability to fund future
operations.
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.
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.
30
<PAGE>
Certain Factors Affecting Future Operating Results
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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.
At December 31, 1998, we had a backlog of approximately $8 million of
signed services contracts as compared to a backlog of approximately $31 million
at December 31, 1997. The largest projects in our backlog at December 31, 1998
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 is expected to begin 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 December 31, 1998 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. See "Business -- Energy
and Waste Treatment Project Development and Management Services."
31
<PAGE>
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 expects 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 uncertainty 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. The settlement
is payable $150,000 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
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Samuel Klein and Company, appears on
pages F-1 through F-37 of this report. See Index to Financial Statements on page
37 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
32
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements: See Index to Financial
Statements on page 37 of this report for financial statements and
supplementary data filed as part of this report.
(2) Financial Statement Schedules
None
(3) Exhibits
Exhibit
Number Description of Exhibit
--------- -------------------------
3.1 Restated Certificate of Incorporation of IDM Environmental Corp.(1)
3.2 Bylaws, as amended, of IDM Environmental Corp. (3)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Class A Warrant Certificate (1)
4.3 Form of Class A Warrant Agreement (1)
4.4* Amendment to Class A Warrant Agreement, dated April 7, 1999
4.5 Certificate of Designation fixing terms of Series A Junior
Participating Preferred Stock (2)
4.6 Warrant Agreement dated February 12, 1997 (6)
4.7 Certificate of Designation of Series RR Preferred Stock (9)
10.1 Lease Agreement between International Dismantling & Machinery
Corporation and L&G Associates dated March 1, 1993 for site in
South River, New Jersey (1)
10.2+ 1993 Incentive Stock Option Plan, as amended (3)
10.3+ 1995 Incentive Stock Option Plan (3)
10.4+ 1998 Comprehensive Stock Option and Award Plan (8)
10.5+ Employment Agreement between the Company and Joel Freedman, as
amended, dated February 1, 1996 (3)
10.6+ Employment Agreement between the Company and Frank Falco, as
amended, dated February 1, 1996 (3)
10.7+ Amendment, dated September of 1997, to Employment Agreement between
the Company and Joel Freedman (8)
10.8+ Amendment, dated September of 1997, to Employment Agreement between
the Company and Frank Falco (8)
10.9+ Second Amendment, dated February 1998, to Employment Agreement
between the Company and Joel Freedman (8)
10.10+ Second Amendment, dated February 1998, to Employment Agreement
between the Company and Frank Falco (8)
10.11+ Nonqualified Stock Option Agreement between the Company and Joel
Freedman (8)
10.12+ Nonqualified Stock Option Agreement between the Company and Frank
Falco (8)
10.13 Alexander Charles Lentes Stock Option (7)
10.14 Bernd Muller Stock Option (7)
10.15 Stock Option Agreement with M.H. Meyerson & Co., Inc. dated August,
1997 (8) 10.16 Nonqualified Stock Option Grant, dated January 8,
1998, between the Company and The Boston Group (8)
10.17 Amended and Restated Warrant Agreement with Rochon Capital Group
Ltd. (7)
10.18 Consulting Agreement dated May 23, 1997 between the Company and Ron
Logerwell (8)
10.19 Form of Agreement regarding confidential information and
competition by employees (1)
34
<PAGE>
10.20 Form of Severance Agreement (3)
10.21 Voting Agreement (1)
10.22 Share Rights Agreement dated April 1, 1996 (2)
10.23 License Agreement dated June 30, 1996 with Life International
Products (4)
10.24* Amendment to License Agreement with Life International Products,
dated October 1, 1998
10.25 Form of Three Year $3.00 Warrant (5)
10.26* Protocol of Intention dated November 5, 1998 re: Georgia power
plant
10.27 License Agreement dated December 15, 1997 between Life
International Products, Inc. and Seven Star International Holding,
Inc. (8)
10.28 Form of Lock-Up Agreement (8)
10.29 Form of Lock-Up Warrant (8)
10.30 Form of Four Year $5.00 Warrant (8)
10.31 Consulting Agreement dated March 1997 with SAGA Promotions, Inc.(8)
10.32 Stock Option Grant dated February 1998 to SAGA Promotions, Inc. (8)
10.33 Stock Option Grant dated February 1998 to Aaron Lehman (8)
10.34 Revised Memorandum of Understanding dated March 1998 re: Taiwan
waste-to-energy project (8)
10.35 Modification to Power Purchase Contract dated November 1997 re: El
Salvador power project (8)
10.36 Registration Rights Agreement dated August 10, 1998 with The
Isosceles Fund Limited (9)
10.37 Form of Amended and Restated Three Year $3.00 Warrant (10)
10.38 Form of Amended and Restated Three Year $4.50 Lock-Up Warrant (10)
10.39 Form of Amended and Restated One Year $6.00 and $6.75 Reload
Warrants (10)
10.40* Contract, dated January 31, 1999, re: acquisition of interest in
Zages Ltd.
21.1* List of subsidiaries
23.1* Consent of Samuel Klein and Company
27.* Financial Data Schedule
+ Compensatory plan or management agreement.
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-66466) declared effective by the Securities and Exchange Commission on
April 20, 1994
(2) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated April 1, 1996
(3) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10-KSB for the year ended December 31,
1995
(4) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996
(5) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997
(6) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996
(7) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form S-3 (Commission File No.
333-28485) declared effective by the Securities and Exchange Commission on
January 9, 1998
(8) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997
(9) Incorporated by reference to the respective exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998
(10) Incorporated by reference to the respective exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IDM ENVIRONMENTAL CORP.
By: /s/ Joel Freedman
-------------------
Joel Freedman
President
Dated: April 15, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
------------- --------- -------
/s/ Joel A. Freedman President, Chief Executive Officer April 15, 1999
- - ---------------------- (Principal Executive Officer) and
Joel A. Freedman Director
/s/ Frank A. Falco Executive Vice President, Chief April 15, 1999
- - ---------------------- Operating Officer and Chairman
Frank A. Falco of the Board of Directors
/s/ Michael B. Killeen Treasurer (Principal Accounting April 15, 1999
- - ---------------------- and Financial Officer) and Director
Michael B. Killeen
/s/ Richard Keller
- - ---------------------- Director April 15, 1999
Richard Keller
- - ---------------------- Director April___, 1999
Frank Patti
- - ---------------------- Director April___, 1999
Robert McGuinness
/s/ Mark Franceschini Director April 15, 1999
- - ----------------------
Mark Franceschini
36
<PAGE>
IDM ENVIRONMENTAL CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditor's Report..............................................F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997..............F-2
Consolidated Statements of Operations for the Years ended December
31, 1998, 1997 and 1996..................................................F-3
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1998, 1997 and 1996.........................................F-4
Consolidated Statements of Cash Flows for the Years ended December
31, 1998, 1997 and 1996..................................................F-5
Notes to Consolidated Financial Statements................................F-7
37
<PAGE>
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
IDM Environmental Corp. and Subsidiaries
South River, New Jersey
We have audited the accompanying consolidated balance sheets of IDM
Environmental Corp. and Subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDM Environmental
Corp. and Subsidiaries as of December 31, 1998 and 1997, and the results of
operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Samuel Klein and Company
SAMUEL KLEIN AND COMPANY
Newark, New Jersey
April 5, 1999
F-1
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
1998 1997
------ ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 384,292 $ 602,242
Accounts receivable 2,572,951 4,094,408
Notes receivable - current 367,198 116,457
Inventory 582,517 582,517
Costs and estimated earnings in excess of billings 1,900,336 455,823
Due from officers - 369,541
Prepaid expenses and other current assets 906,137 1,442,225
---------- ----------
Total Current Assets 6,713,431 7,663,213
Investments in and Advances to Unconsolidated Affiliates 2,454,521 3,453,309
Investment in Affiliate, at cost 1,853,125 1,715,000
Notes Receivable - long term - 1,381,155
Debt Discount and Issuance Costs 16,124 4,610,166
Deferred Income Taxes - 4,170,000
Property, Plant and Equipment 3,133,404 3,277,116
Other Assets 979,925 880,746
---------- ----------
$15,150,530 $27,150,705
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 622,794 $ 3,566,393
Accounts payable and accrued expenses 6,578,070 5,159,635
Billings in excess of costs and estimated earnings - 86,604
---------- ----------
Total Current Liabilities 7,200,864 8,812,632
Long-Term Debt 64,544 258,686
Minority Interest - -
---------- ----------
Total Liabilities 7,265,408 9,071,318
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, authorized 7,500,000 shares $.01 par value, issued
and outstanding 2,947,298 in 1998 and 1,451,307 in 1997 29,473 14,513
Additional paid-in capital 57,215,536 38,497,705
Convertible preferred stock, authorized 1,000,000 shares $1.00 par value
Series B, Issued and outstanding 0 shares in 1998 and 270 shares in 1997,
stated at a conversion value of $10,000 per share - 2,700,000
Series RR, Issued and outstanding 215 shares in 1998 and 0 shares in 1997,
stated at a conversion value of $1,000 per share 215,000 -
Retained earnings (deficit) (49,574,887) (23,132,831)
---------- ----------
7,885,122 18,079,387
---------- ----------
$ 15,150,530 $ 27,150,705
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
For the Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenue:
Contract income $20,018,564 $17,825,849 $20,807,491
Sale of equipment - 96,050 834,355
---------- ---------- ----------
20,018,564 17,921,899 21,641,846
---------- ---------- ----------
Cost of Sales:
Direct job costs 20,257,642 17,002,308 21,491,328
Cost of equipment sales - 47,057 643,242
Write-down of inventory surplus - 600,000 300,000
---------- ---------- ----------
20,257,642 17,649,365 22,434,570
Gross Profit (Loss) (239,078) 272,534 (792,724)
---------- ---------- ----------
Operating Expenses:
General and administrative expenses 12,871,481 10,537,677 9,567,435
Depreciation and amortization 626,766 723,415 668,227
Equity in net loss of unconsolidated partnerships 194,243 - -
---------- ---------- ----------
13,692,490 11,261,092 10,235,662
---------- ---------- ----------
Loss from Operations (13,931,568) (10,988,558) (11,028,386)
Other Income (Expense):
Interest income (expense) (4,321,714) (512,768) 30,542
---------- ---------- ----------
Loss before Provision (Credit) for Income Taxes (18,253,282) (11,501,326) (10,997,844)
Provision (Credit) for Income Taxes 4,170,000 (1,561,000) (1,850,000)
---------- ---------- ----------
Net Loss (22,423,282) (9,940,326) (9,147,844)
Preferred Stock Dividends including amortization
of beneficial conversion feature of $3,830,000
and $1,109,589 in 1998 and 1997 4,018,774 1,284,097 -
---------- ---------- ----------
Net Loss on Common Stock $ (26,442,056) $ (11,224,423) $ (9,147,844)
========== ========== ==========
Loss per Share:
Basic loss per share $ (13.31) $ (10.01) $ (11.30)
========== ========== ==========
Diluted loss per share $ (13.31) $ (10.01) $ (11.30)
========== ========== ==========
Basic common shares outstanding 1,987,264 1,121,269 808,947
========== ========== ==========
Diluted common shares outstanding 1,987,264 1,121,269 808,947
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
Additional Convertible Retained
Common Stock Paid In Preferred Earnings
Shares Amount Capital Stock (Deficit)
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances - January 1, 1996 620,008 $ 6,200 $13,693,895 - $ (2,760,564)
Surrender and Retirement of
Common Stock by Officer (9,221) (92) (670,488) - -
Conversion of Convertible Notes
to Common Stock 114,390 1,144 3,319,108 - -
Class A Warrants Exercised 210,200 2,102 6,954,348 - -
Private Placement Warrants 750 8 33,742 - -
Exercise of Underwriters Options 30,000 300 1,979,700 - -
Common Stock Options Exercised 4,146 41 55,248 - -
Issuance of Non Qualified Options, pursuant
to a consulting agreement - - 210,312 - -
Retirement of Common Stock, pursuant to
a stock repurchase plan (10,000) (100) (216,400) - -
Net Loss for the Year Ended
December 31, 1996 - - - - (9,147,844)
-------- ------- ----------- ---------- ----------
Balances - December 31, 1996 960,273 9,603 25,359,465 - (11,908,408)
Issuance of Convertible
Preferred Stock February 1997 - - - $ 3,000,000 -
Conversion of Preferred Stock
to Common Stock 19,292 193 289,237 (300,000) -
Class A Warrants Exercised 451,703 4,517 6,166,483 - -
Stock Option Plan Exercises 4,539 45 62,996 - -
Issuance of Non-Qualified Options,
pursuant to consulting agreements - - 456,340 - -
Preferred Stock Beneficial Conversion feature - - 1,109,589 - -
Preferred Stock Dividends - - - - (1,284,097)
Exercise of Non-Qualified Consulting Options 15,500 155 234,845 - -
Discounted Conversion feature on
Convertible Notes and Warrants - - 4,818,750 - -
Net Loss for the year ended
December 31, 1997 - - - - (9,940,326)
-------- ------- ----------- ---------- ----------
Balances - December 31, 1997 1,451,307 14,513 38,497,705 2,700,000 (23,132,831)
Issuance of Series C Convertible
Preferred Stock February 1998 - - - 3,600,000 -
Issuance of Series RR Convertible
Preferred Stock August 1998 - - - 1,500,000 -
Conversion of Series B Preferred
Stock to Common Stock 135,944 1,359 2,752,618 (2,700,000) -
Conversion of Series C Preferred
Stock to Common Stock 640,747 6,407 3,508,564 (3,600,000) -
Conversion of Series RR Preferred
Stock to Common Stock 359,981 3,600 1,192,693 (1,285,000) -
Class A Warrants Exercised 243,731 2,437 2,620,531 - -
Stock Option Plan Exercises 321 3 6,411 - -
Conversion of Convertible Debt 115,267 1,153 2,908,464 - -
Preferred Stock Dividends - - - - (4,018,774)
Discounted Conversion Feature
on Preferred Stock and Warrants - - 3,830,000 - -
Issuance of Non-Qualified Options
Pursuant to Consultants Agreements - - 1,898,550 - -
Net loss for the year ended
December 31, 1998 - - - - (22,423,282)
-------- ------- ----------- ---------- ----------
Balances, December 31, 1998 2,947,298 $ 29,472 $57,215,536 $ 215,000 $ (49,574,887)
========= ======= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
For the Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss on common stock $ (26,442,056) $ (11,224,423) $(9,147,844)
Adjustments to reconcile net loss to net cash used
in operating activities:
Deferred income taxes 4,170,000 (1,561,000) (1,956,400)
Depreciation and amortization 661,469 713,717 668,227
Amortization of debt discount 169,053 118,220 -
Amortization of beneficial conversion
feature on convertible notes 4,205,886 612,864 -
Amortization of beneficial conversion
feature on preferred stock 3,830,000 1,109,589 -
Interest expense on convertible debt
converted to common stock 63,621 - -
Dividend on convertible preferred stock
converted to common stock 188,774 8,517 -
Compensation cost of consultant stock options 1,898,550 456,340 -
Write-down of surplus inventory - 600,000 300,000
Provision for loss on notes receivable 1,004,815 1,300,000 630,000
Equity in net loss of unconsolidated affiliates 194,243 - -
Decrease (Increase) In:
Accounts receivable 1,521,457 1,531,800 989,922
Notes receivable 125,599 49,399 (283,893)
Costs and estimated earnings in excess of billings (1,444,513) 1,199,931 1,978,298
Prepaid expenses and other current assets 536,088 498,224 (291,342)
Recoverable income taxes - - 1,114,442
Increase (Decrease) In:
Accounts payable and accrued expenses 1,660,001 (1,946,192) 1,361,671
Billings in excess of costs and estimated earnings (86,604) 108 (833,079)
---------- ---------- ---------
Net cash used in operating activities (7,743,617) (6,532,906) (5,469,998)
---------- ---------- ---------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (517,757) (305,533) (574,832)
Investment in affiliate (138,125) (415,000) (1,300,000)
Investment in and advances to unconsolidated affiliates 804,545 (3,453,309) -
Acquisition of other assets (99,179) (567,500) (313,246)
Loans and advances(to) from officers 369,541 (160,865) (330,768)
---------- ---------- ---------
Net cash used in investing activities 419,025 (4,902,207) (2,518,846)
---------- ---------- ---------
Cash Flows from Financing Activities:
Loan from stockholder 265,122 - -
Net proceeds from convertible note issuance - 2,780,000 -
Net proceeds from convertible preferred stock issuances 4,590,000 2,722,500 -
Proceeds from equipment financing 156,238 - -
Principal payments on long-term debt (534,101) (676,819) (371,109)
Purchase and retirement of common stock - - (216,500)
Contribution from minority interest - - 258,621
Repurchase of minority interest - (258,621) -
Proceeds from exercise of stock options and warrants 2,629,383 6,469,041 9,235,800
---------- ---------- ---------
Net cash provided by financing activities 7,106,642 11,036,101 8,906,812
---------- ---------- ---------
Increase (Decrease) in Cash and Cash Equivalents (217,950) (399,012) 917,968
Cash and Cash Equivalents, beginning of year 602,242 1,001,254 83,286
---------- ---------- ---------
Cash and Cash Equivalents, end of year $ 384,292 $ 602,242 $ 1,001,254
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
For the Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 106,259 $ 184,631 $ 65,694
========== ======== ========
Income taxes $ - $ - $ -
========== ======== ========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Property, plant and equipment financing $ - $ 961,737 $ 195,821
========== ======== ========
Repayment of officers loan through surrender
of common stock $ - $ - $ 670,580
========== ======== ========
Conversion of convertible promissory notes to
common stock $ - $ - $ 3,320,252
========== ======== ========
Sale to minority stockholder with stock
subscription receivable $ - $ - $ 775,862
========== ======== ========
Cancellation of stock subscription receivable $ - $ 775,862 $ -
========== ======== ========
Conversion of preferred stock to common stock $ 7,585,000 $ 300,000 $ -
========== ======== ========
Conversion of interest payable from convertible
notes to common stock $ 144,840 $ - $ -
========== ======== ========
Conversion of dividends payable from convertible
preferred stock to common stock $ 349,121 $ 8,517 $ -
========== ======== ========
Beneficial conversion feature of debt discount
on convertible notes $ - $4,818,750 $ -
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
- - -----------
IDM Environmental Corp. (collectively with its subsidiaries referred to herein
as the "Company") is a global, diversified services and project development
company offering a broad range of design, engineering, construction, project
development and management, and environmental services and technologies to
government and private industry clients. The Company utilizes those same
capabilities to build, own or lease, and operate energy, waste management and
similar facilities. The Company, through its domestic and international
affiliates and subsidiaries, offers services and technologies, and operates in
three principal areas: Energy and Waste Project Development and Management,
Environmental Remediation and Plant Relocation.
Environmental remediation services, the Company's historical core business,
encompasses a broad array of environmental consulting, engineering and
remediation services with an emphasis on the "hands-on" phases of rememdiation
projects. The Company is a provider of full-service turnkey environmental
remediation and plant decommissioning services and has established a track
record in the performance of projects for a wide range of private sector, public
utility and governmental clients worldwide. The Company has melded its core
expertise in engineering, decommissioning and dismantlement services in
environmentally sensitive setting in an effort to establish a position in the
forefront of the nuclear power plant decommissioning, site remediation and
re-industrialization market.
Plant relocation services encompass a broad array of non-traditional engineering
projects, with an emphasis on plant dismantlement, relocation and re-erection.
The Company employs a proprietary, integrated matchmarking, engineering,
dismantling and documentation program in plant relocation services that provide
clients with significant cost and schedule benefits when compared to traditional
alternatives for commencing plant operations.
Principals of Consolidation and Basis of Presentation
- - -----------------------------------------------------
The accompanying financial statements consolidate the accounts of the parent
company and all of its wholly owned and majority owned subsidiaries. Investments
in unconsolidated affiliated joint ventures in which the ownership of the
venture is between 20% and 50% are accounted for under the equity method for
balance sheet presentation and the proportionate consolidation method for
revenues and expenses of the joint venture. Investments in affiliates
representing less than 20% of the ownership of such companies are accounted for
under the cost method.
Translation of Foreign Currencies
- - ---------------------------------
Assets and liabilities of foreign operations, where the functional currency is
the local currency, are translated into U.S. dollars at the fiscal year end
exchange rate. The related translation adjustments are required to be recorded
as cumulative translation adjustments, a separate component of shareholders'
equity. Revenues and expenses are required to be translated using average
exchange rates prevailing during the year. Foreign currency transaction gains
and losses, as well as translation adjustments for assets and liabilities of
foreign operations where the functional currency is the dollar, are included in
net income (loss). Foreign currency realized and unrealized gains and losses for
the years presented were not material.
Revenue Recognition
- - -------------------
The consolidated financial statements have been prepared on the basis of the
percentage of completion method of accounting. Under this method contract
revenue is determined by applying to the total estimated income on each
contract, a percentage which is equal to the ratio of contract costs incurred to
date to the most recent estimate of total costs which will have been incurred
upon the completion of the contract. Costs and estimated earnings in excess of
billings represents additional earnings over billings, based upon percentage
completed, as outlined above. Similarly, billings in excess of costs and
estimated earnings represent excess of amounts billed over income recognized.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Billings on long-term contracts are done on
a monthly basis. Unbilled amounts on long-term contracts include amounts
recognized in revenues under the percentage of completion method of accounting,
but not billed to the customer at year end. It is expected that such billings
will be made as contracts are completed. Unbilled amounts on long-term contracts
are not separately stated as they are not material. Retentions on long-term
contracts are balances billed but not paid by customers which, pursuant to
retainage provisions in contracts, are due upon completion of the contract and
acceptance by the customer. Substantially all retentions are deemed collectible
within one year.
F-7
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
- - -------------------------
For financial statement purposes, short-term investments with a maturity of
ninety days or less and highly liquid investments are considered cash
equivalents.
Inventory
- - ---------
Inventory consists of used equipment and is stated at the lower of cost
(specific identification) or market.
Unamortized Debt Discount and Issuance Costs
- - --------------------------------------------
Costs in connection with the issuance of debt and equity instruments are
amortized and charged to operations using the straight line method over the
terms of the respective issues. Upon conversion, any unamortized costs are
charged to additional paid in capital net of tax effect.
Property, Plant and Equipment
- - -----------------------------
Property plant and equipment are recorded at cost. Depreciation has been
calculated using the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the term of the related lease or
the estimated useful lives of the assets. The depreciation method and estimated
useful lives of the assets are generally as follows:
Estimated Method of
Asset Useful Life Depreciation
Office equipment 3 - 10 Straight-line
Furniture and fixtures 3 - 10 Straight-line
Leasehold improvements 5 - 31.5 Straight-line
Transportation equipment 3 - 5 Straight-line
Job equipment 7 - 10 Straight-line
Costs of repairs and maintenance are charged to operations as incurred and
additions and betterments are capitalized. Upon retirement or disposition of
assets, the cost and accumulated depreciation are eliminated from the accounts
and any gain or loss is reflected in the statement of operations.
Income Taxes
- - ------------
Income taxes have been provided for based on the provisions of Statement of
Financial Accounting Standards Board No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
F-8
<PAGE>
IDM ENVIRONMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting for Stock-Based Compensation
- - ---------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
employee stock options plans. Under APB 25, when the exercise price of the
Company's employee stock options equals or is above the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In accounting for options granted to persons other than employees, the
provisions of Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123") were applied. According
to SFAS 123 the fair value of these options was estimated at the grant date
using Black-Scholes option pricing model.
Impairment of Long-Lived Assets
- - -------------------------------
The Company accounts for impairment of long lived assets in accordance with
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 121 requires that if facts and circumstances indicate that the cost of
fixed assets or other assets may be impaired, an evaluation of recoverability
would be performed by comparing the estimated future undiscounted pre-tax cash
flows associated with the asset to the asset's carrying value to determine if a
write-down to market value or discounted pre-tax cash flow value would be
required.
Comprehensive Income
- - --------------------
For the year ended December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
This statement establishes rules for the reporting of comprehensive income and
its components which require that certain items such as foreign currency
translations adjustments, unrealized gains and losses on certain investments in
debt and equity securities, minimum pension liability adjustments and unearned
compensation expense related to stock issuances to employees be presented as
separate components of stockholders' equity. The adoption of SFAS 130 had no
material impact on total stockholders' equity for any of the years presented in
these consolidated financial statements.
Earnings (Loss) Per Share
- - -------------------------
As of December 31, 1997 the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share" ("SFAS 128") replacing the calculation of
primary and fully diluted earnings per share with Basic and Diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes the
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Diluted earnings per share reflects the potential dilution
that could occur if securities or other agreements to issue common stock were
exercised or converted into common stock. Dilutive earnings per share is
computed based upon the weighted average number of common shares and dilutive
common equivalent shares outstanding. Common stock options, which are common
stock equivalents, had an anti-dilutive effect on earnings per share and no
effect on the weighted average number of common shares. All net loss per share
amounts for all periods presented have been restated to conform to SFAS 128
requirements.
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. All share and
per-share amounts in the accompanying consolidated financial statements have
been restated to give effect to the 1 for 10 reverse stock split.
Reclassifications
- - -----------------
Certain reclassifications have been made to the prior year balances to conform
to the current year presentation.
F-9
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Special Charges
- - ---------------
During the fourth quarters of 1998 and 1997, the Company recorded significant
charges of approximately $5,855,000 and $3,200,000, respectively, to operations,
primarily related to write downs of inventory, notes receivable and other
assets. In addition, the Company increased the valuation allowance for deferred
tax assets based on managements assessment of future operations.
2. MANAGEMENT'S PLANS, FINANCIAL RESULTS AND LIQUIDITY
The Company has suffered recurring losses from operations and at December 31,
1998, the Company had a working capital deficit of approximately $0.5 million
and a cash balance of approximately $0.4 million. As a result of the loss
incurred during 1998, operating activities used $7.7 million in cash. The
Company also used $1.1 million in cash for investing activities during 1998 for
(i) acquisition of additional shares of Life International Products, Inc. for
$0.2 million, (ii) acquisition of a 49% interest in Kortman Polonia for $0.6
million, and (iii) a capital contribution to Seven Star of $0.3 million (See
Note 3, Acquisitions and Investments in Affiliates). Cash flows from financing
activities totaled $7.1 million during 1998 and consisted principally of (i)
$2.6 million in proceeds received from the exercise of various warrants and
options, and (ii) $4.6 million in net proceeds from convertible securities
issuances.
The Company requires substantial working capital to support their 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, 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 within the 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
flows, term notes and bank lines of credit. Since April of 1994, the Company has
carried no bank debt and has funded operations principally through the sale of
equity securities and securities convertible into equity securities. At December
31, 1998, the Company had no bank debt and no significant long term debt and was
funding operations entirely through cash on hand and operating cash flow.
At December 31, 1998, the Company 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 Company's East
Dam California Project ($10.8 million), where the Companys Joint Venture was a
subcontractor on the Reservoir Project for the Water District of Southern
California, and a Department of Energy project in Los Alamos, New Mexico which
was completed in 1997 ($2.8 million). The Company is presently aggressively
pursuing collection of these claims and expects that it will be able to collect
substantially all amounts claimed if they continue to pursue such claims through
litigation, if necessary. However, it is possible that the Company will
compromise some of their 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. The claim with respect to the East Dam Project
has been approved by the general contractor on the project but has not, as yet,
been approved by the project owner. The general contractor agreed in the first
quarter of 1999 to release the $750,000 retainage on the project. There can be
no certainty as to the amount, if any, which the Company will receive with
respect to the claims on change orders and when, if ever, they will receive
such amounts.
At December 31, 1998, the Company had a backlog of approximately $8 million of
signed services contracts as compared to a backlog of approximately $31 million
at December 31, 1997. The largest projects in their backlog at December 31, 1998
are the BNFL, Inc. asset recovery project in Oak Ridge, Tennessee, with an
estimated value of services to be performed of $4 million, and the North East
Rim East Side Reservoir Project for the Water District of Southern California,
with an estimated value of services to be performed of $3 million. The Oak Ridge
Project began in March 1998 and the North East Rim project is expected to begin
in May 1999 with both projects scheduled to be completed during 1999. The
backlog at December 31, 1998 does not include services expected to be rendered
in connection with the Company's involvement in the revitalization of the EWN
site in Germany. The total German government funding for the EWN project is
approximately $3.65 million. The Company anticipates that they will perform as
much as $700 million of services at the EWN site over a ten year period. The
Company expects to finalize a comprehensive
F-10
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. MANAGEMENT'S PLANS, FINANCIAL RESULTS AND LIQUIDITY (continued)
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, the Company is presently bidding on, or
proposes to bid on, numerous projects in order to replace revenue from projects
which will be completed during 1999 and to increase the total dollar volume of
projects under contract. The Company anticipates that its 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 they intend to pursue. Their
regional offices, particularly the Oak Ridge Tennessee office, are strategically
located in areas having a high concentration of prospective governmental and
private remediation sites. While bidding to perform services at such sites is
expected to be highly competitive, the Company believes that their existing
presence on adjacent projects combined with their proven expertise and resources
will allow them to successfully bid on and perform substantial additional
projects based out of their regional offices.
In addition to remediation and plant relocation projects which the Company is
presently bidding or negotiating, during 1997 and 1998 the Company entered the
energy production and waste treatment services market. The Company expects to
begin energy production during the second quarter of 1999 and generate sales
from a power project the Company is developing pursuant to a signed Protocol of
Intention with the Ministry for Fuel and Energy of the former Soviet State of
Georgia. The Company also plans 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 the Company anticipates 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. 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
they expect to undertake. While the Company has been successful in attracting
substantial partners in carrying out various phases of the EWN nuclear
decommissioning/site revitalization project, they 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 the
Company commences future projects.
In an effort to deal with these concerns, the Company is presently evaluating
the sale or other liquidation of various long-term assets which they believe can
provide adequate funding to support future operations. In March of 1999, the
Company agreed to accept $300,000 in full settlement of their notes receivable
from UPE relating to the sale of their surplus equipment inventory. The
settlement is payable $150,000 at closing with the balance payable in monthly
installments over eight months. The Company is presently evaluating the sale of
properties in Poland and the potential compromise of their claims for additional
compensation on the East Dam project as sources of additional funds. The Company
believes that their working capital, combined with the expected receipt of funds
from the resolution of these change orders and litigation, is sufficient to meet
their 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, the Company may be required to seek new bank lines of credit or
other financing in order to facilitate the performance of jobs. While the
Company is conducting ongoing discussions with various potential lenders with a
view to establishing available credit facilities, the Company presently has no
commitments from any bank or other lender to provide financing if such financing
becomes necessary to support operations. 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. However, management believes that the Company will be able to finance
its anticipated needs for 1999.
F-11
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. ACQUISITIONS AND INVESTMENTS IN AFFILIATES
Life International Products
- - ---------------------------
On July 11, 1996, effective June 30, 1996, the Company, pursuant to a license
agreement entered into between the Company and Life International Products
("Life"), acquired a 10% interest (100,000 shares) in Life for $1,300,000. In
addition to acquiring a 10% interest, the Company entered into an exclusive
licensing agreement with Life pursuant to which the Company shall market and
employ Lifes patented environmental remediation technology for long term
bioremediation of contaminated ground water throughout North America. On
November 3, 1997, the Company invested an additional $375,000 (10,000 shares) in
Life to maintain its 10% interest. On April 21, 1998, the Company purchased an
additional 8,250 shares for $178,125 from its chief executive officer. The
Company has recorded its investment at cost and the investment is presented in
the balance sheet classification "Investment in Affiliate, at cost".
Pursuant to such license agreement, the Company agreed to fund the operation and
expenses associated with the marketing plan and allocate revenues from such
agreement for (1) repayment of Life's cost in connection with manufacturing and
(2) any actual expenses of both the Company and Life regarding the sale and
marketing of this technology. The balance (the "Net Revenues") shall be shared
between the Company and Life, 20% and 80% respectively, with a minimum net
revenue payment of $400,000 due to Life. This agreement, as amended November 1,
1996, provides that Life is to be paid this minimum net revenue relating to and
for the period of amendment to October 1, 1998. Subsequent to such time, the
Company and Life agree to negotiate in good faith as to future minimum revenues
and agreement terms. For the years ended December 31, 1998, 1997 and 1996, no
revenues have been recognized.
Global Waste and Energy
- - -----------------------
On July 19, 1996 the Company, through a newly formed 90% owned subsidiary,
Global Waste & Energy, Inc. ("Global Delaware"), a Delaware corporation, entered
into an agreement with Enviropower Industries Inc. (formerly Continental Waste
Conversion, Inc. ("CWC").) Pursuant to this agreement, Global Delaware acquired,
in exchange for a 10% interest in Global Delaware and a loan through a wholly
owned subsidiary of Global Delaware of $160,000 (Canadian) or approximately
$116,550 (U.S.), the exclusive worldwide rights (excluding Canada) to CWCs
proprietary Kocee Gas Generator waste treatment technology that converts
municipal solid waste, including tires and plastics, into electrical energy. In
addition, the Company committed to loan up to $1,350,000 over a four month
period to Global Delaware to carry on this newly acquired waste-to-energy
business.
At closing the Company made an initial loan of $600,000 to Global Delaware
repayable upon demand with interest at 9.25%. As of December 31, 1998 and 1997
the Company had loaned a total of $3,341,000 and $2,491,000, respectively, to
Global Delaware. The consolidated financial statements include results of
operations of Global Delaware and its subsidiaries from July 19, 1996, and
therefore all intercompany loans and transactions have been eliminated within
the consolidated financial statements of the Company.
In conjunction with the July 19, 1996 agreement, Global Delaware formed a wholly
owned Alberta, Canada subsidiary, Global Waste & Energy, Inc. ("Global Alberta")
and through this company acquired from CWC through assignment the rights, title
and interest of certain contracts and agreements and two inactive corporations
domiciled in El Salvador and East Asia. These companies were acquired to market
and develop systems relating to the disposal of domestic, industrial and
agricultural waste and generation of electrical energy by means of gas generator
technology.
On October 18, 1996, Global Alberta entered into a subscription agreement with a
minority investor, pursuant to which the minority investor had committed to
purchase a 45% interest in the El Salvador corporation for approximately
$1,000,000 U.S. As of December 31, 1996, $258,621 had been received from the
minority investor. During 1997 the Company repurchased from this investor their
45% equity interest for their initial investment of $258,621 and a cancellation
of the stock subscription receivable.
As further discussed in Note 11, CWC has filed a claim against the Company
disputing the agreements. On March 20, 1998 Enviropower Industries Inc. filed an
assignment in bankruptcy. As a result, the Company wrote off the $116,550 loan
as of December 31, 1997.
F-12
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. ACQUISITIONS AND INVESTMENTS IN AFFILIATES (continued)
Construction Joint Ventures
- - ---------------------------
During 1996 and 1997, the Company entered into joint venture agreements for the
purposes of completing construction related projects, totaling approximately
$20,225,000, specifically for work to be performed on the Eastside Reservoir
Project for the Water District of Southern California and building
decommisioning and equipment removal at IBM Microelectronics Hudson Valley
Research Park, East Fishkill, N.Y.
These joint ventures, in which the Company holds equity interests of 49% and
50%, respectively, are accounted for using the equity method of accounting for
balance sheet presentation and are presented in the balance sheet classification
Investments in and Advances to Unconsolidated Affiliates. The Company has
included their proportionate share of revenues and expenses related to these
joint ventures within its statement of operations for the years ended December
31, 1998, 1997 and 1996. Included in contract income and direct job costs for
each of the years ended are approximately $5,118,000 and $6,433,000, $3,304,000
and $3,040,000, $0 and $0, respectively.
Seven Star International Holdings, Inc.
- - ---------------------------------------
In January of 1998, the Company made a $300,000 payment representing their one
half share of the capital of Seven Star. Seven Star is a joint venture between
the Company and Jin Xin and is incorporated in the British Virgin Islands. Seven
Star has entered into a license agreement with 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, and elsewhere in
southeast Asia. The license agreement requires a minimum royalty of $400,000 for
the first year which was paid upon execution of the license agreement.
Kortman Polonia
- - ---------------
In November of 1998, the Company paid $600,000 to acquire a 49% interest in
Kortman Polonia, a Polish company with substantial real estate holdings. Kortman
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.
The Company did not recognize any revenues from Seven Star or Kortman Polonia
during 1998 but expects to begin realizing revenues from the water distribution
operations of Seven Star during 1999.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31,
1998 1997
---- ----
Trade accounts receivable $3,072,951 $4,594,408
Allowance for doubtful accounts (500,000) (500,000)
--------------- ---------------
$2,572,951 $4,094,408
--------------- ---------------
--------------- ---------------
F-13
<PAGE>
5. NOTES RECEIVABLE
On September 29, 1995, the Company entered into two agreements for the sale of
equipment inventory with Universal Process Equipment, Inc. and their affiliate,
Bethlehem Corporation (collectively "UPE"), a non-public company with principle
operations in North America, and one of the world's largest marketers of new and
processed equipment. Pursuant to the terms of such agreements, the Company sold
substantially all of its glass lined equipment and process equipment for an
aggregate minimum consideration of $4 million. The purchase price of such
equipment was payable from one third of the net sales proceeds of such equipment
received by UPE. The unpaid portion of the purchase price of such equipment
shall bear interest at the average LIBOR base rate over the previous twelve
month period and any amounts not previously paid under the agreement shall be
payable in full on September 29, 2000. At December 31, 1996 the average twelve
month rate was 5.53%. At December 31, 1998 and 1997, $300,000 and $3,211,155,
respectively, was outstanding (including interest). During the fourth quarter of
1998, 1997 and 1996 management provided $1,004,815, $1,200,000 and $630,000
reserves against the outstanding balance. In March of 1999, the Company agreed
to accept $300,000 in full settlement of the note receivable from UPE. The
settlement is payable $150,000 at closing with the balance payable in monthly
installments over eight months.
On June 7, 1996, the Company loaned $250,000 to Solucorp Industries, Ltd.
("Solucorp"), an environmental company with which the Company had entered into a
September 7, 1995 Joint Marketing and Operation Agreement relating to the cross
marketing of Solucorp's soil remediation process and the Company's products and
services. The note executed June 7, 1996 (and further amended October 4, 1996),
is secured by shares of Solucorps common stock. The terms of the note as amended
require the repayment of principal with interest at 10.25% per annum in eleven
consecutive monthly payments of $22,448 commencing November 1, 1996, with an
initial payment of $23,202 due upon the signing of the amended agreement. During
November 1998, the Company liquidated the collateral and applied the proceeds
($41,607) against the note. At December 31, 1998 and 1997, $167,198 and
$216,457, respectively, remained outstanding (including interest) and is
included within the current portion of Note Receivable net of a $100,000
allowance for uncollectablility at December 31, 1998.
Because of the unsatisfactory performance of these notes, the Company recognized
no interest income on them during 1998. Total interest income earned from these
notes for the years ended December 31, 1998, 1997 and 1996 was $0, $107,879,and
$184,394, respectively.
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to the billing status of uncompleted contracts is as
follows:
December 31,
1998 1997
---- ----
Costs incurred on uncompleted contracts $ 14,617,961 $ 10,108,306
Estimated earnings (loss) (389,867) 2,331,313
-------------- ---------------
14,228,094 12,439,619
Less: Billings to date 12,327,758 12,070,400
-------------- ---------------
$ 1,900,336 369,219
-------------- ---------------
-------------- ---------------
F-14
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (continued)
Included in the accompanying balance sheets under the following captions:
December 31,
1998 1997
---- ----
Costs and estimated earnings in excess of billings $1,900,336 $ 455,823
Billings in excess of costs and estimated earnings - (86,604)
----------- ------------
$1,900,336 369,219
----------- ------------
----------- ------------
7. INVENTORY
Inventory consists of the following:
December 31,
1998 1997
---- ----
Purchased equipment ready for sale $ 582,517 $ 582,517
--------- ----------
--------- ----------
The profitability of the Company's surplus equipment and scrap sales may be
impacted in the future by potential inventory related uncertainties. Further,
because of the Company's practice of acquiring surplus equipment from customers
in connection with the performance of jobs and because of the expense of
relocating and storing such items, many inventory items are held pursuant to
joint venture arrangements at the joint venture partner's site pending the sale
of such items.
During the fourth quarter of 1997 and 1996, management provided write-downs
against the Companys inventory of surplus power generating equipment of
$600,000 and $300,000, respectively. Management believes the write-downs were
necessary due to the lack of sales activity and delays in the utilization of
this equipment within projects currently being negotiated by the Company.
F-15
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31,
1998 1997
------ ------
Land $ 475,023 $ -
Office equipment 418,784 403,846
Furniture and fixtures 437,803 494,117
Leasehold improvements 1,018,885 1,018,885
Transportation equipment 823,866 778,011
Job equipment 4,898,064 4,872,313
Land Improvements 131,968 131,968
------------ -------------
8,204,393 7,699,140
Less: Accumulated depreciation and amortization 5,070,989 4,422,024
------------ -------------
$3,133,404 $
3,277,116
============ =============
During the year ended December 31, 1998 and 1997, $156,608 and $148,526 in
depreciation expense was charged to job costs.
9. LONG-TERM DEBT
7% Convertible Notes, Due September 1997
- - ----------------------------------------
During the quarter ended September 30, 1995, the Company completed a $5,000,000
private placement offering of 7% convertible notes pursuant to Regulation S
under the Securities Act of 1933, as amended. The notes were due September 15,
1997. The holders of the notes were entitled, at their option, to convert on or
after November 15, 1995 one third of the original principal amount of the notes
into the shares of common stock of the Company at a conversion price for each
share equal to the lessor of the closing bid price of the common stock on
September 15, 1995 ($50.00) or 82% of the market price of the common stock at
the date of conversion. The remaining two thirds of the principal amount of
notes could be converted on the same terms, one third after December 15, 1995
and one third after January 15, 1996, respectively. In the event the notes are
converted within one year of their issuance, no interest shall be payable on the
converted portion of such shares. As of December 31, 1997, all the notes had
been converted into 159,727 shares of the Companys common stock.
Due to the lack of a fixed conversion price or other mechanism to limit the
total number of shares exercisable upon conversion of the debt, an inadvertent
violation of the rules applicable to NASDAQ National Market Securities was
determined to have occurred during the first quarter of 1996. To remedy such
problem, the Company imposed a cap on conversions which could not be exceeded
unless the shareholders of the Company first approved the issuance of shares on
conversion in an aggregate amount exceeding 20% of the outstanding shares on the
date of the convertible note issuances. Consequently, the balance of the
Convertible Notes outstanding at March 31, 1996 amounting to $1,750,000 were
subject to a cap on conversions imposed by the Company to assure compliance with
NASDAQ rules. The Company submitted a proposal to its shareholders at its 1996
annual shareholders meeting to permit the conversion of the remaining
Convertible Notes. The proposal was approved and the remaining Notes became
convertible with the conversion price being reduced from 82% of the closing bid
price to 80% of such price and all interest accrued on such Convertible Notes
being payable in shares of common stock.
In connection with the issuance of the convertible notes, the Company paid total
offering costs of approximately $815,000.
F-16
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. LONG-TERM DEBT (continued)
7% Convertible Notes, Due September 1997 (continued)
- - ----------------------------------------------------
Such costs have been capitalized as deferred issuance costs and have been
amortized over the term of the notes. To the extent the notes were converted,
all or an allocable portion of such costs were charged against paid in capital
net of tax effect. As of December 31, 1996, $201,775 was amortized and $613,225
of unamortized deferred issuance costs and ($103,668) in accrued interest (net
of the tax effect of $69,117) was charged (credited) to paid in capital in
connection with the conversion of the $5,000,000 of convertible notes.
7% Convertible Notes, Due January 1999
- - --------------------------------------
On August 13, 1997, the Company completed a private placement of $3,025,000 of
7% Convertible Notes (the "Convertible Notes") and 267,500 three year Warrants
(the "Three Year Warrants").
The Convertible Notes are convertible into common stock at the lesser of (i)
$27.50 per share or (ii) 75% of the average closing bid price of the common
stock during the five trading days prior to conversion. The Three Year Warrants
are exercisable for a three year period at the lesser of $30.00 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 199,713 shares of common stock on conversion unless the shareholders
of the Company approved issuance beyond that level upon conversion. Shareholder
approval of issuance beyond 199,713 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 $27.50 or less at 125%
of the principal amount of such Convertible Notes. The Convertible Notes pay
interest at 7% payable quarterly and on conversion or at redemption in cash or
common stock, at the Companys option. In the event that a registration
statement covering the shares underlying the Convertible Notes has not been
declared effective within 90 days or 180 days after the issuance of the
Convertible Notes, the interest rate on the Convertible Notes was to be
increased to 18% and 24%, respectively, from those dates until such a
registration statement became effective. As a registration was not declared
effective within the 90 days required under the terms of the agreement, the
company incurred $46,215 in additional interest. On January 8, 1998 the
registration was declared effective and during the first quarter of 1998 all
outstanding notes were converted.
The difference between the market price of the Companys common stock, the
discounted beneficial conversion feature and the fair market value of the
granted warrants totaled $4,818,750 and is being accounted for as additional
interest reflected in debt discount and 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 stocks trading price of $40.00 per share on August 13, 1997.
This interest is being amortized over the three year life of the debt. During
1998 and 1997, $4,205,886 and $612,864 has been amortized and recorded as
interest expense.
F-17
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. LONG-TERM DEBT (continued)
<TABLE>
Long-term debt consists of the following:
December 31,
1998 1997
------ ------
<S> <C> <C>
Debentures:
7% convertible notes, due January 1999 $ - 3,025,000
Stockholder Loan:
Demand note payable in connection with locking in an amended warrant exercise price,
convertible into common stock 265,122 -
Notes Payable:
Note, payable in monthly installments of $1,207 including
interest at approximately 8.25% per annum through September 2000, secured by equipment 28,971 42,249
Note, payable in monthly installments of $547 including interest
at approximately 11.9% per annum through February 1998, secured by equipment - 912
Note, payable in monthly installments of $1,082 including interest at approximately
24% per annum through April, 2001, secured by equipment 22,673 28,730
Note, payable in monthly installments of $793 including interest at approximately 10.2%
per annum through February 2000, secured by equipment 9,409 16,803
Capital Lease Obligations:
Capital lease, payable in monthly installments of $3,569 including interest approximately
11.15% per annum through May 2000, secured by equipment 76,350 109,070
Capital lease, payable in monthly installments of $1,508 including interest approximately
11.4% per annum through September 1998, secured by equipment - 12,080
Capital lease, payable in monthly installments of $35,513 including interest at approximately
10.7% per annum through March 1999, secured by equipment 127,285 471,631
Capital lease, payable in monthly installments of $6,614 including interest at approximately
10.7% per annum through October 1999, secured by equipment 53,369 118,604
Capital lease, payable in monthly installments of $7,398 including interest at approximately
10.7% per annum through October 1999, secured by equipment 104,159 -
------------- -------------
687,338 3,825,079
Less: Current portion 622,794 3,566,393
------------- -------------
$ 64,544 $ 258,686
============= =============
</TABLE>
At December 31, 1998, maturities of long-term debt (including capital lease
obligations) are as follows:
1999 $ 622,794
2000 59,520
2001 5,024
2002 -
---------------
$ 687,338
===============
F-18
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. PROVISION (CREDIT) FOR INCOME TAXES
Provision (Credit) for income taxes is as follows:
December 31,
1998 1997 1996
---- ---- ----
Current:
Federal $ - $ - $ -
State - - -
Foreign - - -
--------------- --------------- ---------------
- - -
--------------- --------------- ---------------
Deferred:
Federal 3,870,000 (1,906,000) (1,530,000)
State 300,000 230,000 (205,000)
Foreign - 115,000 (115,000)
--------------- --------------- ---------------
4,170,000 (1,561,000) (1,850,000)
--------------- --------------- ---------------
$ 4,170,000 $ (1,561,000) $ 1,850,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
A reconciliation between income tax expense (benefit) shown in the statement of
operations and expected income tax expense (benefit) using statutory federal
income tax rates applicable to the Company is as follows:
Years Ended December 31,
1998 1997 1996
---- ---- ----
Amount Amount Amount
------ ------ ------
Taxes at Statutory rate $(6,206,000) $(3,910,000) (3,739,000)
State taxes net of federal tax effect (607,000) (480,500) (551,000)
Foreign tax loss carryforward 415,000 390,500 291,000
Non-deductible items 1,430,000 (40,300) (26,100)
Increase in valuation allowance 9,138,000 2,479,300 2,175,100
--------------- --------------- ---------------
$ 4,170,000 (1,561,000) (1,850,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
F-19
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. PROVISION (CREDIT) FOR INCOME TAXES (continued)
Certain items of income and expense are recognized in different years for
financial reporting and income tax purposes. Deferred income taxes are provided
in recognition of these temporary differences. The components of these deferred
income tax assets are as follows:
December 31,
1998 1997 1996
---- ---- ----
Deferred Tax Assets:
Current:
Accounts and notes receivable allowances $ 1,369,000 1,028,800 351,000
Inventory allowance 378,000 401,000 146,700
Consultant expense 860,000 110,100 44,500
Net operating loss carryforward 12,987,000 9,135,400 5,143,900
Less: Valuation allowance (15,334,000) (6,357,000) (2,945,800)
---------- ---------- ----------
260,000 4,318,300 2,740,300
Non-current:
Fixed assets (260,000) (148,300) (131,300)
----------- ----------- ----------
Total deferred tax assets $ 0 $4,170,000 2,609,000
----------- ----------- ----------
----------- ----------- ----------
At December 31, 1998 the Company had net operating loss carryforwards for
federal income tax purposes of approximately $30,000,000, of which approximately
$2,300,000 expires in the year 2010, $9,100,000 in the year 2011, $8,600,000 in
the year 2012, and the balance of $10,000,000 in the following year. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
temporary differences become deductible and the net operating losses can be
carried forward. In determining such projected future taxable income, management
has considered the Companys historical results of operations, the current
economic environment within the Companys core industries and future business
activities which the company has positioned itself. At December 31, 1998, in
view of the Companys substantial losses over the past several years and
uncertainties regarding future operations, the Companys valuation allowance is
equal to their deferred tax assets, net of deferred tax liabilities. The
increase in the valuation allowance resulted in a tax provision of $4,170,000.
11. COMMITMENTS AND CONTINGENCIES
Employment Contracts and Agreements
- - -----------------------------------
On February 1, 1996, and effective January 1, 1996, Joel A. Freedman and Frank
A. Falco each entered into employment agreements, superseding their prior
employment agreements, with the Company on substantially identical terms.
Pursuant to such agreements, Mr. Freedman and Mr. Falco each receive (i) a base
salary of $250,000 per year plus 2% of operating profits; (ii) bonuses as
determined by the Board of Directors; and (iii) participation in any employee
benefit plans and fringe benefit arrangements generally available to the
Companys employees. For purposes of computing the salary of Messrs. Freedman
and Falco, operating profits are defined as net income from operations before
deduction of interest expense, income taxes, depreciation and amortization and
other non-cash charges to income.
F-20
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
Employment Contracts and Agreements (continued)
- - -----------------------------------
In addition to their cash compensation, Messrs. Freedman and Falco will receive
certain bonuses in the form of common stock of the Company (the "Stock Bonus")
if the Company meets certain earnings criteria. Pursuant to such Stock Bonus
arrangements, the Company will issue stock to Messrs. Freedman and Falco in an
aggregate amount of up to 15% of the total issued and outstanding shares of
common stock of the Company as measured at the time(s) of issuance. The criteria
for issuing such shares is as follows: (i) if pre-tax net income for any one of
the years from 1994 to 2005 equals or exceeds $2,500,000, shares in an amount
equal to 5% of total issued and outstanding common stock of the Company shall be
issued; (ii) if pre tax net income for any one of the years from 1994 to 2005
equals or exceeds $3,500,000, shares equal to 5% of total issued and outstanding
common stock of the company shall be issued; and (iii) if pre-tax net income for
any one of the years from 1994 to 2005 equals or exceeds $6,000,000, shares
equal to 5% of total issued and outstanding common stock of the Company shall be
issued. For purposes of determining satisfaction of the above criteria, each of
the criteria may only be satisfied in one of the measuring years but two or more
of such criteria may be satisfied in the same year (e.g. pre-tax earnings of $6
million in any one year will satisfy each of the three criteria thus resulting
in the issuance of the full 15%, but pre-tax earnings of $2.5 million in each of
the years will only satisfy the first criteria for one year thus resulting in
the issuance of only 5% of the possible 15%). Pre-tax net income for each year
shall be determined, and the right to receive shares shall vest, on April 30
following each fiscal year. In computing pre-tax net income for purposes of
determining whether the above criteria has been satisfied, any charges to
earnings arising solely as a result of the issuance of shares pursuant to the
stock bonus arrangement shall be excluded.
Effective September 1, 1997 and February 18, 1998, the employment agreements of
Messrs. Freedman and Falco were amended. Pursuant to such agreements, effective
September 1, 1997, Mr. Freedman and Mr. Falco each receive (i) a base salary of
$480,000 per year plus 2% of net operating profits; (ii) bonuses as determined
by the Board of Directors; (iii) participation in any employee benefit plans and
fringe benefit arrangements generally available to the Companys employees; and
(iv) an entertainment expense allowance of $45,000 per year. For purposes of
computing the salary of Messrs. Freedman and Falco, operating profits are
defined as net income from operations before deduction of interest expense,
income taxes, depreciation and amortization and other non-cash charges to
income. Pursuant to the February 18, 1998 amendment to their employment
agreements, Messrs. Freedman and Falco were each granted 225,000 stock options
exercisable at $6.75 per share, as amended, and expiring February 17, 2003. The
Company obtained a fairness opinion and valuation report from independent
sources that estimated the fair market value for each of these options to be
$7,017,750 at the date of grant using the Black-Scholes value option pricing
model. Exercise of the options is not permitted until the closing bid price of
the Companys common stock equals or exceeds 120% of the applicable option price
in existence prior to December 11, 1998.
Pursuant to the September 1997 and February 1998 amendments to the employment
agreements of Messrs. Freedman and Falco, the previously existing draw schedule
and stock bonus provisions were eliminated from the employment agreements.
For the years ended December 31, 1998, 1997 and 1996 the compensation expense
for the two officers, including board approved bonuses, was $480,000, $480,000
and $507,750 each, respectively. For 1996, the board approved bonuses to be paid
to Mr. Freedman and Mr. Falco to increase their minimum guaranteed cash
compensation to $480,000 each.
The employment agreements prohibit Mr. Freedman and Mr. Falco from competing,
directly or indirectly, with the Company or disclosing confidential matters with
respect to the Company for two years after termination of employment. Each of
such agreements expires on March 31, 2005 and are thereafter automatically
extended for one-year periods unless there is a notice of termination from
either the Company or the employee.
F-21
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
Employment Contracts and Agreements (continued)
- - -----------------------------------
In the event of their disability, Messrs. Freedman and Falco are entitled to
continue their full salary at the date of disability for a period of one year
after which time the Company may terminate the employment of such disabled
employee without further compensation. In the event of death during the term of
employment, the estate of Mr. Freedman and Mr. Falco, as appropriate, shall be
entitled to three months salary. In the event of the termination of Mr.
Freedman's or Mr. Falco's employment within one year of the occurrence of
various change in control events, or in the event of termination of their
employment by the Company for any reason other than death or disability, the
Company must pay or provide to Mr. Freedman and/or Mr. Falco, as appropriate;
(i) a lump sum payment equal to 2.99 times his average annual gross income from
the company for the five tax year period ending before the date of such
termination; (ii) a lump sum payment equal to three times the value of all
"in-the-money" stock options held by such persons at the date of termination;
and (iii) continued participation in all employee benefit programs for a period
of three years, provided that the employee may, at his election, receive a lump
sum cash payment equal to the value of such benefits in lieu of continued
participation in such benefit plans. Additionally, in the event of a change in
control during the term of their contracts, Messrs. Freedman and Falco will be
deemed to have earned in full the Stock Bonuses provided for in their employment
contracts. As used in the employment agreements of Messrs. Freedman and Falco, a
"change in control" is defined to be (i) the acquisition of 15% of the Company"s
common stock; (ii) a change in majority composition of the Board of Directors
within any two year period; or (iii) a failure to elect either of such employees
to the Board when such employee is standing for election; provided, however,
that such events shall not constitute a change in control if a majority of the
Directors immediately prior to such "change in control" approve the transaction
or event otherwise constituting a "change of control."
On July 19, 1996, Global Alberta entered into employment agreements with the two
principle officers of Global Alberta for terms through June 30, 1999. Pursuant
to such agreement, the two officers each are to receive an annual salary of
$240,000 (Canadian) through the term of the agreement. The annual salary in U.S.
dollars is approximately $168,000, utilizing the exchange rate existing at
December 31, 1997.
On February 11, 1996, the Company entered into agreements with its executive
employees pursuant to which such employees have agreed to maintain the
confidentiality of certain information and have agreed to not compete with the
Company within 250 miles of the Companys principal places of business for a
period of three years following the termination of such persons employment with
the Company. Additionally, the Company has entered into agreements with each of
its executive officers, other than Messrs. Freedman and Falco, which provide
that such officers shall be entitled to; (i) a lump sum payment equal to 2.99
times his average annual gross income from the company for the three tax-year
period ending before the date of such termination; (ii) a lump sum payment equal
to three times the value of all in-the-money stock options held by such
persons at the date of termination; and (iii) continued participation in all
employee benefit plans or programs for a period of three years, provided that
the employee may, at his election, receive a lump sum cash payment equal to the
value of such benefits in lieu of continued participation in such benefit plans.
For purposes of such agreements, a change in control is defined in the same
manner as in the employment agreements of Messrs. Freedman and Falco, except
that failure of either Mr. Freedman or Mr. Falco to be elected when standing for
election as a director shall not constitute a change in control for purposes
thereof.
In addition to the foregoing employment and change of control arrangements, the
Companys 1993 and 1995 Stock Option Plans provide that all outstanding options
shall become fully vested and exercisable in the event of a change in control.
Litigation
- - ----------
The Company is periodically subject to lawsuits and administrative proceedings
arising in the ordinary course of business. Management believes that no pending
lawsuits or administrative proceeding is likely to have a material adverse
effect on the condition or results of operations of the Company.
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 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,
F-22
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
- - ----------
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 OSHAs 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 Commissions 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 subcontractors insurance carrier pursuant to
the subcontractors obligation to defend and indemnify the Company with respect
to the actions of its (subcontractors) employees and agents. The Company will be
fully indemnified for any liability, if any, for any potential judgement or
settlement in this matter by the subcontractor's carrier and, if necessary, by
its own general liability insurance carrier and, therefore, the action is not
expected to have any material effect on the Company's consolidated financial
statements.
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, alleged that the Company disseminated false and misleading financial
information to the investing public between March 8, 1996 and November 18, 1996
and sought damages in an unspecified amount to compensate investors who
purchased the Companys securities between the indicated dates, as well as the
disgorgement of profits allegedly received by some of the individual defendants
from sales of common stock during that period. A written settlement agreement
was executed by plaintiffs counsel on behalf of the class and was approved by
the Court. The matter was settled and finally resolved with the payment of
$1,125,000 to the class. The entire settlement sum was paid by the Companys
directors and officers (D&O) insurance policy carrier pursuant to the
obligations owed by the carrier under the Companys existing D&O policy. The
settlement covered the class period March 8, 1996 to June 5, 1997. The
settlement, as expressly reflected in the settlement documents, has been made as
a business accommodation only, and neither the Company, nor any director,
officer or employee of the Company has admitted or will admit any wrong doing of
any kind. With the closing of the settlement, the action was dismissed with
prejudice and the Company and each of the individuals who have been named as
defendants were released from any and all claims for the entire class period.
On April 1, 1997, Enviropower Industries Inc., formerly Continental Waste
Conversion Inc. (Enviropower), commenced an action in court in Calgary, Alberta
against IDM Environmental Corp. and its subsidiaries, 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 were
then subsequently employed by Global Alberta. 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 Enviropowers 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 sought to set
aside the Agreements on the alleged basis that its shareholders did not approve
the transaction. In addition, Enviropower claimed 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 sought 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. In June of 1997, the Company
filed a separate cause of action against Enviropower seeking injunctive relief
against Enviropower, seeking to enforce the agreements with Enviropower and to
collect amounts owed to the Company by Enviropower. On September 19, 1997, the
Company was awarded an interim injunction against Enviropower recognizing its
exclusive rights to the licensed technology throughout the pendency of the
action and until further order of the court. Enviropower has since filed for
protection under Canadian bankruptcy laws, staying all proceedings between the
Company and Enviropower. On or about January 13, 1999, the Company entered into
a comprehensive settlement of the matter with the bankruptcy Trustee. Among
other things, the settlement provided for the entry of a permanent injunction in
favor of the Company which, in essence, recognizes the Company's exclusive
rights to the Technology and the validity of the Agreements that were at issue
in the litigation.
F-23
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
- - ----------
In July of 1998, Kasterka Vrtriebs GmbH (Kasterka) filed a cause of action
suit against the Company, its subsidiary, Global Waste & Energy and certain
affiliates and officers in the Court of Queens Bench of Alberta, Judicial
District of Calgary. The plaintiff alleges that the Company and its affiliates
breached a marketing agreement that had been entered between Kasterka and
Enviropower. Kasterka also alleges that the defendants failed to supply the
required plans and specifications relating to the gasification technology
originally developed by Enviropower and that, as a result, Kasterka was unable
to manufacture and market gasification units in the territories designated in
the marketing agreement. Kasterka asserts a variety of claims for damages in the
aggregate amount of approximately $42 million. The Company believes the suit is
without merit and intends to vigorously contest the cause of action.
In September of 1998, Balerna Concrete Corporation (Balerna) filed a cause of
action against the Company in the United States District Court of Massachusetts.
The plaintiff alleges that the Company, and others, engaged in a pattern of
illegal conduct to divert funds from Balerna through the operation of a concrete
finishing business. Balerna has asserted various claims under RICO, common law
fraud, conversion, breach of contract and other 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.
Operating Leases
- - ----------------
The Company currently leases its office and warehouse facilities from L&G
Associates (L&G), a related partnership owned by the principal shareholders of
the Company, as further discussed in Note 13, Related Parties. The Company has
also entered into leases for other facilities outside of New Jersey under
operating lease agreements with terms ranging from two to five years.
A schedule of the future minimum payments under operating leases is as follows:
Related Other
Year ending December 31, Party Operating
----------------------- -------- ----------
1999 295,032 183,986
2000 295,032 177,018
2001 295,032 123,237
2002 295,032 -
2003 295,032 -
Thereafter 2,360,256 -
------------- -------------
$ 3,835,416 $ 484,241
------------- -------------
------------- -------------
As further discussed in Note 13, the Company incurred renovation and
construction costs at their New Jersey facility which premises are leased from a
related party. The cost of these improvements, totaling approximately $448,000,
by agreement entered into in 1994 and amended May 16, 1996, will be charged over
fifteen (15) years, through May 31, 2011, in lieu of lease payments. The cost
allocation is reflected as amortization at a rate equal to the lease terms.
F-24
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (continued)
Year 2000 Compliance
- - --------------------
As has been widely reported, many computer systems process dates based on two
digits for the year of a transaction and are unable to process dates in the year
2000 and beyond. The Company primarily uses licensed software products in its
operations with a significant portion of processes and transactions centralized
in one particular software package. During 1999, management plans to upgrade to
the most current version of this software package which, among other things, is
Year 2000 compliant. In addition the Company has previously replaced or modified
other systems that were not Year 2000 compliant. These systems have been
assessed, and detailed plans have been developed and are being implemented to
make the necessary modifications to insure year 2000 compliance. The financial
impact of making the required system changes for year 2000 compliance are not
expected to have a material effect on the Companys financial statements.
The Company is continuing its process of formal communication with all of its
significant suppliers and customers to determine the extent to which the Company
is vulnerable to potential third parties failure to remediate their own year
2000 issued. The Company can give no guarantee that the systems of other
companies on which the Companys systems rely will be remedied for the year 2000
issues on time or that a failure to remedy the problem by another company would
not have a material adverse effect on the Company.
Other
- - -----
The Company is contingently liable to sureties under general indemnity
agreements. The Company agrees to indemnify the sureties for any payments made
on contracts of suretyship, guaranty or indemnity. The Company believes that all
contingent liabilities will be satisfied by their performance on the specific
bonded contracts involved.
12. RETIREMENT SAVINGS PLAN
In July of 1992, the Company amended an existing profit sharing plan to convert
such plan to a retirement savings plan (the 401(k) Plan) under section 401(k)
of the Internal Revenue Code. The 401(k) Plan generally covers all employees of
the Company who have completed two years of service with the Company. Employees
may elect to defer, in the form of contributions to the 401(k) Plan, up to 15%
of their annual compensation, subject to the federal maximum limit. The Company
may, at its own discretion, contribute to the plan. The Company did not
contribute to the 401(k) Plan during the years ended December 31, 1998, 1997 and
1996.
13. RELATED PARTIES
Officer Loans and Advances
- - --------------------------
From time to time the Company has made loans and advances to the two principal
shareholders, directors and officers of the Company.
On September 1, 1995, Joel Freedman, the President and Chief Executive Officer
of the Company, surrendered to the Company 3,662 shares of his common stock of
the Company at $52.50 per share, the average closing market price for the
previous month, as payment in full of loans from the Company in the amount of
$192,260. Such shares have been canceled.
At December 31, 1995, the Company had a receivable due from Frank Falco,
chairman of the Board of Directors and Chief Operating Officer of the Company,
of $552,479 including interest at 7% per annum. On April 1, 1996, Mr. Falco
surrendered to the Company 9,221 shares of his common stock of the Company at
$72.72 per share, the average closing market price for the previous month, as
payment in full of loans from the Company in the amount of $670,580, the then
current balance. Such shares have been canceled.
At December 31, 1997, the company had receivables due from Mr. Freedman and Mr.
Falco for $7,965 and $361,576, respectively, including interest at 7% per annum,
which were repaid during 1998.
F-25
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. RELATED PARTIES (continued)
Officer Loans and Advances (continued)
- - --------------------------
During 1998, Frank Falco, Chairman of the Board of Directors and Chief Operating
Officer of the Company, paid the Company $490,000, which represented payment in
full of all amounts due from officers to the Company.
During 1998, the Company purchased 8,250 shares of common stock of Life
International Products, Inc. from Joel Freedman for $178,125, Mr. Freedman's
cost basis in those shares.
Leases
- - ------
The Company leases its offices and yard storage facilities from L & G
Associates, a related partnership owned by the principal stockholders of the
Company.
On March 1, 1993, the Company entered into a five year lease agreement on such
property, which includes two additional parcels of land. Pursuant to such lease,
the Company will pay base rent of $270,000 annually subject to annual
adjustments based on the consumer price index, plus costs of maintenance,
insurance and taxes.
In 1994, the Company and L&G Associates ("L&G") entered into an agreement
regarding the construction and/or renovation of expanded facilities on the
premises presently leased by the Company from L&G and the renovation and leasing
of an adjoining property. The expanded facilities were needed to support current
operations and anticipated future growth. The Board of Directors formed the
Building Committee to review the terms and fairness of such proposed expansion.
In November of 1994, the parties agreed in principal with respect to the terms
of the proposed expansion and the Building Committee determined that such
expansion met the Company's needs and was on terms which were fair to the
Company. Based on such agreement and determination, the Company in November of
1994 commenced renovation and construction on such sites of which one facility,
office space (7,600 square feet), was completed during the third quarter of
1995, and the second facility, warehouse space (5,700 square feet), was
completed during the third quarter of 1996. Renovation of such office space by
the company at an approximate cost of $303,000 constitutes payment in full of
rent for the initial term of the lease of such office space. The Company shall
also be responsible for all taxes, utilities, insurance and other costs of
occupying the office space during the initial term. Construction of such
warehouse space by the Company at an estimated cost of $145,000 constitutes
payment in full of rent for the initial term of the lease of such warehouse
space. The Company shall also be responsible for all taxes, utilities, insurance
and other costs of occupying the warehouse space during the initial term. The
total cost of the renovations was to be amortized over the initial terms of the
lease. On May 16, 1996 the leases were amended and extended 15 years to May 31,
2011. The amortization associated to the cost of the renovation was extended
through the terms of the modified lease. Amortization expense related to these
costs for the years ended December 31, 1998, 1997 and 1996 was $93,320, $93,320
and $42,014, respectively. For the years ended December 31, 1998, 1997 and 1996
the rent paid was $308,948, $302,412 and $292,884, respectively. Future minimum
rental payments are reflected in Note 11, Commitments and Contingencies.
14. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company earned more than 10% of its revenue from one customer in 1996. In
1998and 1997 the Company earned more than 10% of its revenue from each of four
and two different customers, respectively. For the years ended December 31,
1998, 1997 and 1996 the revenues were $13,560,000, $8,443,000, and $2,745,000,
respectively.
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of trade receivables, notes receivable and
investments in affiliates. Management believes that the risk associated with
trade receivables has been adequately provided for in the allowance for doubtful
accounts.
F-26
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS' EQUITY
Preferred Stock
- - ---------------
In July of 1993, the Company offered and sold ten units at $50,000 per unit, for
an aggregate of $500,000. Each unit consisted of 500 shares of Series A
Preferred Stock, 600 shares of common stock and 500 warrants, exercisable to
purchase one share of common stock at $50 per share until July 31, 1996. The
preferred stock had a 9% per annum cumulative dividend, payable quarterly. The
holders of the Series A Preferred Stock had the right to "put" such shares to
the Company at a price of $100 per share after the Company attained a net worth
of $3,000,000 or more or at any time after January 15, 1994. The Company had the
right to redeem the Series A Preferred Stock at $100 per share on or after
August 1, 1995. The Company had also agreed to include the shares underlying the
warrants included in such units in any registration statement filed by the
Company following the Company's initial public offering at no cost to such unit
holders. On April 29, 1994, the Company redeemed all of the outstanding
Preferred Stock at the request of the preferred shareholders.
On July 14, 1997, the Company filed an amendment to their corporate charter
authorizing it to issue up to 1,000,000 shares of Preferred Stock, $1.00 par
value.
Convertible Preferred Stock
- - ---------------------------
On February 12, 1997 (the closing date) the Company entered into a private
placement wherein it offered and sold 300 shares of $10,000 Series B
Convertible Preferred Stock (the preferred shares) in private transactions to
selected investors who qualify as accredited investors (within the meaning of
Rule 501(a) promulgated under the Securities Act of 1933, as amended). The
preferred shares were convertible into shares of the Companys common stock
beginning on the 91st calendar day after the closing date according to the
following:
Lower of x or y
x y
- -
Calendar Days Closing Date Conversion Date
After Closing Average Times Average Times
------------- ------------- -------------
91 - 120 120% 82%
121 - 150 110% 79%
151 - 180 100% 76%
+180 100% 73%
The conversion date average was the average closing bid price of the common
stock as calculated over the five trading day period ending on the trading day
preceding the date on which the holder transmits (by telecopier) his notice to
convert. Each preferred share was convertible into the Companys common stock
(the conversion shares) determined by dividing $10,000 by the applicable
conversion price. The preferred shares were due to mature on February 12, 2000,
and on that date each preferred share then outstanding would automatically
convert into conversion shares at the then current conversion price. The
preferred shares pay an annual 7% dividend. The dividends were payable only upon
conversion or redemption of the preferred shares and were payable either in
shares of common stock (the dividend shares) at the average market price of the
common stock over the five trading days preceding the conversion date or in
cash, at the option of the Company. The difference between the market price of
the Companys common stock and the applicable conversion rate, the beneficial
conversion feature, totaled $1,109,589, and was recorded as additional dividends
amortizable over a 180 day period from February 12, 1997, the issue date of the
convertible preferred stock. The Company agreed to register the dividend shares,
the conversion shares and penalty shares in a registration statement filed by
the Company at no cost to the holders of such shares. The registration statement
was declared effective on January 9, 1998.
F-27
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (Continued)
Convertible Preferred Stock (continued)
- - ---------------------------
In connection with this transaction the Company paid a fee of $195,000 and
$25,000 in expenses to the placement agent. In addition, the Company granted
10,000 warrants to the placement agent. Each warrant is exercisable to purchase
one share of common stock at $24.00 per share, as amended by agreement dated
November 21, 1997, commencing on February 12, 1998 and expiring on February 12,
2002. The Company has granted demand and piggy-back registration rights to the
holders of these warrants.
During the year ended December 31, 1997, 30 shares with a stated value of
$300,000 were converted into 19,292 shares of the Companys common stock. During
the first quarter of 1998 the remaining 270 shares with a stated value of
$2,700,000 were converted into 135,944 shares of the Companys common stock.
On February 13, 1998 (the closing date) the Company entered into a private
placement wherein it offered and sold 3,600 shares of Series C 7% Convertible
Preferred Stock and 235,000 Four Year $50.00 Warrants (amended on June 2, 1998
to $37.50). The securities were issued to five accredited investors. The
aggregate sales price of such securities was $3,600,000. Commissions totaling
10% were paid in connection with the placement. The securities were offered
pursuant to Regulation D. The offer was directed exclusively to a limited number
of accredited investors without general solicitation or advertising and based on
representations from the investors that such investors were acquiring for
investment. The securities bear legends restricting the resale thereof. The
Series C Preferred Stock was convertible into Common Stock at the lesser of (i)
$45.00 (amended on June 2, 1998 to $32.50) 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 $50.00 Warrants were exercisable for a four year
period at the lesser of $37.50 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 $50.00 Warrants was subject to the issuance of a
maximum of 328,544 shares of Common Stock on conversion unless the shareholders
of the Company have approved issuance beyond that level upon conversion. Such
approval was granted at the Companys annual meeting of shareholders on June 2,
1998. Further, the Company had the right, upon notice to the holders, to redeem
any Series C Preferred Stock submitted for conversion at a price or $27.50 or
less at 125% of the principal amount of such Series C Preferred Stock plus
accrued and unpaid dividends. The Series C Preferred Stock paid dividends at 7%
per annum payable quarterly and on conversion or at redemption in cash or Common
Stock, at the Company's option. During the year ended December 31, 1998 all
Series C Preferred stock was converted into 640,747 shares of the Companys
common stock.
On August 11, 1998 (the closing date) the Company entered into a private
placement wherein it offered and sold 1,500 shares of Series RR 6% Convertible
Preferred Stock. The securities were issued to on 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
representation from the investor that such investor was acquiring for
investment. The Series RR Preferred Shares are convertible into Common Stock at
the lessor 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 Companys option.
During the year ended December 31, 1998, 1,285 shares of Series RR Preferred
Stock were converted into 359,981 shares of the Companys 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
March 15, 1999, negogiations 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.
Common Stock
- - ------------
On June 2, 1998, the Company filed an amended and restated Certificate of
Incorporation increasing the authorized shares of common stock the Company is
authorized to issue from 30,000,000 to 75,000,000 shares with a par value of
$0.001. On March 11, 1999, the Companys Board of Directors authorized a 1 for 10
reverse stock split of its common stock and amended the par value of the common
stock to $0.01 and reduced the authorized shares to 7,500,000 effective April
16, 1999 for shareholders of record at the close of business on April 16, 1999.
All share and per-share amounts in the accompanying consolidated financial
statements have been restated to give effect to the 1 for 10 reverse stock
split.
F-28
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (Continued)
Common Stock (continued)
- - ------------
In January of 1994, the principal shareholders of the Company surrendered for
cancellation an aggregate of 66,667 shares of common stock. All references to
number of shares, except shares authorized, and to per share information in the
financial statements, have been adjusted to reflect the surrender and
cancellation of such shares on a retroactive basis.
The Company completed an initial public offering of 345,000 units (including
units sold pursuant to the underwriters over allotment options) in April of
1994. Each Unit consisted of one share of the Companys common stock and one
Class A Warrant. The Company received $11,792,588 from the proceeds of the
offering, net of the payment of all offering costs.
On September 1, 1995, Joel Freedman, a principal shareholder, director and Chief
Executive Officer of the Company surrendered 3,662 shares of his common stock in
repayment of his officers loan.
From November 1995 through December 31, 1996, the Company issued 159,727 shares
of common stock in exchange for the cancellation of $5,000,000 of the Companys
7% convertible notes.
On April 1, 1996, Frank Falco, a principal shareholder, director and Chief
Operating Officer of the Company, surrendered 9,221 shares of his common stock
in repayment of his officers loan.
On November 15, 1996, the board of directors of the Company approved a stock
repurchase plan whereby the Company may, from time to time, repurchase on the
open market shares in its common stock in an amount up to $750,000. During the
year ended December 31, 1996, the Company repurchased for retirement 10,000
shares at a price of $216,500.
During the year ended December 31, 1997 $300,000 of the Companys Convertible
Preferred Stock were converted into 19,292 shares of the Companys common stock.
Common Stock Purchase Warrants and Options
- - ------------------------------------------
The Company has authorized and in July of 1993, issued 5,000 warrants (the
Private Placement Warrants) to purchase common stock. The Private Placement
Warrants were exercisable to purchase one share of common stock per warrant at a
price of $50.00 per share until August 1, 1996 and are not redeemable. In
January of 1994, the Company granted to the holders of the Private Placement
Warrants piggy-back registration rights pursuant to which the holders of such
warrants may include the shares underlying such warrants in any registration
statement subsequently filed by the Company at no cost to the holders of the
Private Placement Warrants. During the year ended December 31, 1996, 750 Private
Placement Warrants were exercised, 750 shares were issued in connection with the
exercises and resulted in net proceeds to the Company of $33,750. The remaining
4,250 Private Placement Warrants expired and were canceled.
The Companys Class A Warrants are separately transferrable and entitle the
holder to purchase two shares of common stock at $45.00 per share (subject to
adjustment, which occurred). The Class A Warrants are exercisable commencing on
April 20, 1995 and expiring April 20, 1999. Any or all of the Class A Warrants
may be redeemed by the Company at a price of $.50 per warrant, upon the giving
of 30 days written notice and provided that the closing bid price of the common
stock for a period of twenty (20) consecutive trading days ending within ten
(10) days of the notice of redemption has equaled or exceeded $90.00 per share.
During the year ended December 31, 1996, 1997 and 1998, 105,100, 225,851 and
9,790 Class A Warrants were exercised, 210,200, 451,703 and 19,580 shares were
issued in connection with these exercises and resulted in net proceeds to the
Company of $6,956,450, $6,171,000 and $184,500.
A total of approximately 34,000 Class A Warrants were outstanding and
exercisable at December 31, 1998. As part of the 1 for 10 reverse stock split of
the Companys Common Stock and Class A Warrants, the term of the Class A
Warrants was extended to April of 2000.
F-29
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------
In connection with the Offering, the Company sold to the Underwriter for nominal
consideration, an option for the purchase of up to 30,000 units (the "option
units"). Each option unit consisted of one share of the Companys common stock
and one Class A Warrant. Each option unit was exercisable at a price of $66.00
per option unit during the period beginning April 20, 1996 and continuing until
April 20, 1999. The option units could be exercised as to all or any lesser
number of option units and contained provisions which required, under certain
circumstances, the Company to register the option units underlying such options
for sale to the public. The option units were nontransferable except to officers
of the Underwriter, members of the underwriting group and their respective
officers and partners. The option unit exercise price and the number of option
units covered by the option were subject to adjustment to protect the holders
thereof against dilution in certain events. During May 1996, all the option
units were exercised and the company received net proceeds of $1,979,700 and
issued 30,000 shares of the Companys common stock. As of December 31, 1998 all
30,000 Class A Warrants issued in connection with the underwriter option
remained outstanding.
In February of 1998, the Company issued 270,000 Three Year $45.00 Warrants (the
Lock-Up Warrants). The Lock-Up Warrants were issued in conjunction with the
execution of Lock-Up Agreements by the holders of $30.00 Warrants 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 $45.00 (amended on November 10, 1998 to $3.30 until
December 31, 1998 and $10.00 thereafter) per share.
In June of 1998, the Company issued 26,688 $60.00 Warrants and 26,688 $67.50
Warrants (collectively the Reload Warrants). The Reload Warrants were issued
as an inducement for early exercise by the holders of certain $30.00 Warrants
and are exercisable to the extent of one $60.00 Warrant and one $67.50 Warrant
for each $30.00 Warrant previously exercised. The $60.00 Warrants and $67.50
Warrants are exercisable for a period of one year commencing June 8, 1998 to
purchase common stock at $60.00 and $67.50 (amended on November 10, 1998 to
$3.30 until December 31, 1998 and $10.00 thereafter) per share, respectively.
Exercise of the $60.00 Warrants and $67.50 Warrants is subject to the
restrictions that the holders, individually, will not beneficially own in excess
of 4.99% of the Common Stock following any exercise.
During the fourth quarter of 1998, the Company agreed to amend the terms of
certain warrants to reduce the exercise price of those warrants for certain
warrant holders who had indicated a willingness to exercise currently
outstanding warrants. Pursuant to such agreement, the exercise price of those
warrants was reduced to $3.30 per share until December 31, 1998, and $10.00 per
share thereafter, and the Company obtained the right to call the warrants for
redemption. In total, the exercise prices were reduced on 117,651 of the $30.00
Warrants, 67,000 of the Lock-Up Warrants, 15,750 of the $60.00 Reload Warrants,
and 15,750 of the $67.50 Reload Warrants.
On December 11, 1998 the Companys common stock option holders were offered a
repricing of their options to $6.75 per share. With the exception of one
consultant the repricing excluded all Directors and consultants. Exercise of the
repriced options is not permitted until the closing bid price of the Companys
common stock equals or exceeds 120% of the applicable option price in existence
prior to December 11, 1998.
On June 17, 1993, the Company adopted the IDM Environmental Corp. 1993 Stock
Option Plan (formerly International Dismantling & Machinery Corp. 1993 Stock
Option Plan) (the "Stock Option Plan"). Pursuant to the Stock Option Plan, the
Company has reserved 47,500 shares of common stock for issuance pursuant to the
grant of incentive stock options and nonqualified stock options.
On April 11, 1994, the Board of Directors granted options under the Company's
1993 Stock Option Plan to certain employees and a Director to purchase 44,540
and 500 shares, respectively, of the Company's common stock at $40.00 per share,
the market price of the Companys common stock at the date of grant. The options
are incentive stock options, except for the Director's stock option which is a
nonqualified stock option. The options are exercisable until April 2004. Twenty
percent of the options vest three months from the date of grant. The balance of
the options vest at a rate of twenty percent per year on each of the four
anniversary dates subsequent to the grant of the options. The option exercise
price was reduced to $20.00 per share on May 22, 1997. Holders of 20,808
outstanding options at the date of the aforementioned repricing under this grant
accepted the repricing. The balance of the outstanding options remained at
$20.00.
F-30
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------
On June 2, 1994, the Company granted a total of 500 non qualified stock options
to two of the directors to purchase common stock at $62.50 per share, the market
price of the Companys common stock at the date of the grant. The options vest
at the same rate as the initial grant. The option exercise price was reduced to
$20.00 per share on May 22, 1997. Holders of 1,485 outstanding options at the
date of the aforementioned repricing under this grant accepted the repricing.
The balance of the outstanding options remained at $20.00.
On December 28, 1994, the Company granted options to certain employees to
purchase 2,970 shares of the Company's common stock at $43.80 per share, the
market price of the Companys common stock at the date of the grant. On August
9, 1995, the Company granted an option to a new employee to purchase 500 shares
of the Companys common stock at $52.50 per share, the market price of the
Companys common stock at the date of grant. The options vest at the same rate
as the first grant. The option exercise price was reduced to $20.00 per share on
May 22, 1997.
On January 8, 1996, the Company amended the terms of its 1993 Stock Option Plan
to add provisions allowing for the cashless exercise of options issued under the
plan and providing for the automatic vesting of all options granted under the
plan in the event of certain changes in control of the Company. Pursuant to such
cashless exercise provisions, holders of options may, as payment of the exercise
price, have the Company withhold the number of shares of common stock at the
then market price of the Companys common stock, less the exercise price, of
which is equal to the aggregate exercise price of the shares of common stock
issuable upon exercise of the option. Under such provision of the accelerated
vesting, notwithstanding any vesting schedule set forth in any individual option
agreement, all options granted under the 1993 Plan will become fully vested and
exercisable in the event a person or group, other than Joel Freedman or Frank
Falco, acquire in excess of 15% of common stock of the Company unless such
acquisition is approved by the Board.
On January 8, 1996, the Companys Compensation Committee and Board of Directors
adopted and approved a new stock option plan for the Company, the IDM
Environmental Corp. 1995 Stock Option Plan (the 1995 Plan), under which stock
option awards may be made to employees, directors and consultants of the
Company. The 1995 Plan became effective on the date it was adopted by the Board
of Directors and it will remain effective until the tenth anniversary of the
effective date unless terminated earlier by the Board of Directors. Pursuant to
the plan, the Company has reserved 50,000 shares of common stock for issuance
pursuant to the grant of incentive stock options and non qualified stock
options. On January 8, 1996, the Company granted options to certain employees
and consultants to purchase 6,900 shares of the Companys common stock at $29.40
per share, the market price of the Companys common stock at the date of the
grant (4,150 have vested). In addition, on January 8, 1996, the Company
approved, effective November 20, 1995, the granting of 4,000 options to purchase
common stock at $37.20 per share, the market price of the Companys common stock
at the date of the grant, to certain consultants (all options were vested). The
balance of the 6,900 options vest at a rate of twenty percent per year on each
of the four anniversary dates subsequent to the grant of the options. Also on
January 8, 1996, the Company granted 7,500 options each to Messrs., Falco and
Freedman at $32.30 per share, 110% of the market price of the Companys common
stock at the date of grant. The option exercise price was reduced to $20.00 per
share on May 22, 1997. Holders of 6,900 outstanding options at the date of the
aforementioned repricing under this grant accepted the repricing. The balance of
the outstanding options remained at $20.00.
On May 23, 1996, the Company granted vested options to the outside directors, a
consultant and an employee to purchase 5,000 shares at $82.50 per share, the
market price of the Companys common stock at the date of grant. The option
exercise price was reduced to $20.00 per share on May 22, 1997.
On June 28, 1996 the Company adopted and approved a new stock option plan (the
1996 consulting options) under which nonqualified stock options have been
granted to a consultant for the right to acquire 5,000 shares of its common
stock at $32.30 per share. The options, which are fully vested and exercisable
through June 28, 2006, were granted pursuant to a consultant agreement. The fair
market value of these shares at the date of grant was $74.40. The difference
between the exercise price and the market price of the Companys common stock at
date of grant (the intrinsic value) reflects the compensation for the
consulting services. The option exercise price was reduced to $20.00 per share
on May 22, 1997.
F-31
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------
On May 22, 1997, the Company granted vested options to certain of its employees
to purchase 5,295 shares at $20.00 a share, the market price of the Companys
common stock at the date of grant. In addition, the Company agreed to reprice
all options granted on or before May 22, 1997 to the same $20.00 per share.
Holders of 3,420 outstanding options at the date of the aforementioned repricing
under this grant accepted the repricing. The balance of the outstanding options
remained at $20.00.
On June 10, 1997, the Company granted vested options to three of its outside
directors for each to purchase 500 shares at $25.312, the market price of the
Companys common stock at date of grant.
On July 23, 1997, the Company granted vested options in the amount of 500 shares
for a consultant, and 500 shares for each of three officers at $25.625, the
market price of the Companys common stock at date of grant. In addition, the
Company granted a vested option to purchase 10,000 shares each to Messrs. Falco
and Freedman at $28.1875 per share, 110% of the market price of the Companys
common stock at the date of grant. Holders of 1,500 outstanding options at the
date of the aforementioned repricing under this grant accepted the repricing.
The balance of the outstanding options remained at $25.625 and $28.1875.
On August 26, 1997, the Company granted a vested option to its proposed nominee
for director for 500 shares at $46.875, the market price of the Companys common
stock at the date of grant.
During 1997, 4,539 options issued under the stock option plans were exercised
resulting in net proceeds of $63,041.
During 1997 the Company issued to six consultants options to purchase 39,500
shares of the Companys common stock at exercise prices ranging from $12.50 to
$45.00. In accordance with FAS 123 the fair value of these options were
estimated at the grant date using the Black-Scholes value option pricing model
resulting in the recording of $456,340 as compensation costs of consultants
options. During 1997 15,500 of these options were exercised resulting in net
proceeds to the Company of $235,000.
On January 8, 1998, the Company adopted and approved the 1998 Comprehensive
Stock Option and Award Plan (the 1998 Plan), and reserved 100,000 shares of
its common stock for issuance under the 1998 Plan.
Under the 1998 Plan, stock options, shares of restricted stock, stock awards or
performance shares, or a combination of any such awards (collectively,
Awards), may be granted from time to time to Eligible Persons (hereinafter
defined), all generally in the discretion of the Committee responsible for
administering the 1998 Plan (hereinafter described). Each Award under the 1998
Plan will be evidenced by a separate written agreement which sets forth the
terms and conditions of the Award. Eligible Persons generally include any
employee of the Company or its subsidiaries, members of the Board of Directors
of the Company and any consultant or other person whose participation the
Committee determines is in the best interest of the Company. Grants under the
1998 Plan to non-employee directors are limited to an initial grant of
non-qualified stock options in an amount equal to 500 shares multiplied by the
number of years remaining in the term of each non-employee director commencing
with the first annual shareholders meeting following the adoption of the 1998
Plan and additional grants on like terms on each subsequent reelection of a
non-employee director. There is no maximum number of persons eligible to receive
Awards under the 1998 Plan, nor is there any limit on the amount of Awards that
may be granted to any such person, except as described below with respect to
incentive stock options. The Company intends that stock options or other grants
of Awards under the 1998 Plan to persons subject to Section 16 of the Exchange
Act will satisfy the requirements of Rule 16b-3 under the Exchange Act (Rule
16b-3")
On January 8, 1998 the Company granted vested options to certain employees to
purchase 7,380 shares of the Companys common stock at $37.19 per share, the
market price of the Companys common stock at the date of grant. These options
are exercisable until January 2008. Holders of 6,520 outstanding options, at the
date of the aforementioned repricing, under this grant accepted the repricing.
The balance of the outstanding options remained at $37.19.
F-32
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------
On June 2, 1998 the Company granted options to certain officers of the Company
and one consultant to purchase 11,000 shares of the Companys common stock at
$35.00 per share, the market price of the Companys common stock at the date of
grant. The options have vesting periods as follows: (i) 1,500 of the officers
options are fully vested at the date of grant; (ii) 3,500 of the officers
options vest 50% at the date of grant with the balance vesting on the first
anniversary of the date of grant; (iii) the remaining 4,500 of the officers
options and the 1,500 consultants options vest one third at the date of grant
and one third per year on each of the two anniversary dates subsequent to the
date of grant. These options are exercisable until June 2008. Holders of 4,500
outstanding options, at the date of the aforementioned repricing, under this
grant accepted the repricing. The balance of the outstanding options remained at
$35.00.
During the year ended December 31,1998, the Company granted immediately
exercisable options to consultants to purchase 126,500 shares of common stock at
the market price of the Companys common stock at the date of the grants. During
the years ended December 31, 1998, 1997 and 1996, the Company recorded non-cash
compensation expense of $1,898,55, $456,340 and $63,094, respectively, in
connection with the grants of these options.
As referred to in Note 1, the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123 (FASB 123"), Accounting for Stock-Based
Compensation, requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Companys employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Companys 1993, 1995 and 1998 Stock Option and Award Plans have authorized
the granting of options to key employees, management personnel, Company
Directors and consultants for up to 197,500 shares of the Companys common
stock. Options granted pursuant to the 1993 and 1995 plans have terms between 5
and 10 years and become fully exercisable ranging from 0 to 4 years of continued
employment. The 1998 Plan grants have terms of 5 and 10 years and become fully
exercisable ranging from 0 to 2 years and are granted at no less than the fair
market value of the Companys common stock at the grant date.
Pro forma information regarding net income and earnings per share is required by
FASB 123, and has been determined as if the Company had accounted for the
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of implementation of FASB 123
for options granted in 1995 and 1996 and on the date of grant for options
granted during 1998 and 1997 using the Black-Scholes option pricing model with
the following weighted average assumptions for 1998, 1997 and 1996,
respectively, with ranges as follows:
1998 1997 1996
---- ---- ----
Risk-Free interest 4.15 - 5.55% 5.65% 4.39 - 6.40%
Dividend yields 0% 0% 0%
Volatility factors of the
expected market price of the
Company's Common Stock .92 - 1.05% .92% .72 - .87%
Expected life of options 3 - 10 years 1 - 5 years 2 - 5 years
Fair values for future options are to be estimated at the date of grant.
F-33
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS' EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Companys stock options have characteristics significantly different from
those of traded options, and because changes in subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options. In managements opinion existing stock option valuation
models do not provide a reliable single measure of the fair value of employee
stock options that have vesting provisions and are not transferable. In
addition, option pricing models require the input of highly subjective
assumptions, including expected stock price volatility.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. In accordance with
FASB 123, only stock options granted during the years ended December 31, 1998,
1997 and 1996 have been included for the Companys pro forma information as
follows:
1998 1997 1996
---- ---- ----
Pro forma net loss on common stock $(40,901,556) $(11,885,575) $(9,700,064)
Pro forma loss per share:
Basic $ (20.58) $ (10.60) $ (12.00)
Diluted $ (20.58) $ (10.60) $ (12.00)
An additional $14,459,500, $661,152, and $552,220 of compensation expense (net
of tax effect) would be recognized under implementation of FASB 123.
F-34
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------
A summary of changes in common stock options under the 1993 plan during 1998,
1997 and 1996, is as follows:
<TABLE>
Weighted
Number Price per Average
of Shares Share Exercise Price
----------- --------- ---------------
<S> <C> <C> <C>
January 1, 1996 45,553 20.00
Canceled during 1996 (6,397) 40.00 40.00
Exercised during 1996 (2,091) 40.00 40.00
------------
Outstanding at December 31, 1996 37,065
Granted during 1997 9,295 $20.00 - $46.90 $20.80
Canceled during 1997 (2,017) 20.00 20.00
Exercised during 1997 (3,876) 20.00 20.00
------------
Outstanding at December 31, 1997 40,467
Granted during 1998 - -
Canceled during 1998 (37) 20.00 20.00
Exercised during 1998 (321) 20.00 20.00
------------
Outstanding at December 31, 1998 40,109 $6.75 - $46.90 $9.30
============
Options exercisable at December 31, 1998 39,610 $6.75 - $46.90 $9.30
============
Available for Future Grant 1,103
============
</TABLE>
At December 31, 1998 the remaining outstanding shares weighted average
contractual life was 6.81.
F-35
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------
A summary of the 1995 plan activity which occurred during 1998, 1997 and 1996 is
as follows:
<TABLE>
Weighted
Number of Price per Average
Shares Share Exercise Price
--------- --------- --------------
<S> <C> <C> <C>
Outstanding, January 1, 1996 - - -
Granted during 1996 30,900 $20.00 $20.00
Exercised during 1996 (2,055) 37.20 37.20
Canceled during 1996 (945) 37.20 37.20
----------
Outstanding at December 31, 1996 27,900 20.00
Granted during 1997 20,000 $28.20 $28.20
Exercised during 1997 (663) 20.00 20.00
Canceled during 1997 (337) 20.00 20.00
----------
Outstanding at December 31, 1997 46,900 20.00
Granted during 1998 - -
Exercised during 1998 - -
Canceled during 1998 - -
----------
Outstanding at December 31, 1998 46,900 $6.75 - $28.20 $9.50
==========
Options Exercisable at December 31, 1998 46,350 $9.50
==========
Available for future grants 382
==========
</TABLE>
At December 31, 1998 the remaining outstanding shares weighted average
contractual life was 4.3.
A summary of the 1998 plan activity which occurred during 1998 is as follows:
<TABLE>
Weighted
Number of Shares Price Per Share Average Exercise Price
------------------ ----------------- ------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1998 - - -
Granted during 1998 18,380 $6.75 - $37.20 $18.20
Exercised during 1998 - -
Canceled during 1998 (40) $37.20 37.20
----------
Outstanding at December 31, 1998 18,340 6.75 - 37.20 18.10
==========
Options Exercisable at December 31, 1997 12,570 $6.75 - $37.20 $14.30
==========
Available for future grants 81,660
==========
</TABLE>
F-36
<PAGE>
IDM ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. STOCKHOLDERS EQUITY (continued)
Common Stock Purchase Warrants and Options (continued)
- - ------------------------------------------
At December 31, 1998 the remaining outstanding shares weighted average
contractual life was 9.25.
In addition, as of December 31, 1998, 253,000 options granted to consultants
remain outstanding at exercise prices ranging from $3.75 to $45.00 and have a
weighted average exercise price of $31.60. At December 31, 1998 the remaining
outstanding shares weighted average contractual life was 1.54.
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1997 for the 1993 plan, 1995 plan and the various
consulting options were as follows:
1998 1998 1997
---- ---- ----
Stock Prices Equal to Exercise Price 29.30 25.60 12.90
Stock Prices in Excess of Exercise Price - - 25.30
Stock Prices Less than Exercise Price 5.70 7.90 7.80
Shareholders Rights Plan
- - -------------------------
On April 1, 1996, the Board of Directors adopted and approved a Shareholder
Rights Plan in order to preserve for stockholders the long-term value of the
Company in the event of a take-over. To put the Plan into effect, the Board
declared a dividend of one Right for each share of common stock outstanding to
stockholders of record at the close of business on April 1, 1996. Each right
represents the right to purchase one one-hundredth of a share of a new series of
preferred stock without voting rights par value $1.00 per share. The exercise
price for each right is $20.00. Each right expires December 31, 2005.
The rights are not exercisable and are not transferrable apart from the
Companys common stock until the tenth day after such time as a person or group
acquires beneficial ownership of 15% or more of the Companys common stock or
the tenth business day (or such later time as the board of directors may
determine) after a person or group announces its intention to commence or
commences a tender or exchange offer the consummation of which would result in
beneficial ownership by a person or group of 15% or more of the Companys common
stock. As soon as practicable after the rights become exercisable, separate
right certificates would be issued and the rights would become transferrable
apart from the Companys common stock. In the event a person or group were to
acquire a 15% or greater position in the Company, each right then outstanding
would flip in and become a right to receive that number of shares of common
stock of the Company which at the time of the 15% acquisition had a market value
of two times the exercise price of the rights. The acquirer who triggered the
rights would become excluded from the flip-in because his rights would become
null and void upon his triggering the acquisition. The rights are redeemable by
the Companys Board of Directors at a price of $.01 per right at any time prior
to the acquisition by a person or group of beneficial ownership of 15% or more
of the Companys common stock. The redemption of the rights may be effective at
such time, on such basis, and with such conditions as the board of directors in
its sole discretion may establish. Thus, the rights would not interfere with a
negotiated merger or a white knight transaction, even after a hostile tender
offer has been commenced.
16. EARNINGS PER SHARE
For the years reported in within these consolidated financial statements
weighted average shares for basic and dilutive computations are the same due to
losses reported for each of the years.
Options to purchase 804,350, 661,367 and 41,250 shares of common stock at
exercise prices ranging from $6.75 to $82.50 per share were outstanding during
the years ended December 31, 1998, 1997 and 1996, respectively, and were not
included in the computation of diluted earnings per share in accordance with FAS
128, as the potential shares are considered anti-dilutive due to the Companys
losses from continuing operations.
F-37
AMENDMENT TO WARRANT AGREEMENT
AMENDMENT, dated this ____ day of April, 1999, to Warrant Agreement dated
April 20, 1994 (the "Warrant Agreement"), by and between IDM ENVIRONMENTAL
CORP., a New Jersey corporation (the "Company"), and CONTINENTAL STOCK TRANSFER
& TRUST COMPANY, as Warrant Agent (the "Warrant Agent").
W I T N E S S E T H :
WHEREAS, the Company and the Warrant Agent previously entered into the
Warrant Agreement setting out the terms governing the Class A Warrants (the
"Warrants") of the Company;
WHEREAS, the Company's board of directors has approved a 1-for-10 reverse
split (the "Reverse Split") of both the common stock (the "Common Stock") of the
Company and the Warrants and an amendment to the Warrant Agreement to extend the
term (the "Extension") during which the Warrants may be exercised until April
20, 2000; and
WHEREAS, the Company and the Warrant Agent desire to evidence the terms of
the Warrants as adjusted to reflect the Reverse Split and the Extension.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the Company and the Warrant Agent agree as follows:
1. Amendment of Warrant Expiration Date to Effect Extension. The definition
of "Warrant Expiration Date" as set forth in Section 1(k) of the Warrant
Agreement is hereby amended to read in full as follows:
(k) "Warrant Expiration Date" shall mean 5:00 P.M. (E.S.T.) on the
earlier of the Redemption Date, as defined in Section 8, or April 20, 2000;
provided that is such date shall in the State of New Jersey be a holiday or
a day in which banks are authorized to close, then 5:00 P.M. (E.S.T.) on
the next following day which in the State of New Jersey is not a holiday or
a day on which banks are authorized to close.
2. Delivery of Certificate to Effect Reverse Split. Attached hereto is a
certificate in the form required by Section 9(e) of the Warrant Agreement
reflecting adjustments to the Exercise Price, Redemption Price and Redemption
Trigger Price and other matters resulting from the Reverse Split.
3. Other Provisions Unchanged. Except as modified above, all other
provisions of the Warrant Agreement shall be unchanged as a result of this
amendment
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
IDM ENVIRONMENTAL CORP. CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By: By:
-------------------------- --------------------------
Joel Freedman, President Title:
-----------------------
AMENDMENT TO LICENSING AGREEMENT
10/1/98
This will confirm our agreement with respect to the amendment to that certain
License Agreement dated as of June 30, 1996 by and between Life International
Products, Inc. and IDM Environmental Corp. We have agreed that paragraph 6.1.1
shall be amended to read as follows:
6.1.1 For the period from the date hereof through 12 months after the date
on which marketable environmental equipment is manufactured, Licensor shall
receive net profits of no less than $400,000, which shall be the Minimum
Revenues for such period.
Except as provided herein, all other terms and provision of the License
Agreement shall remain in full force and effect. Any inconsistency between any
of the amendments contained herein and the terms of the License Agreement shall
be resolved in favor of this letter.
Sincerely,
Life International Products, Inc.
By /s/ Ronald Rainson
----------------------------
Ronald Rainson, President
Agreed to and accepted by:
IDM Environmental Corp.
By /s/ Frank Falco
-------------------------------
Frank Falco, Chairman of the Board
PROTOCOL OF INTENT
BY AND BETWEEN
THE MINISTRY FOR FUEL AND ENERGY OF GEORGIA
AND
IDM FOREIGN POWER, INC.
Tbilisi November 5, 1998
The Government of Georgia, represented by the Ministry for Fuel and Energy of
Georgia, hereinafter referred to as "Georgian Party" or its assignees or
designees, on one hand and IDM Foreign Power, Inc., hereinafter referred as
"Foreign Party", or its assignees or designees, on the other hand, hereinafter
collectively referred as "Parties", recognising the important role of the energy
sector of Georgia for the development of the Georgian Economy and in expressing
their Good Will and intent of establishing long-term co-operation in the sector
have agreed as follows:
The Foreign Party, taking into consideration its resources, shall incur the
legal and economic expenses, necessary to evaluate the possibilities of
generating and selling electric energy in Georgia or elsewhere. The Georgian
Party agrees to conduct the relevant negotiations regarding the sale of certain
existing facilities for the generation of electric energy and the associated
Power Purchase Agreements.
The Foreign Party undertakes and agrees to supply all such electrical energy as
is demonstrated by the Georgian Party as being a demand in Georgia up to initial
limit of 2,000 MW.
The steps for implementing this goals consists of the following steps:
1. The Parties shall immediately initiate negotiations for the sale and
purchase or long-term lease of the energy generation facilities identified
as Gardabani, Units 1, 2, 9 and 10, including all real and chattel property
therein and referred hereinafter to as "Units" and shall complete and
execute the related documentation for this sale and the Georgian Party and
related government entities shall negotiate with the Foreign Party for the
consummation of the transaction contemplated hereby. The Parties agree,
that within 180 days of the execution of this agreement, they will agree
upon a price for the Units based upon all appropriate factors including,
without limitation, engineering and financial considerations.
2. The Foreign Party subsequent thereto, and at its own sole discretion
investigate the economic and strategic relevance of developing such
Greenfield projects as it may deem necessary in order to meet the growth in
demand of electric energy in Georgia.
3. The Georgian party shall facilitate the purchase of all such energy
generated from the facilities owned and operated by the Foreign Party at
the Foreign Party's sole discretion, and at such terms as shall be
developed between the Foreign Party and Public Sector Entities Georgian or
foreign, prepared to purchase electrical energy from Foreign Party.
<PAGE>
4. The Georgian Party shall furthermore facilitate the issuance of all such
permits, concessions and licenses in favour of the Foreign Party as may be
required in order for Foreign Party to carry on its business in Georgia in
a financially sound and responsible manner.
5. In the event of the proposal from the Third Party, Georgian party is
obliged to inform about it the Foreign Party, and the Foreign Party shall
be given 15 days to match the proposal from the Third Party.
This Protocol of Intent is and constitutes a bidding obligation and the Parties
will do their best to collaborate and sign the Final Agreement, wherein the
intents considered and declared in this Protocol will be started further and
would become enforceable obligations for both Parties.
Executed in Tbilisi, this November 5, 1998
Georgian Party: Foreign Party:
By: /s/ By: /s/
Temur Giorgadze Birger Munck, Ph.D
Minister for Fuel and Energy Director
/s/
Sam de Lapa
Director
CONTRACT
Date: January 31st 1999
Parties:
The Partners of ZAHES LTD, incorporated and acting in compliance with the
Georgian legilsation (hereinafter "the Company"), jointly holding 100% of the
total outstanding equity of the Company, which partners are hereinafter referred
to as "the Georgian Partners", represented by the director of the Company
Teimuraz Chkheidze;
IDM Foreign Power, incorporated and acting in compliance with the legislation of
the British Virgin Islands, (hereinafter "IDM"), represented by the director Sam
de Lapa,
hereinafter jointly referred to as "the Parties",
1. Subject of the Contract
1.1 IDM invests in the Company from the view of rehabilitation and upgrade of
the hydroelectric power station ZAHES (hereinafter "the Station") and the
Georgian Parnters assign, convey, transfer to IDM 80% (eighty per cent) of
the total outstanding equity of the Company on fully diluted basis against
the above mentioned investment.
2. Obligations of the Parties
2.1 The Parties undertake the obligation to ensure by joint efforts
prolongation of the existing lease contract of the Station dd. March 23,
1993.
2.2 The parties are obliged to utilize the above-mentioned investment strictly
in compliance with the purpose of investment.
2.3 The parties agree to act jointly towards collecting the existing
receivables of the Company amounting to GEL 3.5 million approximately,
which will be reinvested into the Company.
2.4 The Georgian Partners undertake to assign to IDM 80% (eighty per cent) of
the total outstanding equity of the Company and register such assignment in
compliance with the Georgian legislation.
2.5 IDM undertakes to invest into the Company up to the total amount of USD
9000000 (nine million) gradually:
2.5.1 Within 45 days from the date of registration of the named assignment
of the share of equity to invest up to the amount of USD 75000 (seventy five
thousand) for rehabilitation of the 6th unit (15 MW) subject to technical
examination approved by IDM.
2.5.2 To invest the amount of up to USD 1000000 (one million) for repair of
derivation canal in compliance with the technical examination to be approved by
IDM by July 1st 1999.
2.5.3 The total investment in the amount up to USD 9000000 (nine million)
for rehabilitation and upgrade of the Station will be carried out in compliance
with the technical examination data to be approved by IDM and subject to the
extention of the current Lease term for a 25 year period.
<PAGE>
2.5.4 In the event the Lease term is extended for an additional 5 year term
only, IDM shall invest up to US$1000000 (one million) subject to technical
examination to be approved by IDM.
2.5.5 Within the current Lease term IDM shall invest up to US$200000 (two
hundred thousand) in the general rehabilitation of Zages Power Station subject
to technical examination to be approved by IDM.
2.5.6 IDM hereby guaranties that all technically approved decisions by IDM
will be financially sufficient to execute such decisions.
2.5.7 IDM shall have the rights to establish its own representation
separated from ZAHES LTD. Such representation shall have the rights to control
all financial and economic matters regarding Zages and other matters via the
existing ZAHES LTD bank account. IDM shall have the sole right as majority owner
to control such representation. All income to be derived from the sell of
electricity or otherwise shall be controlled by such representation.
3. Rights of the Parties
3.1 The Parties agree that the managerial group of the organizational structure
of the Company (ZAHES LTD) is represented by and limited to the following
persons: Teimuraz Chkheidze (Director), Togo Khabelshvili (1st Deputy
Director - Chief Engineer), Revaz Lomtadze (Deputy Director in Aggregate
Repair Sphere), Tariel Matiashvili (Deputy Director in Hydro Technical and
Construction Sphere), Archil Kipiani (Deputy Director in Legal and Economic
Spheres), and the said managerial group will remain unchanged and none of
this above mentioned group will be dismissed or transferred to another
position, no changes will be introduced to their job functions and rights,
neither any position of a managerial level higher then of members of the
above-mentioned group of persons will be introduced to the personnel
structure of the company (ZAHES LTD), nor any other position will be added
to the structure of the said managerial group without being adopted
unanimously by all partners of the Company (ZAHES LTD), despite any other
organization structure or personnel structure changes different from
above-mentioned changes or alternations as long that the above-mentioned
personnel will oblige to all decisions made by the majority Partners or
their representatives on the meeting.
3.2 All other decisions different from the issues mentioned in 3.1 of the
present contract are binding and enforceable upon the director of the
Company and his deputies providing that such decisions do not contradict
the Georgian legislation and/or the interests of the Company. Otherwise
they will lose their immunity. In case the decision is not enforced despite
the consent of the director and his deputies, due to objective or
subjective reasons independent from the director and his deputies, their
immunity will be kept unchanged.
3.3 Personnel's salary and wage payment can be changed only with the approval
by the director of the Company (Teimuraz Chkheidze).
4. Responsibilities of the Parties
4.1 The Georgian Partners agree to reimburse the expenses born by IDM in
connection to preparation of the present contract in case the Georgian
Partners fail to perform their obligations provided by or arising from the
present contract.
<PAGE>
4.2 IDM agrees, in case it fails to perform its obligations provided by or
arising from the present contract, to unconditionally and on a free basis
return 80% (eighty per cent) of the total outstanding equity of the Company
to the Georgian Partners and reimburse the loss caused by such failure to
the Georgian Partners and the Company.
5. Term of the Contract
5.1 The contract is signed for an indeterminate term.
5.2 The contract enters into force from the moment it is signed by the Parties.
6. Cessation of the Contract
6.1 The contract can be ceased by a mutual agreement of the parties.
7. Force Majeure
7.1 For the purpose of this contract, Force Majeure and Force Majeure Event
means in relation to any Party any event or circumstance which is beyond
the reasonable control of such Party which, despite the exercise of
reasonable diligence by such Party cannot be prevented, avoided or removed
and which results in or causes the failure of that Party to perform any of
its obligations under this contract including but not limited to:
7.1.1 war, blockade, mobilization, requisition or embargo;
7.1.2rebellion, revolution, insurrection, other military acts, unsurped
power or civil war;
7.1.3 riot, civil commotion or sabotage;
7.1.4 act of public enemies or terrorists;
7.1.5 lighting, fire, explosion, storm, wind, flying debris, flood, tidal
wave, earthquake, tempest or other natural disasters and other acts of God.
7.2 either Party shall be excused from performance and shall not be construed
to be in default in respect of their obligations under this contract for so
long as their failure to perform such obligations is due to Force Majeure
Event.
7.3 In the event of Force Majeure, the Party affected by such event shall as
soon as reasonably practicable notify the other Party of such event and
provide suitable evidence of the occurrence of such event and an estimate
of its duration and affect and both Parties shall:
7.3.1 make all reasonable efforts to prevent and to reduce to a minimum and
mitigate the effect of any delay occasioned by a Force Majeure Event;
7.3.2 use all reasonable efforts to ensure resumption of normal performance
of this contract after the termination of any Force Majeure Event and shall
perform their obligations to the maximum extent practicable between the Parties;
<PAGE>
7.3.3 Take all reasonable measures to reduce the losses of the Party
occasioned by a Force Majeure Event.
8. Dispute Resolution
8.1 If any dispute or difference between any of the Parties arises in relation
to this contract and/or the transactions contemplated by it (including any
question regarding such transaction(s), existence, validity or
termination), the Party seeking resolution of the dispute shall give the
Party alleged to be in breach and/or against whom relief is sought, a
notice and in the notice shall give sufficient details to allow the
recipient to understand the substance of the dispute and the relief sought.
8.2 The authorized person of the Parties of the dispute or their appointed
representatives shall within 30 calendar days after the date on which the
notice is deemed to be have been delivered, meet together and negotiate in
good faith in order to try to resolve the dispute as quickly and
economically as possible.
8.3 If the Parties have not resolved the dispute within 30 calendar days after
this meeting or within such longer period as the Parties to the dispute
agree in writing, the dispute shall be resolved by arbitration under the
Rules of the ICSID (International Court for the Settlement of Disputes) in
force at the time of the referral.
8.4 The seat of the arbitration shall be in London and the arbitration will be
carried out and conducted in London, England.
9. Miscellaneous
9.1 From the moment of signing the present contract all various agreements,
contracts and correspondence between the Parties become void.
10. Addresses of the Parties
Georgian Partners: 1 Cascade Str., Mtskheta, Georgia
IDM:Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands.
Signatures:
From Georgian Partners side:
/s/
Teimuraz Chkheidze
From IDM side:
/s/
Sam De Lapa
Exhibit 21.1
List of Subsidiaries
--------------------
IDM ENVIRONMENTAL CORP.
Name State of Incorporation
------- -------------------------
IDM Energy Corp. Delaware
IDM Environmental of Massachusetts, Inc. Massachusetts
IDM Asia Corp. Delaware
IDM Environmental Ventures, Inc. Delaware
Seven Star International Holding, Inc. British Virgin Isl.
Kortmann Polonia Poland
Global Waste & Energy, Inc. Alberta
Global Waste & Energy, Inc. Delaware
CWC de El Salvador S.A. de C.V. El Salvador
Empresa de Poder y Energia de
El Salvador S.A. de C.V. El Salvador
CONSENT OF SAMUEL KLEIN AND COMPANY
We consent to the incorporation by reference in Registration Statements No.
33-92972, 333-04703 and 333-57049 of IDM Environmental Corp. on Form S-8 and in
Registration Statement No. 333-66841 on Form S-3 of our reports dated April 5,
1998 appearing in this Annual Report on Form 10-K of IDM Environmental Corp. for
the year ended December 31, 1998.
SAMUEL KLEIN AND COMPANY
/s/ Samuel Klein and Company
Newark, New Jersey
April 15, 1999
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<PERIOD-START> JAN-01-1998
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